10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

x Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

or

¨ Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                  to                 

Commission file no. 000-30523

First National Bancshares, Inc.

(Exact name of registrant as specified in its charter)

South Carolina	58-2466370
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
215 N. Pine St. Spartanburg, S.C.	29302
(Address of principal executive offices)	(Zip Code)

864-948-9001

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act: Common Stock.

Securities registered pursuant to Section 12(g) of the Act: None.

Title of class	Name of each exchange on which registered
Common Stock $0.01 par value	The NASDAQ Global Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨                    Accelerated filer  ¨                    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the common stock held by non-affiliates (shareholders holding less than 5% of an outstanding class of stock, excluding directors and executive officers, computed by reference to the price at which the common stock was last sold) was $39,954,196, as of the last business day of the registrant’s most recent completed second fiscal quarter.

3,461,534 shares of the registrant’s common stock were outstanding as of March 9, 2007. (The most practicable date.)

DOCUMENTS INCORPORATED BY REFERENCE

Company’s Proxy Statement for the 2007 Annual Shareholders Meeting (Part III)

IMPORTANT INFORMATION ABOUT THIS REPORT

In this report, the words “First National,” “Company,” “we,” “us” and “our” mean First National Bancshares, Inc., including First National Bank of the South (the “Bank”), our wholly-owned national bank subsidiary.

SPECIAL NOTE 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 anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” potential,” “believe,” “continue,” “assume,” “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;

• construction delays and cost overruns related to our expansion;

• changes in technology;

• changes in deposit flows;

• 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;

• changes in accounting principles, policies or guidelines;

• our ability to maintain internal control over financial reporting;

• our reliance on secondary sources such as Federal Home Loan Bank advances, sales of securities and loans, federal funds lines of credit from correspondent banks and out-of-market time deposits, to meet our liquidity needs;

• 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. Description of Business

General

We are a South Carolina corporation organized in 1999 and serve as the holding company for First National Bank of the South, a national banking association. We operate under a traditional community banking model,

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with a particular focus on commercial real estate and small business lending. We commenced banking operations in March 2000 in Spartanburg, South Carolina, where we operate three full-service branches under the name First National Bank of Spartanburg. In August 2002, we began to offer trust and investment management services through a strategic alliance with Colonial Trust Company, a South Carolina private trust company established in 1913. We also operate a wholesale mortgage division and a small business lending division that operates under the name First National Business Capital.

In October 2005, we successfully converted our Mount Pleasant loan production office, opened in October 2004, to our fourth full-service branch, our first in the Charleston area. In January of 2006, we expanded into our state’s capital with the opening of our loan production office in Columbia, South Carolina. In February of 2006, we opened our loan production office on Daniel Island to expand our presence in the Charleston area.

In September of 2006, we opened our fifth full-service branch, our first in the Greenville market, in a temporary location until the construction of our permanent branch and market headquarters on Pelham Road in Greenville is completed in the spring of 2007. We plan to continue our expansion into the Greenville market and have received approval from the Office of the Comptroller of the Currency to open a full-service branch in an existing facility which we have purchased located in Greer, South Carolina. We anticipate opening this facility during the summer of 2007.

We have received approval from the Office of the Comptroller of the Currency to open a full-service branch at 140 East Bay Street in downtown Charleston, South Carolina in a leased facility which we expect to open in the spring of 2007. Additionally, we are expanding our banking operations into York and Lancaster Counties in South Carolina, beginning with a loan production office in Rock Hill, South Carolina which opened in February 2007.

Banking Services

We are primarily engaged in the business of accepting deposits insured by the FDIC and providing commercial, consumer, and mortgage loans to the general public. We also originate small business loans under the Small Business Administration’s (“SBA”) various loan programs. The SBA division operates from the Greenville loan production office and makes loans to customers located throughout the Carolinas and Georgia.

In addition, we opened a wholesale mortgage division on January 29, 2007, as an enhancement to our current banking operations. The division operates from leased office space located at 200 North Main Street in downtown Greenville, South Carolina, and employs a staff of ten individuals. It offers a wide variety of conforming and non-conforming programs with fixed and variable rate options, as well as FHA/VA and construction/permanent products to its customers who are located primarily in South Carolina. We anticipate the division will continue to serve its existing base of customers which includes other community banks and mortgage brokers.

Our Market Areas

To better execute our strategic plan for growth and expansion, we have organized our banking operations into four regions:

• Spartanburg Region;

• Eastern Region;

• Western Region; and

• Northern Region.

Within each region, we conduct our banking operations in selected market areas which meet the criteria for our business plan.

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Spartanburg Region

Our primary market area is Spartanburg County, which is located in the upstate region of South Carolina between Atlanta and Charlotte on the I-85 business corridor. According to the South Carolina Budget and Control Board, as of July 1, 2005, Spartanburg County’s estimated population totaled 266,809 residents. The South Carolina Department of Commerce notes that Spartanburg County attracted over $118.8 million in capital investment in 2004. The Spartanburg Area Chamber of Commerce reports that since 2001, downtown Spartanburg has attracted more than $170 million in investments and 1,200 new jobs. As of 2006, estimated median family income for the Spartanburg metropolitan statistical area was $54,200, as compared to $52,900 for South Carolina, according to the U.S. Department of Housing and Urban Development. Spartanburg was named the top U.S. market for European business expansion by Expansion Management magazine in 2003. According to the South Carolina Department of Commerce, more than 110 international firms, representing 15 nations, do business in the Spartanburg County business community, including Michelin, BMW, and Invista. BMW’s North American assembly plant in Spartanburg began production in September 1995 and is now the sole producer of both the Z4 convertible and the X5 Sports Activity Vehicle. Spartanburg is also home to many domestic corporations, including Milliken, Cryovac, Denny’s, QS/1, and Advance America. We believe that this dynamic economic environment will continue to support the community and our business in the future.

We advertise heavily in the Spartanburg market and, through our three full-service offices in Spartanburg, have positioned ourselves as the leading local community bank in this market. As of June 30, 2006, we were the fifth largest bank in Spartanburg County, with $289.7 million in total deposits, or 9.47% of the approximately $3.06 billion of deposits in the market. The following table includes information from the FDIC website regarding our deposit market share in Spartanburg County relative to top competitor banks as of June 30, 2006:

Rank	Bank	Branches	Total Deposits		Market Share
1	Wachovia	7	$	532.2 million	17.40	%
2	BB&T	9		441.9 million	14.44	%
3	Bank of America	8		380.5 million	12.44	%
4	First Citizens B&T	10		298.4 million	9.76	%
5	First National Bank	3		289.7 million	9.47	%
6	Suntrust Bank	12		272.4 million	8.91	%
7	Arthur State Bank	7		203.7 million	6.66	%
8	National Bank of South Carolina	4		174.7 million	5.71	%
	All others (6 institutions)	16		465.6 million	15.21	%
	Total	76		3,059.1 million	100	%

The Spartanburg Region also serves as the backbone and support center for our expanding branch network. We operate our corporate headquarters and operations in this region and anticipate opening our new operations center adjacent to our corporate headquarters in April 2007. The completion of this addition will result in 29,500 square feet of office space and will continue to house a full-service branch.

Eastern Region

The Eastern Region reaches from the state capital of Columbia down to the historic community of Charleston and will encompass future coastal areas of South Carolina. Bob Whittemore serves as Eastern Region Executive Officer and Rudy Gill serves as Market President in Charleston. Our full-service branch in Mount Pleasant and our loan production office on Daniel Island serve the fast-growing Charleston market. We have also received regulatory approval to open another full-service branch in the Charleston market at 140 East Bay Street in downtown Charleston. Total deposits in the downtown Charleston area as of June 30, 2006 total $4.5 billion.

As of July 1, 2005, Charleston County’s estimated population totaled 330,368 residents, according to the South Carolina Budget and Control Board. As of 2003, the population of Charleston’s metropolitan statistical

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area was 571,631 per the U.S. Census Bureau. The Charleston area achieved an employment growth rate of 13.5% from 1999 through 2004, outpacing national employment growth of 4.3% during that same period, according to the Charleston Regional Development Alliance. In addition, the South Carolina Department of Commerce reports that Charleston County attracted over $593.0 million in announced capital investment in 2004. For 2006, the estimated median family income for the Charleston/North Charleston metropolitan statistical area was $56,400, as compared to $52,900 for South Carolina, according to the U.S. Department of Housing and Urban Development. The Charleston Regional Development Alliance reports that since 1995, new and expanding companies invested more than $5 billion in the region. In its May 2005 issue, Inc. magazine ranked Charleston as one of “The Top U.S. Cities for Doing Business.” The Charleston regional economy has attracted approximately 70 firms with internationally-owned operations, according to the Charleston Regional Development Alliance. These firms include Bosch, Berchtold, Maersk Sealand, Rhodia, and Holset Engineering. Domestic firms also maintain significant operations in the Charleston area, including MeadWestvaco, Nucor Steel, Alcoa, Arborgen, Blackbaud, and Piggly Wiggly. In addition, as of 2005, the U.S. Navy and the Charleston Air Force Base collectively employed over 22,000 full-time employees, according to the Charleston Metro Chamber of Commerce.

Conde Nast Traveler magazine has ranked Charleston as one of the country’s top 10 domestic travel destinations for the past 13 years. According to the Charleston Metro Chamber of Commerce, in 2004, there were over 4.7 million visitors to the Charleston region with an aggregate regional economic impact of $5.7 billion. In addition, the total direct and indirect jobs in the Charleston region related to tourism was approximately 105,000 in 2004, resulting in aggregate earnings for local residents exceeding $1.45 billion.

As of June 30, 2006, with only one full-service branch in Mt. Pleasant that we opened in October 2005, we were the 19^th largest bank in Charleston County, with $23.7 million in total deposits, or 0.37% of the approximately $6.47 billion of deposits in the market. The following table includes information from the FDIC website regarding deposit market share in Charleston County as of June 30, 2006:

Rank	Bank	Branches	Total Deposits		Market Share
1	Wachovia	20	$	1,819.6 million	28.11	%
2	Bank of America	17		1,024.7 million	15.83	%
3	First FS&LA of Charleston	17		916.9 million	14.17	%
4	National Bank of South Carolina	7		402.9 million	6.23	%
5	BB&T	7		372.8 million	5.76	%
6	Southcoast Community Bank	4		311.6 million	4.81	%
7	First Citizens B&T	13		295.4 million	4.56	%
8	Community Firstbank Charleston	4		275.4 million	4.26	%
9	Carolina First	4		266.6 million	4.12	%
10	Tidelands Bank	1		228.9 million	3.54	%
	All others (12 institutions)	24		557.6 million	8.61	%
	Total	118	$	6,472.4 million	100	%

In January 2006, we opened a loan production office located at 725 Crosshill Road in Columbia, South Carolina. Currently, we primarily originate loans to builders and developers in the region through this loan production office. However, we anticipate identifying experienced bankers in this market area in the near future to expand our lending capabilities to full-service banking operations. Richland County had $7.9 billion in deposits as of June 30, 2006 and holds considerable business opportunities for our company to gain market share.

Western Region

The Western Region stretches to our state’s Georgia border along South Carolina’s I-85 corridor and is led by a team of skilled bankers in Greenville County. Barry Starling who serves as Western Region Executive

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Officer. We have operated a full-service branch at a temporary location since October 2006 in Greenville. We anticipate completion of our permanent branch and market headquarters on Pelham Road in Spring 2007. We also have received approval from the Office of the Comptroller of the Currency (the “OCC”) to open a full-service branch in an existing facility which we have purchased located in Greer, South Carolina.

Greenville County is South Carolina’s most populous county with an estimated 407,383 residents, according to the South Carolina Budget and Control Board, at July 1, 2005. Greenville is also one of the state’s wealthiest counties, with an estimated median income of $56,500 in 2006. In the past decade, Greenville County has attracted more than $6 billion in new business investment, 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.

As of June 30, 2006, FDIC-insured institutions in Greenville County had approximately $8.40 billion in deposits, an increase of 8.7% over the $7.73 billion as of June 30, 2005.

Northern Region

Opening a loan production office in February 2007 in Rock Hill begins our entry into the Northern Region of South Carolina which includes rapidly growing York and Lancaster counties and the attractive South Charlotte market. Rock Hill is located 20 minutes outside of Charlotte, North Carolina along the I-77 corridor. It is the home of Winthrop University and several business parks. Lancaster County has a population of 62,220 residents while York County has a population of 170,300 residents, of which 50,000 reside in Rock Hill.

York County has one of the highest median household incomes in the state at $47,987. The three largest employers in York County are Wells Fargo Home Mortgage, Bowater and Duke Power. York and Lancaster Counties, combined, have $2.1 billion in deposits, as of June 30, 2006, according to the FDIC’s website. It is our goal of opening full-service banking facilities and expanding into other high-growth communities in this market area. Rick Manley is leading our expansion effort in this market area and serves as the Northern Region Executive Officer.

Our Expansion Strategy

While we continue to build our franchise in the Spartanburg, Charleston, Columbia, Greenville and Rock Hill markets, we plan to expand into other fast-growing markets throughout South Carolina. In considering the markets in which to expand, we intend to analyze the population, growth rate, deposit growth rate, and other factors related to the target market. We also plan to identify experienced executives in our target markets with local expertise who share our philosophies regarding community banking, strong credit policies, and customer service. After retaining these key executives, we would expect to open a loan production office in the new market. Once we have built a sufficient loan and customer base at the loan production office, we would convert the loan production office to a full-service branch to further serve the market. We are following this approach with our expansion into the Greenville market through our Greenville full-service branch, which we recently converted from a loan production office. We believe our expansion philosophy enables us to test our markets and operate more efficiently upon the opening of a full-service branch.

In addition to opening new offices in target markets, we may also expand through selective acquisitions.

Our Operating Philosophy and Culture

We operate under a traditional community banking model, offering both personalized customer service and a broad array of financial products. We seek to be the premier community bank in each of the markets we serve. We have created a full-service community bank with a robust product and service offering available for our

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customers. To meet our customers’ needs, we also offer trust and investment management services through a strategic alliance with Colonial Trust Company, a South Carolina private trust company established in 1913. We also operate a small business lending division based in Greenville County under the name First National Business Capital that provides small business lending services under the SBA’s loan programs to customers primarily in the Carolinas and Georgia.

We have developed an operations infrastructure designed to support our growth and expansion plans without sacrificing credit quality. In addition to our use of traditional credit measures, we rely upon our professional and personal relationships and experience in our markets to evaluate subjective aspects of the market that we believe are more difficult to quantify. Our continued focus on asset quality has resulted in our achieving a ratio of nonperforming assets to total assets as of December 31, 2006 of 0.01%.

Lending Activities

General. We offer a variety of lending services, including real estate, commercial, and consumer loans, including home equity lines of credit, primarily to individuals and small- to mid-size businesses that are located, or conduct a substantial portion of their business in the Spartanburg, Charleston, Columbia, Greenville or Rock Hill markets. As of December 31, 2006, we had total loans of $379.5 million, representing 81.5% of our total assets. We emphasize a strong credit culture based on traditional credit measures and our knowledge of our markets through experienced relationship managers. We have designed our credit grading system to reduce the risk in our loan portfolio and to assist us in setting performance benchmarks in the areas of nonperforming assets, charge-offs, past dues, and loan documentation. In addition to having developed a strong in-house credit review function, we engage outside firms to evaluate our loan portfolio. As of December 31, 2006, there were no loans accruing interest that were 90 days or more past due, we had no restructured loans, and our ratio of nonperforming assets to total assets was 0.01%.

Our underwriting standards vary for each type of loan. While we generally underwrite the loans in our portfolio in accordance with our internal underwriting guidelines and regulatory supervisory guidelines, in certain circumstances we have made loans that exceed either our internal underwriting guidelines, supervisory guidelines, or both. We are permitted to hold loans that exceed supervisory guidelines up to 100% of our capital. We have made loans that exceed our internal guidelines to a limited number of our customers who have significant liquid assets, net worth, and amounts on deposit with the bank. As of December 31, 2006, $12.4 million, or approximately 3.3% of our loans and 45.8% of our capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines.

We have focused our lending activities primarily on small business owners, commercial real estate developers, and the professional market. We also strive to maintain a diversified loan portfolio and limit the amount of our loans to any single customer. As of December 31, 2006, our 10 largest customer loan relationships represented approximately $36.3 million, or 9.6% of the loan portfolio.

Real Estate Mortgage Loans. Loans secured by real estate mortgages are the principal component of our loan portfolio. To increase the likelihood of the ultimate repayment of the loan, we obtain a security interest in real estate whenever possible, in addition to other available collateral. As of December 31, 2006, loans secured by first or second mortgages on real estate made up approximately $348.0 million, or 91.7% of our loan portfolio.

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Within the broader category of real estate mortgage loans, the following table describes the loan categories of one-to-four family residential real estate loans, multi-family residential real estate loans, home equity loans, commercial real estate loans, and land loans as of December 31, 2006 (dollars in thousands):

Type of Real Estate Loan	Amount
One-to-four residential	$	71,849
Multi-family residential		3,596
HELOC		14,183
Commercial real estate		209,045	(1)
Land		49,310
Total	$	347,983

⁽¹⁾ Includes SBA loans.

Most of our real estate loans are secured by residential or commercial property. 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. As of December 31, 2006, our individual commercial real estate loans ranged in size from $5,200 to $4.4 million. The average commercial real estate loan size was approximately $409,000. Other than the SBA loans discussed below, 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 properties where the loan-to-value ratio, established by independent appraisals, does not exceed 80%. We prepare a credit analysis in addition to a cash flow analysis to support the loan. 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. These commercial real estate loans include various types of business purpose loans secured by commercial real estate.

Residential Real Estate Loans. As of December 31, 2006, our individual residential real estate loans ranged in size from $1,200 to $1.8 million, with an average loan size of approximately $141,000. 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 amortizations up to 20 years. To limit our risk, we offer fixed rate and variable rate loans for terms greater than 20 years through a third party, rather than originating and retaining these loans ourselves. Generally, we do not originate traditional long term residential mortgages for our portfolio, but we do issue traditional first and second mortgage residential real estate loans and home equity lines of credit. Included in the residential real estate loans was $29.2 million, or 38.0% of our residential loan portfolio, in first and second mortgages on individuals’ homes.

Home Equity Lines of Credit. As of December 31, 2006, our individual home equity lines of credit ranged in size from $300 to $346,000, with an average balance of approximately $47,000. Our underwriting criteria for, 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 15 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. We have $14.2 million or 18.5% of home equity loans.

Small Business Loans. We offer small business loans through our small business lending division, First National Business Capital, that typically have terms of 25 years and are made with floating rates. These loans utilize government enhancements such as the SBA’s 7(a) program and 504 programs and are partially guaranteed, which helps to reduce their risk. These loans are generally secured by first or second mortgages on

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commercial real estate. Government guarantees of SBA loans are generally 75% of the loan. We usually sell the portion of loans that are secured by the SBA guarantee in the secondary market to provide additional liquidity and to provide a source of noninterest income. We typically retain servicing for these loans as at an agreed upon servicing rate for the life of the loan. In order to secure secondary sources of payment and liquidity, we typically require the personal guarantees of the principal owners.

Real Estate Construction and Land Development Loans. We offer adjustable and fixed rate residential and commercial construction loans to builders and developers. As of December 31, 2006, our commercial construction and development real estate loans ranged in size from approximately $3,000 to $4.0 million, with an average loan size of approximately $381,000. As of December 31, 2006, our individual residential construction and development real estate loans ranged in size from approximately $3,000 to $404,000, with an average loan size of approximately $90,000. The duration of our construction and development loans generally is limited to 12 months, although payments may be structured on a longer amortization basis. We attempt to reduce the risk associated with construction and development loans by obtaining personal guarantees and by keeping the loan-to-value ratio of the completed project at or below 80%. 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 or home and usually on the sale of the property or permanent financing. Specific risks include:

• cost overruns;

• mismanaged construction;

• inferior or improper construction techniques;

• economic changes or downturns during construction;

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

• failure to sell completed projects in a timely manner.

As of December 31, 2006, total construction and development loans amounted to $145.8 million, or 38.4% of our total loan portfolio. Included in the $145.8 million was $20.7 million in construction loans, or 14.2% of our construction and development loan portfolio, that were made to commercial construction developers.

Commercial Business Loans. Most of our commercial business loans are secured by first or second mortgages on real estate, as described above. We also make some commercial business loans that are not secured by real estate. We make loans for commercial purposes in various lines of business, including retail, service industry, and professional services. As of December 31, 2006, our individual commercial business loans ranged in size from approximately $1,000 to $1.2 million, with an average loan size of approximately $70,000. As with other categories of loans, the principal economic risk associated with commercial loans is the creditworthiness of the borrower. The risks associated with commercial loans vary with many economic factors, including the economy in our market areas. 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. As of December 31, 2006, commercial business loans amounted to $25.6 million, or 6.8% of our total loan portfolio.

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 negotiable terms. Our installment loans typically amortize over periods up to 60 months. However, 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 consumer loans may be unsecured, or if they are secured, the value of the

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collateral may be difficult to assess and more likely to decrease in value than real estate. As of December 31, 2006, consumer loans amounted to $6.5 million, or 1.7% 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 customer 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 reviewed by the internal management loan committee comprised of voting members Mr. Calvert, Mr. Zabriskie, Mr. Murdoch, and Ms. Payne. Individual loan authorities for secured loans range from $25,000 for our retail lenders, to $500,000 for our senior lenders, and up to $750,000 for our chief executive officer. Any three concurring members of our management loan committee can approve loans up to $2.0 million. If the loans exceed $2.0 million, then a board of directors’ loan committee comprised of Mr. Calvert and seven other directors may approve loans up $3.5 million. The Board of Directors, with any seven concurring members, can approve loans up to 15% of the bank’s capital and unimpaired surplus or our legal lending limit of $5.8 million as of December 31, 2006.

Credit Administration and Loan Review. We emphasize a strong credit culture based on traditional credit measures and our knowledge of our markets through experienced relationship managers. We maintain a continuous internal loan review system and engage an independent consultant on an annual basis to review loan files on a test basis to confirm our loan grading. Each loan officer is responsible for every 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. The compensation of our lending officers is dependent in part on the asset quality of their loan portfolios. We have adopted an incentive plan under which our loan officers are eligible to receive cash bonuses for achieving monthly and annual goals relating to, among other things, loan production and maintenance of minimum quality levels for the officer’s loan portfolio.

Our dedication to strong credit quality is reinforced by our internal credit review process and performance benchmarks in the areas of nonperforming assets, charge-offs, past dues, and loan documentation. As we continue to grow, we intend to add additional employees to assist with credit administration and loan review. In addition to our strong in-house credit review function, we currently engage an outside firm to evaluate our loan portfolio on a quarterly basis for credit quality, a second outside firm for compliance issues on an annual basis, and a third outside firm to provide advice and recommendations and respond to specific inquiries at any time.

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. This limit will increase or decrease as the bank’s capital increases or decreases. Based upon the capitalization of the bank as of December 31, 2006, our legal lending limit was approximately $5.8 million. We sell participations in our larger loans to other financial institutions, which allows us to manage the risk involved in these loans and to meet the lending needs of our customers requiring extensions of credit in excess of this limit.

Deposit Services

One of our principal sources of funds is core deposits (deposits other than time deposits of $100,000 or more). As of December 31, 2006, approximately 75% of our total deposits were obtained from within the Spartanburg market. We also rely on time deposits of $100,000 or more to support our growth, and we derive most of these deposits from outside our primary market areas. We generally obtain out-of-market time deposits of $100,000 or more through brokers with whom we maintain ongoing relationships. We do not obtain time deposits of $100,000 or more through the internet. As of December 31, 2006, 56.6% of our total time deposits were deposits of $100,000 or more.

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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. We regularly review our deposit rates to ensure that we remain competitive in our markets.

During 2006, we converted our loan production office in Greenville, South Carolina to a full-service branch and market headquarters that enabled us to generate deposits in the Greenville market. This full-service branch is located in a temporary office near the location of the future permanent branch. As of December 31, 2006, the construction of our permanent full-service branch was ongoing, and we expect capital expenditures over the next twelve months associated with the remainder of this conversion to be approximately $1.0 million.

Trust and Investment Management Services

Since August 15, 2002, we have offered trust and investment management services through an alliance with Colonial Trust Company, a South Carolina private trust company established in 1913 with offices in Greenville and Spartanburg. This arrangement allows our consumer and commercial customers access to a wide variety of services provided by Colonial Trust Company, including trust services, professional portfolio management, estate administration, individual financial and retirement planning, and corporate retirement planning services. We receive a residual fee from Colonial Trust Company based on a percentage of the aggregate assets under management generated by referrals from the bank.

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 provide ATM transactions to our customers at no charge; however, we receive ATM transaction fees from transactions performed at our branches by persons who are not customers of the bank. We are associated with the Cirrus and Pulse ATM networks, which are available to our customers throughout the country. Since we outsource our ATM services, we are charged related transaction fees from our ATM service provider. We have contracted with an outside vendor to provide our core data processing services and our ATM processing. Given our current size, we believe that outsourcing these services reduces 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.

First National Online, our internet website www.firstnational-online.com, provides our customers access to internet banking services, including electronic bill payment services and cash management services including account-to-account transfers. The internet banking services are provided through a contractual arrangement with an outside vendor.

We offer our customers insurance services, including life, long term care, and annuities through vendors associated with the South Carolina Bankers Association. Additionally, we provide equipment leasing arrangements through an outside vendor.

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. 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.

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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.

First National 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, as amended (the “Bank Holding Company Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the Board of Governors of the Federal Reserve (the “Federal Reserve”) under the Bank Holding Company Act and its regulations promulgated thereunder. Moreover, as a bank holding company of a bank located in South Carolina, we also are subject to the South Carolina Banking and Branching Efficiency Act.

Permitted Activities. Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than 5% of the voting shares of any company engaged in, the following activities:

• banking or managing or controlling banks;

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

• any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

• factoring accounts receivable;

• making, acquiring, brokering or servicing loans and usual related activities;

• leasing personal or real property;

• operating a non-bank depository institution, such as a savings association;

• trust company functions;

• financial and investment advisory activities;

• conducting discount securities brokerage activities;

• underwriting and dealing in government obligations and money market instruments;

• providing specified management consulting and counseling activities;

• performing selected data processing services and support services;

• acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

• performing selected insurance underwriting activities.

As a bank holding company we also can elect to be treated as a “financial holding company,” which would allow us engage in a broader array of activities. In sum, a financial holding company can engage in activities that are financial in nature or incidental or complimentary to financial activities, including insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities. We have not sought financial holding company status, but may elect such status in the future as our business matures. If we were to elect in writing for financial holding company status, each insured depository institution we control would have to be well capitalized, well managed and have at least a satisfactory rating under the CRA (discussed below).

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The Federal Reserve has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.

Change in Control. 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 Section 12 of the Securities Exchange Act. The regulations provide a procedure for rebutting control when ownership of any class of voting securities is below 25%.

Source of Strength. 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 non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary of a bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or non-bank subsidiaries if the agency determines that divestiture may aid the depository institution’s financial condition.

Capital Requirements. The Federal Reserve Board imposes certain capital requirements on the bank holding 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 “First National Bank of the South—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 is subject to regulatory restrictions as described below in “First National Bank of the South—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.

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 (the “S.C. Board”). We are not required to obtain the approval of the S.C. 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.

First National Bank of the South

The Bank operates as a national banking association incorporated under the laws of the United States and subject to examination by the OCC. Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is currently $100,000 for each non-retirement depositor and $250,000 for certain retirement-account depositors. The OCC 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;

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• 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 OCC 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 OCC 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.

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 federal banking 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 has developed 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 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.

Prompt Corrective Action. As an insured depository institution, the Bank is required to comply with the capital requirements promulgated under the Federal Deposit Insurance Act and the OCC’s prompt corrective action regulations thereunder, which set forth five capital categories, each with specific regulatory consequences. Under these regulations, the categories are:

• Well Capitalized—The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution is one (i) having a total capital ratio of 10% or greater, (ii) having a tier 1 capital ratio of 6% or greater, (iii) having a leverage capital ratio of 5% or greater and (iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

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• Adequately Capitalized—The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution is one (i) having a total capital ratio of 8% or greater, (ii) having a tier 1 capital ratio of 4% or greater and (iii) having a leverage capital ratio of 4% or greater or a leverage capital ratio of 3% or greater if the institution is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market risk) rating system.

• Undercapitalized—The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution is one (i) having a total capital ratio of less than 8% or (ii) having a tier 1 capital ratio of less than 4% or (iii) having a leverage capital ratio of less than 4%, or if the institution is rated a composite 1 under the CAMEL rating system, a leverage capital ratio of less than 3%.

• Significantly Undercapitalized—The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution is one (i) having a total capital ratio of less than 6% or (ii) having a tier 1 capital ratio of less than 3% or (iii) having a leverage capital ratio of less than 3%.

• Critically Undercapitalized—The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%.

If the OCC determines, after notice and an opportunity for hearing, that the Bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the Bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.

If the Bank is not well capitalized, it cannot accept brokered deposits without prior FDIC approval and, if approval is granted, cannot offer an effective yield in excess of 75 basis points on interests paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the Bank’s normal market area. Moreover, if the Bank becomes less than adequately capitalized, it must adopt a capital restoration plan acceptable to the OCC that is subject to a limited performance guarantee by the corporation. The Bank also would become subject to increased regulatory oversight, and is increasingly restricted in the scope of its permissible activities. Each company having control over an undercapitalized institution also must provide a limited guarantee that the institution will comply with its capital restoration plan. Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate Federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.

An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause the Bank to become undercapitalized, it could not pay a management fee or dividend to us.

As of December 31, 2006, the Bank was deemed to be “well capitalized.”

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Deposit Insurance and Assessments. Deposits at the Bank are insured by the Deposit Insurance Fund (the “DIF”) as administered by the FDIC, up to the applicable limits established by law—generally $100,000 per accountholder and $250,000 for certain retirement accountholders. In accordance with regulations adopted to implement the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”), deposit insurance premium assessments are based upon perceived risks to the DIF, by evaluating an institution’s supervisory ratios and other financial ratios and then determining insurance premiums based upon the likelihood an institution could be downgraded to a CAMELS 3 or worse in the succeeding year. As a result, institutions deemed to pose less risk, pay lower premiums than those institutions deemed to pose more risk, which pay more.

FDIRA caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue cash dividends, awarded on a historical basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, the FDIC is required issue cash dividends, awarded on a historical basis, for half of the amount of the excess. Pursuant to the FDIIRA, the FDIC will begin to indexing deposit insurance coverage levels for inflation beginning in 2012. Moreover, if we become undercapitalized we cannot accept employee benefit plan deposits.

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 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 also limits the amount of loans that can be purchased by a bank from an affiliate to not more than 100% of the bank’s capital and surplus.

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Dividends. A national bank may not pay dividends from its permanent 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 OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus.

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 OCC. 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 the OCC evaluate the record of the Bank 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.

Finance Subsidiaries. Under the Gramm-Leach-Bliley Act (the “GLBA”), 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 GLBA 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 GLBA imposes new restrictions on transactions between a bank and its financial subsidiaries similar to restrictions applicable to transactions between banks and non-bank affiliates.

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.

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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.

Enforcement Powers. The Bank and its “institution-affiliated parties,” including its management, employees agents independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of the financial institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. 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.

USA PATRIOT Act. The USA PATRIOT Act became effective on October 26, 2001, amended, in part, the Bank Secrecy Act and provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (iv) filing suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations and requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.

Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”) can send our banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The Bank can be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.

The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S. Department of the Treasury, is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

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Privacy and Credit Reporting. Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer. 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 consumers. It is the Bank’s policy not to disclose any personal information unless required by law.

Like other lending institutions, the Bank utilizes credit bureau data in its underwriting activities. Use of such data is regulated under the Federal Credit Reporting Act on a uniform, nationwide basis, including credit reporting, prescreening, sharing of information between affiliates, and the use of credit data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) authorizes states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of the FACT Act.

Check 21. The Check Clearing for the 21st Century Act 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 the re-crediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred.

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.

Competition

The banking business is highly competitive, and we experience competition in our markets 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

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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 the Spartanburg, Charleston, Greenville, Columbia and Rock Hill markets and elsewhere.

As of June 30, 2006, there were 13 other financial institutions in Spartanburg County, 21 other financial institutions in Charleston County, 28 other financial institutions in Greenville County and 11 other financial institutions in Rock Hill. We compete with institutions in these markets 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, that we do not provide. Other local or regional financial institutions, such as First Citizens Bank of South Carolina and Arthur State Bank in Spartanburg, The Bank of South Carolina and Community FirstBank in Charleston, and Greenville First and Grand South Bank in Greenville have considerable business relationships and ties in their respective communities that assist them in competing for attracting customers.

We also compete with credit unions, in particular, in attracting deposits from retail customers. Additionally, 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 emphasis on decision-making by our market executives and our management’s and directors’ ties to the communities in which we operate provide us with a competitive advantage.

Employees

As of February 6, 2007, we had 102 employees, of which 87 were full time. These employees provide the majority of their services to our bank.

Item 1A. RISK FACTORS

Our business, financial condition, and results of operations could be harmed by any of the following risks, or other risks that have not been identified or which we believe are immaterial or unlikely. Shareholders should carefully consider the risks described below in conjunction with the other information in this Form 10-K and the information incorporated by reference in this Form 10-K, including our consolidated financial statements and related notes.

Our decisions regarding credit risk 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, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed our loan loss reserves. 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.

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While we generally underwrite the loans in our portfolio in accordance with our own internal underwriting guidelines and regulatory supervisory limits, in certain circumstances we have made loans that exceed either our internal underwriting guidelines, supervisory limits, or both. As of December 31, 2006, approximately $12.4 million, or approximately 3.26%, of our loans, net of unearned income, had loan-to-value ratios that exceeded regulatory supervisory limits. We generally consider making such loans only after taking into account the financial strength of the borrower. The number of loans in our portfolio with loan-to-value ratios in excess of supervisory limits, our internal guidelines, or both could increase the risk of delinquencies or defaults in our portfolio. Any such delinquencies or defaults could have an adverse effect on our results of operations and financial condition.

We have a concentration of credit exposure in commercial real estate.

As of December 31, 2006, we had approximately $262.0 million in loans to borrowers in the commercial real estate industry, representing approximately 69.0% of our total loans outstanding as of that date. The real estate consists primarily of owner-operated properties, warehouse and other commercial properties. These types of loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Cash flows may be affected significantly by general economic conditions, and a downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default. Because our loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our percentage of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

Our commercial real estate loans have grown 71.5% or $109.2 million since December 31, 2006. The banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.

The success of our growth strategy depends on our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand.

We intend to expand our banking network over the next several years, not just in our core market areas of Spartanburg, Charleston, Greenville and Columbia, but also in other fast-growing markets throughout South Carolina, such as York and Lancaster Counties, and in contiguous markets. We believe that to expand into new markets successfully, we must identify and retain experienced key management members with local expertise and relationships in these markets. We expect that competition for qualified management in the markets in which we expand will be intense and that there will be a limited number of qualified persons with knowledge of and experience in the community banking industry in these markets. Even if we identify individuals that we believe could assist us in establishing a presence in a new market, we may be unable to recruit these individuals away from more established banks. In addition, the process of identifying and recruiting individuals with the combination of skills and attributes required to carry out our strategy is often lengthy. Our inability to identify, recruit, and retain talented personnel to manage new offices effectively and in a timely manner would limit our growth and could materially adversely affect our business, financial condition, and results of operations. We may fail to open any additional offices and, if we open these offices, they may not be profitable.

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Our business strategy includes the continuation and successful management of significant growth, and if we fail to grow or fail to manage our growth effectively as we pursue our strategy, it could negatively affect our financial condition and results of operations.

We intend to continue developing our business by pursuing a significant growth strategy. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth stages of development. In order to execute our growth strategy successfully, we must, among other things, continue our loan growth, improve our profitability and utilize technology to enhance our customer service and maximize deposit growth. In addition, our ability to successfully grow will depend on the continued availability of desirable business opportunities, our ability to attract and retain highly qualified employees and the competitive responses from other financial institutions in our market. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them.

We cannot assure you that we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such expansion will not adversely affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

The building of market share through our de novo branching strategy could cause our expenses to increase faster than our revenues.

We intend to continue to build market share through our de novo branching strategy. We have regulatory approval to open two new branches, which we intend to do during 2007. There are considerable costs involved in opening branches. New branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, our new branches can be expected to negatively impact our earnings for some period of time until the branches reach certain economies of scale. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. Finally, we have no assurance our new branches will be successful even after they have been established.

The lack of seasoning of our loan portfolio makes it difficult to assess the adequacy of our loan loss reserves accurately.

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.

However, there is no precise method of predicting credit losses, since any estimate of loan losses is necessarily subjective and the accuracy depends on the outcome of future events. In addition, due to our rapid growth over the past several years and our limited operating history, a large portion of the loans in our loan portfolio was originated recently. In general, loans do not begin to show signs of credit deterioration or default

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until they have been outstanding for some period of time, a process referred 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 charge-offs in future periods increase, we may be required to increase our provision for loan losses, which would decrease our net income and possibly our capital.

Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses or that our loan loss allowance will be adequate in the future. Excessive loan losses could have a material impact on our financial performance. Consistent with our loan loss reserve methodology, we expect to make additions to our loan loss reserve levels as a result of our loan growth, which may affect our short-term earnings.

Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.

We could sustain losses if our asset quality declines.

Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Problems with asset quality could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase, which could adversely affect our results of operations and financial conditions.

We depend on the accuracy and completeness of information about clients and counterparties.

In deciding whether to extend credit or to enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we may assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.

Changes in interest rates and our ability to successfully manage interest rates may reduce our profitability.

Our profitability depends in large part on the net interest income of our banking subsidiary, which is the difference between interest income from interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. We believe that we are asset sensitive over a one-year time frame, which means that our net interest income will generally rise in higher interest rate environments and decline in lower interest rate environments. Our net interest income will be adversely affected if the market interest rate changes such that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments. Many factors cause changes in interest rates, including governmental monetary policies and domestic and international economic and political conditions. The Federal Reserve has made significant changes in interest rates during the last few years. 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, which could adversely affect our financial condition and results of operations. In addition, there are costs associated with our risk management techniques, and these costs could be material.

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Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Fluctuations in interest rates are not predicable or controllable and therefore, there can be no assurances of our ability to continue to maintain a consistent positive spread between the interest earned on our earning assets and the interest paid on our interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our net interest income and, in turn, our profitability. In addition, loan volumes are affected by market interest rates on loans. Rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. Interest rates also affect how much money we can lend. When interest rates rise, the cost of borrowing increases. Accordingly, changes in market interest rates could materially and adversely affect our net interest income, asset quality, and loan origination volume.

Our small- to medium-sized business target markets may have fewer financial resources to weather a downturn in the economy.

We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small- and medium-sized businesses. These businesses generally have fewer financial resources in terms of capital borrowing capacity than larger entities. If general economic conditions negatively impact this major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.

An economic downturn, especially one affecting the Spartanburg, Charleston, Greenville, Rock Hill, or Columbia areas, could reduce our customer base, our level of deposits, and demand for financial products such as loans.

Our success significantly depends upon the general economic conditions in our markets of Spartanburg and Charleston. 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 90.8% of our interest income for the year ended December 31, 2006. If an economic downturn occurs in the economy as a whole, or in the Spartanburg, Charleston, Greenville, Rock Hill or Columbia areas, borrowers may be less likely to repay their loans as scheduled.

Moreover, the value and liquidity of real estate or other collateral that may secure our loans in our market areas could be adversely affected by an economic downturn. Real estate values in our market areas have risen substantially over the last several years. If the value of real estate decreases or does not continue to rise, our business 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 or markets. In addition to the financial strength and cash flow characteristics of the borrower in each case, our bank subsidiary often secures loans with real estate collateral. As of December 31, 2006, approximately 92% of the Bank’s loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be negatively affected. An economic downturn could, therefore, result in losses that materially and adversely affect our business.

We may have higher loan losses than we have allowed for in our allowance for loan losses.

Our bank subsidiary’s loan losses could exceed the allowance for loan losses it has set aside. Our bank subsidiary’s average loan size continues to increase and reliance on historic allowance for loan losses may not be adequate. Approximately 76% of our loan portfolio is composed of construction, commercial mortgage and commercial loans. Repayment of such loans is generally considered more subject to market risk than residential

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mortgage loans. Industry experience shows that a portion of loans will become delinquent and a portion of loans will require partial or entire charge-off. Regardless of the underwriting criteria utilized, losses may be experienced as a result of various factors beyond our control, including among other things, changes in market conditions affecting the value loan collateral and problems affecting the credit of our borrowers.

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 or even grow our business at all. Because of our relatively small size and short operating history, it will be difficult for us to replicate our historical earnings growth as we continue to expand. 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.

Liquidity needs could adversely affect our results of operations and financial condition.

We rely on dividends from our bank as our primary source of funds. The primary sources of funds of our bank are client deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demands. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

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

Jerry L. Calvert, our president and chief executive officer, has substantial experience with our operations and has contributed significantly to our growth since our founding. If we lose Mr. Calvert’s services, he would be difficult to replace and our business and development could be materially and adversely affected. Our success is dependent on the personal contacts and local experience of Mr. Calvert and other key management personnel in each of our market areas. Our success also depends in part on our continued ability to attract and retain experienced loan originators, as well as other key executive management personnel, including our chief financial officer, Kitty B. Payne, our retail banking manager, Robert W. Murdoch, Jr., and our chief lending officer, David H. Zabriskie. We have entered into employment agreements with each of these executive officers. The existence of such agreements, however does not necessarily assure that we will be able to continue to retain their services. The unexpected loss of the services of several of such key personnel could adversely affect our growth strategy and prospects to the extent we are unable to replace such personnel.

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 the Office of the Comptroller of the Currency, or OCC, the FDIC, and the Federal Reserve Board. Our compliance with these regulations is costly and restricts certain of our activities, including payment of

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dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, and locations of offices. We must also meet regulatory capital requirements. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity, and results of operations would be materially and adversely affected. Our failure to remain “well capitalized” and “well managed” for regulatory purposes could affect customer confidence, our ability to grow, our cost of funds and FDIC insurance, our ability to pay dividends on common stock, and our ability to make acquisitions.

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. For example, new legislation or regulation could limit the manner in which we may conduct our business, including our ability to obtain financing, attract deposits, make loans and expand our business through opening new branch offices. Many of these regulations are intended to protect depositors, the public, and the FDIC, not shareholders. In addition, the burden imposed by these regulations may place us at a competitive disadvantage compared to competitors who are less regulated. The laws, regulations, interpretations, and enforcement policies that apply to us have been subject to significant change in recent years, sometimes retroactively applied, and may change significantly in the future. Our cost of compliance with these laws and regulations could adversely affect our ability to operate profitably. See “Supervision and Regulation.”

We face strong competition for customers in our market areas, which could prevent us from obtaining customers and may cause us to pay higher interest rates to attract deposits.

The banking business is highly competitive and the level of competition facing it may increase further. We experience competition in our markets from commercial banks, savings and loan associations, mortgage banking firms, consumer finance companies, credit unions, 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. Competitors that are not depository institutions are generally not subject to the extensive regulations that apply to us.

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, such as BB&T, Bank of America, and Wachovia with substantially greater access to capital and other resources. These institutions offer larger lending limits and some services, such as extensive and established branch networks, that we do not provide. In new markets that we enter, we will also compete against well-established community banks that have developed relationships within the community.

We may face a competitive disadvantage as a result of our relatively smaller size, lack of multi-state geographic diversification and inability to spread our marketing costs across a broader market. There is a risk that we will not be able to compete successfully with other financial institutions in our markets, and that we may have to pay higher interest rates as we have done in some of our marketing promotions in the past to attract deposits, resulting in reduced profitability. In addition to paying higher interest rates to attract deposits, we may find alternative funding sources to fund the growth in our loan portfolio. In 2006, deposit growth was not sufficient to fund our loan growth and we have used Federal Home Loan Bank advances and principal and interest payments on available-for-sale securities to make up the difference. However, our borrowing ability is limited and we may be put in the position of choosing between slowing the growth of our loan portfolio or contraction in our net interest margin if we must pay higher rates for deposits. Moreover, as a regulated entity, we are subject to examination and supervision and can be requested to implement changes to our operations. We have addressed areas of regulatory concern, including interest rate risk, through the adoption of board resolutions and improved policies.

Our growth may require us to raise additional capital that may not be available when it is needed, or at all.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. We may at some point need to raise additional capital to support our continued growth. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are

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outside our control, and on our financial performance. Accordingly, we may be unable to raise additional capital, if and when needed, on terms acceptable to us, or at all. 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 issue additional equity capital, your interest would be diluted.

Our trading volume has been low compared with larger bank holding companies and the sale of substantial amounts of our common stock in the public market could depress the price of our common stock.

The average daily trading volume of our shares on The Nasdaq Global Market for the three months ended March 12, 2007 was approximately 2,200 shares. Lightly traded stock can be more volatile than stock trading in active public market like that for the larger bank holding companies. We cannot predict the extent to which an active public market for our common stock will develop or be sustained. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experience wide price fluctuations that have not necessarily been related to their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire. We cannot predict the effect, if any, that future sales of our common stock in the market, or availability of shares of our common stock for sale in the market, will have on the market price of our common stock. We therefore can give no assurance that sales of substantial amounts of our common stock in the market, or the potential for large amounts of sales in the market, would not cause the price of our common stock to decline or impair our ability to raise capital through sales of our common stock.

The common stock of First National Bancshares, Inc. is not FDIC insured.

Our common stock is not a savings or deposit account or other obligation of any bank and is not insured by the Federal Deposit Insurance Corporation, the Bank Insurance Fund or any other governmental agency and is subject to investment risk, including the possible loss of principal.

Efforts to comply with the Sarbanes-Oxley Act of 2002 will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act of 2002 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 of completing our audit and the costs related to maintaining our internal controls, as a result of the Sarbanes-Oxley Act. 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, our ability to obtain any necessary equity or debt financing could suffer, and our common stock could ultimately be delisted from The NASDAQ Global Market. In this event, the liquidity of our common stock would be severely limited and the market price of our common stock would likely decline significantly.

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.

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We may identify a material weakness or a significant deficiency in our internal control over financial reporting that may adversely affect our ability to properly account for non-routine transactions.

As we have grown and expanded, we have acquired and added, and expect to continue to acquire and add, businesses and other activities that complement our core retail and commercial banking functions. Such acquisitions or additions frequently involve complex operational and financial reporting issues that can influence management’s internal control system. While we make every effort to thoroughly understand any new activity or acquired entity’s business process, our planning for proper integration into our company can give no assurance that we will not encounter operational and financial reporting difficulties impacting our internal control over financial reporting.

We will face risks with respect to future expansion.

As a strategy, we plan to increase the size of our franchise by expanding into new markets or lines of business or offering new products or services by aggressively pursing business development opportunities and we have grown rapidly since our inception in 1999. These activities involve a number of risks, including:

• taking additional time and creating expense associated with evaluating new markets for expansion, hiring experienced local management, and opening new offices, as there may be a substantial time lag between these activities before we generate sufficient assets and deposits to support the costs of the expansion;

• taking a significant amount of time negotiating a transaction or working on expansion plans, resulting in management’s attention being diverted from the operation of our existing business;

• creating an adverse short-term effect on our results of operations; and

• time and expense of evaluating, selecting, and introducing new products and services into our business.

We may not be successful in overcoming these risks or other problems encountered in connection with expansion activities and we can give no assurance that such expansion will result in the level of profits we seek. Our inability to overcome these risks could have a material adverse effect on our ability to achieve our business strategy and on our financial condition and results of operations.

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

Although we do not have any current plans to do so, we may also seek to acquire other financial institutions or parts of those institutions as a part of our strategy. Risks of these activities may include the following:

• difficulties and expense associated with identifying and evaluating potential acquisitions and merger partners;

• inaccuracies in estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or assets;

• our ability to finance an acquisition;

• difficulties and expense in integrating the operations and personnel of the combined businesses;

• loss of key employees and customers as a result of an acquisition that is poorly received; and

• the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our result of operations.

We expect to compete with other financial institutions regarding any potential acquisitions. We may be unable to identify attractive acquisition candidates or to complete acquisitions on terms favorable to us, or at all. We may not be able to integrate any banks we acquire successfully. We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions. We have never acquired another institution before and therefore lack experience in handling any of these risks. Our inability to overcome

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these risks could have a material adverse effect on our ability to achieve our business strategy and on our financial condition and results of operations. Also, we may issue equity securities, including common stock, and securities convertible into shares of our common stock in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders.

Item 1B. Unresolved Staff Comments

We have no unresolved staff comments with the SEC regarding our periodic or current reports under the Exchange Act.

Item 2. Description of Property

Since February 5, 2001, the principal place of business of both the company and the bank has been located at 215 North Pine Street in Spartanburg. We lease the approximately 2.0 acre site and the 15,000 square foot building with four drive-through banking stations and an automated teller machine. Expansion of this facility in the form of an additional 14,500 square feet of finished space on an additional acre which we also lease to support the bank’s operations and future growth is ongoing and scheduled for completion in spring 2007.

We own a 3,500 square foot branch office on a leased parcel on the west side of Spartanburg. We lease a 3,000 square foot branch office on Boiling Springs Road in northern Spartanburg County.

We lease a 1,700 square foot branch office on Johnnie Dodds Boulevard in Mount Pleasant, South Carolina located in Charleston County. We have exercised our option to purchase the land and building at this location for a purchase price of $800,000. We plan to close this purchase during May of 2007. We lease an 853 square foot loan production office on Daniel Island, South Carolina located in Berkley County. We lease a 5,379 square foot branch office on East Bay Street in the City of Charleston, South Carolina in Charleston County. Renovations are currently underway at this location, with the opening of this branch anticipated in the spring of 2007.

We own land located in Greenville, South Carolina on Pelham Road and Milestone Way. We received regulatory approval from the OCC in March 2006 to convert our Greenville loan production office to a full-service branch and market headquarters at this location. We are in the process of constructing our permanent branch and market headquarters location on this site. In the interim, we lease an 1,800 square foot temporary branch office space near our branch construction location. This space will be leased until construction of the permanent branch and market headquarters is completed in the spring of 2007.

We lease a 1,900 square foot loan production office in the City of Greenville, South Carolina in Greenville County, which also houses the small business lending division, First National Business Capital. We plan to consolidate the Greenville loan production office with the full service branch and market headquarters upon its completion in the spring of 2007. Our other leased loan production offices in Columbia, South Carolina and on Daniel Island in the Charleston market opened in the first quarter of 2006.

We own a 3,000 square foot branch in Greer, South Carolina located in Greenville County. We received regulatory approval from the OCC in March of 2007 to open a full-service bank branch at this location. We are currently renovating the real property at this location and anticipate opening this branch in summer of 2007.

In January 2007, we occupy approximately 1,700 square feet of office on North Main Street in downtown Greenville under a short term lease to house our wholesale mortgage division.

Item 3. Legal Proceedings.

There are no material legal proceedings.

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.

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Part II.

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

Our common stock was approved for listing on The NASDAQ Global Market in November 2005 under the symbol “FNSC.” Prior to such listing, our common stock was quoted on the OTC Bulletin Board under the symbol “FNSC.OB.” As of March 9, 2007, there were 609 shareholders of record.

The following table shows the high and low sales prices published by NASDAQ beginning with the fourth quarter of 2006. For the prior periods indicated, the table shows the reported high and low bid information on the OTC Bulletin Board. The OTC Bulletin Board prices are quotations, which reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The prices shown reflect historical activity and have been adjusted for the 3 for 2 stock splits distributed on January 18, 2006, and March 1, 2004, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007.

	2006				2005				2004
	High		Low		High		Low		High		Low
First Quarter	$	19.39	$	16.41	$	16.46	$	14.10	$	9.99	$	6.27
Second Quarter		19.63		14.33		17.64		13.81		12.64		10.29
Third Quarter		18.00		14.95		17.64		13.34		14.10		11.76
Fourth Quarter		15.42		14.54		18.22		12.35		15.58		12.50

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The following graph sets forth the performance of our common stock for the five-year period ended December 31, 2006, as compared to the NASDAQ Composite and The SNL Bank and Thrift Index. The graph assumes $100 originally invested on December 31, 2001, and that all subsequent dividends were reinvested in additional shares.

Our ability to pay cash dividends is dependent upon receiving cash in the form of dividends from our bank. However, certain restrictions exist regarding the ability of the bank to transfer funds to the company in the form of cash dividends. 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 OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus.

All of our outstanding shares of common stock are entitled to share equally in dividends from funds legally available therefore, when, as and if declared by the Board of Directors. To date, we have not paid cash dividends on our common stock. We currently intend to retain earnings to support operations and finance expansion and, therefore, we do not anticipate paying cash dividends in the foreseeable future.

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Item 6. Selected Financial Data

Selected Consolidated Financial and Other Information

(dollars in thousands, except per share data)

	2006			2005			2004			2003			2002
Summary of Operations
Net interest income	$	14,161		$	9,511		$	6,512		$	4,570		$	3,536
Provision for loan losses		1,192			594			679			518			418
Noninterest income		2,079			1,855			1,771			1,377			842
Noninterest expense		8,901			6,476			4,966			4,087			3,365
Income taxes		2,095			1,461			823			425			—
Net income		4,052			2,835			1,815			916			595
Per common share—basic	$	1.12		$	0.90		$	0.59		$	0.30		$	0.20
Per common share—diluted	$	0.94		$	0.73		$	0.49		$	0.26		$	0.18
Year End Balance Sheets
Investment securities		63,374			45,151			36,165			36,174			20,560
Loans, net of unearned income		379,490			251,405			188,508			130,421			93,106
Allowance for loan losses		3,795			2,719			2,259			1,630			1,164
Total assets		465,382			328,679			236,344			180,663			139,224
Noninterest-bearing deposits		31,321			18,379			15,695			13,345			15,428
Interest-bearing deposits		345,380			253,316			176,116			141,388			104,290
FHLB advances		37,476			26,612			23,079			9,500			7,000
Junior subordinated debentures		13,403			6,186			6,186			3,093			—
Shareholders’ equity		26,990			22,029			13,911			12,228			11,544
Book value per share	$	7.29		$	6.21		$	4.53		$	3.99		$	3.77
Average Balance Sheets
Investment securities		52,423			39,683			35,352			27,989			12,573
Loans, net of unearned income		314,610			222,026			160,914			112,804			78,926
Total interest-earning assets		373,253			269,745			199,653			149,804			101,320
Noninterest-bearing demand deposits		23,056			18,009			15,641			12,206			8,651
Interest-bearing deposits		285,522			208,854			159,386			124,256			83,774
FHLB advances		33,421			27,966			13,657			8,436			2,777
Ratios and Other Data
Return on average assets		1.05	%		1.01	%		0.87	%		0.58	%		0.56	%
Return on average equity		16.82	%		17.72	%		13.87	%		7.68	%		5.33	%
Net interest margin		3.79	%		3.53	%		3.26	%		3.05	%		3.49	%
Efficiency ratio		54.81	%		56.98	%		59.94	%		68.72	%		76.86	%
Total risk-based capital		11.13	%		13.16	%		12.21	%		12.91	%		13.01	%
Net chargeoffs to average loans		0.04	%		0.06	%		0.03	%		0.05	%		0.07	%
Nonperforming assets to loans year end		0.15	%		0.16	%		0.03	%		0.23	%		0.00	%
Allowance for loan losses to loans, year end		1.00	%		1.08	%		1.20	%		1.25	%		1.25	%
Closing market price per share	$	14.95		$	17.60		$	15.58		$	7.35		$	5.88
Price to earnings, year end		15.90			24.11			31.80			28.26			32.66

All share and per share data reflects the 3 for 2 stock splits on March 1, 2004, and January 18, 2006, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FIRST NATIONAL BANCSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

First National Bancshares, Inc. was organized on July 14, 1999, to serve as the holding company for First National Bank of Spartanburg, which opened its first full-service bank branch in March 2000. Our bank opened two additional full-service offices in Spartanburg County during 2000 and 2001. In October 2002, we changed the legal name of our bank to First National Bank of the South as part of our strategy of growth and expansion. We continue to do business in Spartanburg County as First National Bank of Spartanburg. In October 2005, we successfully converted our loan production office in Mount Pleasant, South Carolina to our fourth full service branch, our first in the Charleston area.

In January 2006, we opened a loan production office in Columbia, South Carolina and in February 2006, we added the Daniel Island loan production office to our Charleston market operations. In September 2006, the Bank opened its fifth full-service branch, its first in the Greenville market. This branch is currently housed in a temporary location until the construction of the 6,000 square foot permanent branch and market headquarters on Pelham Road in Greenville is completed in the spring of 2007. We also operate a loan production office in Greenville County, which also houses our small business lending division that operates under the name First National Business Capital. Upon completion of the full-service branch, First National Business Capital will relocate to this facility.

We have received regulatory approval to open our sixth full-service branch in a leased facility located at 140 East Bay Street in downtown Charleston, South Carolina. Renovations are currently underway at this location, with the opening of this branch anticipated in the spring of 2007. We have received approval from the OCC for our seventh full-service branch to be located in Greer, South Carolina.

Additionally, we have announced plans to expand our banking operations into York and Lancaster counties of South Carolina beginning with a loan production office in Rock Hill, which opened in February 2007. Finally, construction of a new 14,500 square foot Operations Center located adjacent to the existing corporate headquarters in Spartanburg is scheduled for completion in the spring of 2007.

Overview

Our strategy has produced consistent growth in assets, loans and deposits, with strong earnings performance. We became cumulatively profitable during the third quarter of 2003, and we have been profitable in each quarter since recording our first quarterly profit in the fourth quarter of 2001.

The following table sets forth selected measures of our financial performance for the periods indicated (dollars in thousands).

As of or for the Years Ended December 31,

	2006		2005		2004
Total revenue(1)	$	16,240	$	11,366	$	8,283
Net income		4,052		2,835		1,815
Total assets		465,382		328,679		236,344
Total loans(2)		379,490		251,405		188,507
Total deposits		376,701		271,695		191,811

⁽¹⁾ Total revenue equals net interest income plus total noninterest income

⁽²⁾ Includes nonperforming loans; net of unearned income

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Like most financial institutions, we derive the majority of our income from interest we receive on our interest-earning assets, such as 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 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. 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 other sources, such as fees and surcharges to our customers and income from the sale and/or servicing of financial assets such as loans and investments. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion.

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 the financial statements and the related notes and the other statistical information also included in this report.

Critical Accounting Policies

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent 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, 2006, as included in our annual report.

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

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgments and estimates when preparing 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, cash flow assumptions, the determination of loss factors for estimating credit losses, the impact of current events, 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.

Results of Operations

Income Statement Review

Summary

Our net income was $4.0 million, or $0.94 per diluted share, for the year ended December 31, 2006, as compared with $2.8 million, or $0.73 per diluted share, for the year ended December 31, 2005. The 42.9% increase in net income over 2005 was primarily driven by a $4.7 million, or 48.9%, increase in net interest income.

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Our return on average assets of 1.05% for 2006 was a four basis-point increase over the result of 1.01% for 2005. We were able to accomplish this result due to an increase in the net interest margin from 3.53% in 2005 to 3.79% in 2006, an increase in average loans as a percentage of average earning assets from 82.3% as of December 31, 2005, to 84.3% as of December 31, 2006, and a decrease in the efficiency ratio to 54.81% during 2006 from 56.98% in 2005.

Our return on average equity decreased by 90 basis points to 16.82% for 2006 from 17.72% in 2005. This decrease is primarily due to the 50.6% increase in average equity from year to year due to receiving $6.3 million in net proceeds from the completion of our secondary stock offering completed in December 2005.

Net Interest Income

Our primary source of revenue is net interest income. The level of net interest income is determined by the balances of interest-earning assets and interest-bearing liabilities and successful management of the net interest margin. In addition to the growth in both interest-earning assets and interest-bearing liabilities, and the timing of repricing of these 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 increased $4.7 million, or 48.9%, to $14.2 million in 2006, from $9.5 million in 2005. The growth in net interest income resulted from an increase of $11.6 million in interest income, partially offset by an increase of $6.9 million in interest expense from 2005 to 2006.

The increase in net interest income was due primarily to the growth of our loan portfolio, as reflected in an increase in our average earning assets of 38.4% and an increase in our net interest margin of 26 basis points during 2006. Our decision to grow the loan portfolio at the current pace has resulted in a significant portion of our assets being in higher earning loans than in lower yielding investments.

Our net interest income has also been positively influenced by the increase in our net interest margin following the twelve increases in the prime rate of interest since 2004 for a total of 300 basis points. Since we are asset-sensitive over a one-year time period, our net interest income on our existing earning asset base increases when the prime rate rises.

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The following table sets forth, for the years ended December 31, 2006, 2005 and 2004, information related to our average balances, yields on average assets, and costs of average liabilities. We derived average balances from the daily balances throughout the periods indicated. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. Average loans are stated net of unearned income and include nonaccrual loans. Interest income recognized on nonaccrual loans has been included in interest income (dollars in thousands).

Average Balances, Income and Expenses, and Rates

For the Years Ended December 31,

	2006						2005						2004
	Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate		Average Balance		Income/ Expense		Yield/ Rate
Loans	$	314,610	$	26,237	8.34	%	$	222,026	$	15,461	6.96	%	$	160,914	$	8,926	5.55	%
Investment securities		52,423		2,329	4.44	%		39,683		1,581	3.98	%		35,352		1,420	4.02	%
Federal funds sold and other		6,220		320	5.14	%		8,037		299	3.72	%		3,387		78	2.30	%
Total interest-earning assets	$	373,253	$	28,886	7.74	%	$	269,745	$	17,341	6.43	%	$	199,653	$	10,424	5.22	%
Time deposits	$	201,957	$	9,129	4.52	%	$	144,082	$	5,001	3.47	%	$	121,434	$	3,115	2.56	%
Savings & money market		57,962		2,331	4.02	%		42,865		1,141	2.66	%		18,926		170	0.90	%
NOW accounts		25,603		674	2.63	%		21,907		343	1.57	%		19,026		112	0.59	%
FHLB advances		33,421		1,570	4.70	%		27,966		925	3.31	%		13,657		269	1.97	%
Junior subordinated debentures		11,663		877	7.52	%		6,186		380	6.14	%		5,155		236	4.58	%
Federal funds purchased		2,612		144	5.51	%		1,329		40	3.01	%		549		10	1.82	%
Total interest-bearing liabilities	$	333,218	$	14,725	4.42	%	$	244,335	$	7,830	3.20	%	$	178,747	$	3,912	2.19	%
Net interest spread					3.32	%					3.23	%					3.03	%
Net interest income/ margin			$	14,161	3.79	%			$	9,511	3.53	%			$	6,512	3.26	%
Non-interest-bearing demand deposits	$	23,056					$	18,009					$	15,641

The net interest spread, which is the difference between the rate we earn on interest-earning assets and the rate we pay on interest-bearing liabilities, was 3.32% for the year ended December 31, 2006, compared to 3.23% for the year ended December 31, 2005. Our consolidated net interest margin, which is net interest income divided by average interest-earning assets for the period, was 3.79% for the year ended December 31, 2006, as compared to 3.53% for the year ended December 31, 2005.

The increase in our net interest spread and our net interest margin from 2005 to 2006 was principally due to the faster increase in yields on average interest-earning assets relative to the repricing of our average interest-bearing liabilities following the twelve increases in the prime rate during 2005 and 2006. The relative increase in our average loans as a percentage of average earning assets from 2005 to 2006 also contributed to the increase in our net interest margin during the year. We anticipate that growth in loans will continue to drive the growth in assets and the growth in net interest income. Changes in interest rates paid on assets and liabilities, the rate of growth of the asset and liability base, the ratio of interest-earning assets to interest-bearing liabilities and management of the balance sheet’s interest rate sensitivity all factor into changes in net interest income. Therefore, we may not be able to continue to sustain the increases in net interest income that we have achieved in the past.

Analysis of Changes in Net Interest Income

Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The change in net interest income is primarily due to the increases in volume of both loans and deposits and changes in average rates.

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The following table sets forth the effect that the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented (dollars in thousands).

	Changes in Net Interest Income
	For the Years Ended December 31, 2006 vs. 2005 Increase (Decrease) Due to							For the Years Ended December 31, 2005 vs. 2004 Increase (Decrease) Due to							For the Years Ended December 31, 2004 vs. 2003 Increase (Decrease) Due to
	Volume			Rate		Total		Volume		Rate			Total		Volume			Rate			Total
Interest-Earning Assets
Federal funds sold and other	$	(68	)	$	89	$	21	$	173	$	48			221	$	(129	)	$	79			(50	)
Investment securities		507			240		748		173		(12	)		161		296			7			303
Loans(1)		6,444			4,329		10,776		4,256		2,279			6,535		2,674			(100	)		2,574
Total interest-earning assets	$	6,883		$	4,658	$	11,545	$	4,602	$	2,315		$	6,917	$	2,841		$	(14	)	$	2,827
Interest-Bearing Liabilities
Deposits	$	2,469		$	3,180	$	5,649	$	1,462	$	1,625		$	3,087	$	985		$	(457	)	$	528
FHLB advances		181			465		645		473		183			656		95			21			116
Federal funds purchased		39			65		104		24		7			31		10			—			10
Junior subordinated debentures		336			162		497		63		81			144		231			1			232
Total interest-bearing liabilities	$	3,025		$	3,872	$	6,895	$	2,022	$	1,896		$	3,918	$	1,321		$	(435	)	$	886
Net interest income	$	3,858		$	786	$	4,650	$	2,580	$	419		$	2,999	$	1,520		$	421		$	1,941

⁽¹⁾ Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes.

Provision for Loan Losses

At the end of each quarter or more often, if necessary, we analyze the collectibility of our loans and accordingly adjust the loan loss allowance to an appropriate level. Our loan loss allowance covers estimated credit losses on individually evaluated loans that are determined to be impaired, as well as estimated credit losses inherent in the remainder of the loan portfolio. Our process for determining an appropriate level for the loan loss allowance is based on a comprehensive, well-documented, and consistently applied analysis of our loan portfolio. We consider all significant factors that affect the collectibility of the portfolio and support the credit losses estimated by this process. We have an effective loan review system and controls (including an effective loan grading system) that identify, monitor, and address asset quality problems in an accurate and timely manner. We evaluate any loss estimation model before it is employed and document inherent assumptions and adjustments. We promptly charge off loans that we determine are uncollectible. It is essential that we maintain an effective loan review system that works to ensure the accuracy of our internal grading system and, thus, the quality of the information used to assess the appropriateness of the loan loss allowance. Our board of directors is responsible for overseeing management’s significant judgments and estimates pertaining to the determination of an appropriate loan loss allowance by reviewing and approving the institution’s written loan loss allowance policies, procedures and model quarterly.

In arriving at our loan loss allowance, we consider those qualitative or environmental factors that are likely to cause credit losses, as well as our historical loss experience. Because of our relatively short history, we also factor in a five-year trend of peer data on historical losses. In addition, as part of our model, we consider changes in lending policies and procedures, including changes in underwriting standards, and collection, chargeoff, and

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recovery practices not considered elsewhere in estimating credit losses, as well as changes in regional and local economic and business conditions. Further, we factor in changes in the nature and volume of the portfolio and in the terms of loans, changes in the experience, ability, and depth of lending management and other relevant staff, the volume of past due and nonaccrual loans, as well as adversely graded loans, changes in the value of underlying collateral for collateral-dependent loans, and the existence and effect of any concentrations of credit. Please see the discussion below under “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.

Our provision for loan losses was $1,192,000, $594,000 and $679,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The percentage of allowance for loan losses was reduced to 1.0% of gross loans outstanding as of December 31, 2006, from 1.08% as of December 31, 2005. The allowance for loan losses was also reduced from 1.20% of gross loans outstanding as of December 31, 2004. The decrease in this ratio reflects management’s opinion of the level of credit quality in the loan portfolio and other factors, such as net chargeoffs remaining stable from year to year and nonperforming assets continuing to be low as a percentage of total assets. The increase in the provision for loan losses for the quarter and year ended December 31, 2006, is primarily due to the 50.9% growth of the loan portfolio. Management continues to review and evaluate the allowance for loan losses based on the performance of the loan portfolio.

Noninterest Income

The following table sets forth information related to the various components of our noninterest income (dollars in thousands).

	Years ended December 31,
	2006		2005		2004
Service charges and fees on deposit accounts	$	1,080	$	961	$	866
Gain on sale of guaranteed portion of SBA loans		322		441		348
Loan service charges and fees		220		163		127
Mortgage loan fees from correspondent banks		179		135		103
Gain on sale of investment securities		33		—		160
Other		245		155		167
Total noninterest income	$	2,079	$	1,855	$	1,771

Noninterest income for the year ended December 31, 2006, was $2.1 million, a net increase of 12.1% compared to noninterest income of $1.9 million during the same period in 2005. Excluding the nonrecurring gain on the sale of investment securities of $33,000 realized in 2006, noninterest income for the year ended December 31, 2006, increased by $191,000, or 10.3%, over 2005. Excluding the nonrecurring gain on the sale of investment securities of $160,000 realized in 2004, noninterest income for the year ended December 31, 2005, increased by $244,000, or 15.1%, over 2004.

This increase occurred primarily due to increases in service charges and fees on deposit accounts resulting from growth in the number of deposit accounts. Gains recognized on the sale of the guaranteed portion of SBA loans decreased 27% from 2005 to 2006; however, the 58% increase in other income to $245,000 was primarily due to $106,000 in SBA servicing income on previously sold loans. Loan service charges and fees and fees from correspondent banks on the origination of mortgage loans increased 35.0% and 32.6%, respectively from 2005 to 2006.

The increase from the year ended December 31, 2004, to December 31, 2005, occurred primarily due to the increases in service charges and fees on deposit accounts resulting from growth in the number of deposit accounts. Gains recognized on the sale of the guaranteed portion of SBA loans increased 26.7% from 2004 to 2005 as a result of a full year of loan production from the small business lending division during 2005 that

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opened in March 2004. Loan service charges and fees and fees from correspondent banks on the origination of mortgage loans increased 28.3% and 31.1%, respectively, from 2004 to 2005.

Noninterest Expenses

The following table sets forth information related to the various components of our noninterest expenses (dollars in thousands).

	Years ended December 31,
	2006		2005		2004
Salaries and employee benefits	$	5,128	$	3,744	$	2,783
Occupancy and equipment		1,046		660		562
Public relations		609		378		308
Data processing and ATM expense		587		487		378
Telephone and supplies		295		211		137
Professional fees		284		251		231
Other		952		745		567
Total noninterest expense	$	8,901	$	6,476	$	4,966

Noninterest expense was $8.9 million for 2006, as compared to $6.5 million in 2005, an increase of 37.4%. The majority of the increased expenditures reflects the cost of salaries and other variable expenses that have increased to support our growth. Although total noninterest expense increased $2.4 million over 2005, continued efficiency of banking operations resulted in this category increasing only 37.4% over 2005 while total revenue (net interest income plus noninterest income) increased by 42.9% during the same period.

Public relations expense increased by 22.7% to $378,000 for 2005, as compared to $308,000 in 2004, primarily due to increased community relations expenditures and continued expansion of print and television media advertising as a result of our increasing customer base and expansion into additional markets. Professional fees increased from $231,000 in 2004 to $251,000 in 2005, an increase of 8.2%, which resulted primarily from a charge of approximately $20,000 for consulting services in preparation for the offering of our common stock completed in December 2005.

The most significant item included in noninterest expense is salaries and employee benefits, which totaled $5.1 million, $3.7 million and $2.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. Occupancy and equipment expenses were $1.0 million, $660,000 and $562,000 for the years ended December 31, 2006, 2005 and 2004, respectively. This increase is a result of opening the additional loan production offices in Columbia and Daniel Island during January and February of 2006 and converting the Mount Pleasant loan production office to a full-service branch in October of 2005, as well as the addition of the temporary Greenville branch in September 2006. In addition, we relocated our operations staff to a temporary facility in Spartanburg during April of 2005 as we prepared to expand our main office in Spartanburg to accommodate these staff as well as support future growth. For the year ended December 31, 2005, the most significant item included in noninterest expense is salaries and employee benefits, which totaled $3.7 million in 2005, as compared to $2.8 million in 2004, an increase of 32.1%. Occupancy and equipment expense increased to $660,000 in 2005 from $562,000 in 2004, or an increase of 17.4%.

Data processing and ATM expense were $587,000, $487,000 and $387,000 for the years ended December 31, 2006, 2005 and 2004, respectively. The majority of the increase of 20.5% in 2006 and 28.8% in 2005 reflects the increased costs associated with growth in customer transaction processing due to the increasing number of loan and deposit accounts in our customer base. We have contracted with an outside computer service company to provide our core data processing services. 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.

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Public relations expense increased by 61.1% to $609,000 for 2006, as compared to $378,000 in 2005, primarily due to increased community relations expenditures and continued expansion of print and television media advertising as a result of our increasing customer base and expansion into additional markets. In addition, we began to incur listing fees for our stock on The NASDAQ Global Market beginning in November 2005. Telephone and supplies increased from $211,000 in 2005 to $284,000 in 2006, an increase of 34.6%, which resulted primarily from our growing number of branches.

Noninterest expense was $6.5 million for 2005, as compared to $5.0 million in 2004, an increase of 30.0%. The majority of the increased expenditures reflect the cost of salaries and other variable expenses that have increased to support our growth. Although total noninterest expense increased $1.5 million over 2004, continued efficiency of banking operations resulted in this category increasing only 30.0% over 2004 while total revenue (net interest income plus noninterest income) increased by 37.2% during the same period.

Included in the line item “other,” which increased $207,000, or 27.8%, between 2006 and 2005 and $178,000, or 31.4%, between 2005 and 2004, are charges for insurance premiums, fees paid to our board of directors and our newly formed board in the Charleston market in 2006, postage, printing and stationery expense and various customer-related expenses.

A majority of the increases in these expenditures reflects the costs of additional personnel hired to support our growth, including branch staff for the Mount Pleasant office which opened in late October 2005, the Greenville office which opened in September 2006, additional lenders in the Spartanburg, Columbia and Charleston markets as well as staff in the loan and deposit operation functions to support the continued growth in all markets. The increased costs are also associated with growth in customer transaction processing due to the increase in our customer base.

Although we recognize the importance of controlling noninterest expenses to improve profitability, we are also committed to retaining our team of well-trained officers and staff, maintaining a highly technical operations function and pursuing a professional marketing program.

Provision for Income Taxes

Income tax expense can be analyzed as a percentage of net income before income taxes. The following table sets forth information related to our income tax expense (dollars in thousands).

	Years ended December 31,
	2006			2005			2004
Provision for income taxes	$	2,095		$	1,461		$	823
Net income before income taxes		6,147			4,296			2,638
Effective income tax rate		34.08	%		34.00	%		31.20	%

Our effective tax rate for 2006 was consistent with 2005. This consistency was accomplished by increasing nontaxable securities by $90,000, or 34%, from the year ended December 31, 2005, to December 31, 2006. In addition, net interest income increased by $4.7 million, or 49%, compared to the overall increase in net income of $1.2 million, or 43%. The increase in the effective income tax rate from 2004 to 2005 occurred due to the relative increase in fully taxable income during the year. Although the net nontaxable income increased during the year from sources such as municipal securities investments, which increased from 2004 to 2005, and was partially offset by a decline in earnings on bank owned life insurance contracts, fully taxable income such as interest income on loans and government agency investments and noninterest income from fees and charges experienced much greater percentage increases from 2004 to 2005.

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Balance Sheet Review

General

As of December 31, 2006, we had total assets of $465.3 million or an increase of 41.6% over total assets of $328.7 million on December 31, 2005. Total assets on December 31, 2006 and 2005, consisted of loans, net of unearned income, of $379.5 million and $251.4 million, respectively; securities available for sale of $63.4 million and $45.2 million, respectively; other assets of $11.2 million and $8.6 million, respectively; premises and equipment, net accumulated depreciation and amortization, of $6.9 million and $5.0 million, respectively; cash and due from banks of $8.2 million and $2.7 million, respectively; and federal funds sold and interest-bearing bank balances of $5,000 and $18.6 million, respectively.

The interest-earning assets, consisting of loans net of unearned income, securities available for sale, federal funds sold and interest-bearing bank balances, grew to $439.1 million as of December 31, 2006, or an increase of 40.5% over the balance of $312.5 million as of December 31, 2005. This increase resulted primarily from the increase in loan originations, net of principal collections, from 2005 to 2006 of approximately $127.0 million due to our expansion into the Charleston market, which began in October of 2004, and new production from lenders hired for the Columbia and Greenville markets during the fourth quarter of 2005 and the Daniel Island loan production office in the first quarter of 2006.

The increase of $2.6 million in other assets during 2006 resulted primarily from the increase in accrued interest receivable due to the increase in our net interest margin due to twelve increases in the prime interest rate during 2005 and 2006, as well as the growth in interest-earning assets during 2005.

Premises and equipment increased $1,929,000 during 2006 primarily due to the ongoing construction of the Spartanburg operations center and the Greenville full-service branch, net of $409,000 in depreciation expense for 2006. As of December 31, 2006, construction on our operations center at our corporate headquarters in Spartanburg and our Greenville market headquarters was underway with construction costs to date totaling $1.0 million and $327,000, respectively. Renovations at the East Bay Street branch also were ongoing, with construction costs to date totaling $81,000. We anticipate remaining related capital expenditures to be completed within the next six months, for an expected $2.5 million at all our construction sites.

For the year ended December 31, 2006, our non-core deposits included wholesale funding in the form of brokered CDs of approximately $54 million. We generally obtain out-of-market time deposits of $100,000 or more through brokers with whom we maintain ongoing relationships. The guidelines governing our participation in brokered CD programs are part of our Asset Liability Management Program Policy, which is reviewed, revised and approved annually by the Asset Liability Committee. These guidelines limit our brokered CDs to 25% of total assets, dictate that our current interest rate risk profile determines the terms and that we only accept brokered CDs from approved correspondents. In addition, we do not obtain time deposits of $100,000 or more through the Internet. These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the inherent related risk.

Our liabilities on December 31, 2006, were $438.4 million, an increase of 42.9% over liabilities as of December 31, 2005, of $306.7 million and consisted primarily of deposits of $376.7 million, $37.4 million in Federal Home Loan Bank advances, $13.4 million in junior subordinated debentures and $8 million in federal funds purchased. The increase of $7.2 million in junior subordinated debentures from December 31, 2005, occurred with the closing of FNSC Capital Trust III on March 30, 2006, in a pooled offering of trust preferred securities.

Shareholders’ equity on December 31, 2006, was $27.0 million, as compared to shareholders’ equity on December 31, 2005, of $22.0 million. The increase of $5.0 million, or 22.5%, can be attributed primarily to the net income earned during 2006. Also contributing to the increase was the decrease in the unrealized loss on investment securities available for sale, net of tax, during 2006.

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Federal Funds Sold and Interest-Bearing Bank Balances

As of December 31, 2006, short-term overnight investments in federal funds sold and interest-bearing bank balances comprised less than 1% of total interest-earning assets of $439.1 million as compared to 6.0% of total interest-earning assets of $317.3 million on December 31, 2005. Although we experienced record deposit growth during 2006, a net increase in loans from 2005 to 2006 of 103.4% over the net growth from 2004 to 2005 drove the decrease in cash and due from banks, federal funds sold and interest-bearing bank balances of approximately $13.1 million from 2005 to 2006.

Investments

On December 31, 2006 and 2005, our investment securities portfolio of $63.4 and $45.1 million, respectively, represented approximately 14.4% of our interest-earning assets. As of December 31, 2006 and 2005, we were invested in U.S. Government agency securities, mortgage-backed securities, and municipal securities with an amortized cost of $64.1 million and $46.2 million, respectively, for an unrealized loss of $700,000 and $1.0 million, respectively.

As a result of the strong growth in our loan portfolio and the historically low fixed rates during the past several years, we had maintained a lower than normal level of investments. As rates on investment securities have risen and additional capital and deposits have been obtained, we have increased the size of the investment portfolio.

Fair values and yields on our investments (all available for sale) as of December 31, 2006, are shown in the following table based on contractual maturity dates. 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. Yields on municipal securities are presented on a tax equivalent basis (dollars in thousands).

					As of December 31, 2006
	Within one year				After one but within five years				After five but within ten years				Over ten years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
U.S. Government/government sponsored agencies	$	—	—		$	8,787	4.39	%	$	4,946	5.25	%	$	—	—		$	13,733	4.70	%
Mortgage-backed securities		261	4.50	%		6,531	4.19	%		7,581	4.80	%		21,904	5.05	%		36,277	4.84	%
Municipal securities		—	—			—	—			3,564	3.39	%		9,800	4.05	%		13,364	3.87	%
Total	$	261	4.50	%	$	15,318	4.31	%	$	16,091	4.63	%	$	31,704	4.74	%	$	63,374	4.60	%

The amortized cost and fair value of our investments (all available for sale) as of December 31, 2006, 2005 and 2004, are shown in the following table (dollars in thousands).

	December 31, 2006				December 31, 2005				December 31, 2004
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government/government sponsored agencies	$	13,969	$	13,733	$	9,500	$	9,169	$	6,500	$	6,353
Mortgage-backed securities		36,729		36,277		28,070		27,378		23,998		23,871
Municipal securities		13,382		13,364		8,600		8,604		5,924		5,941
Total	$	64,080	$	63,374	$	46,170	$	45,151	$	36,422	$	36,165

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We also maintain certain equity investments required by law that are included in the consolidated balance sheets as “other assets.” The carrying amounts of these investments as of December 31, 2006, 2005 and 2004, consisted of the following:

	As of December 31,
	2006		2005		2004
Federal Reserve Bank stock	$	602	$	448	$	330
Federal Home Loan Bank stock		2,356		1,674		1,405

We increased the level of Federal Reserve Bank (“FRB”) stock during 2006 to reflect the contribution of capital to the bank by the holding company from proceeds received from the issuance of approximately $7 million in floating trust securities in March 2006. The level of Federal Home Loan Bank (“FHLB”) stock varies with the level of FHLB advances and increased during 2006 to reflect the net increase in FHLB advances during the year.

No ready market exists for these stocks and they have no quoted market value. However, redemption of these stocks has historically been at par value. Accordingly, we believe the carrying amounts are a reasonable estimate of fair value.

Loans

Since loans typically provide higher interest yields than do other types of interest-earning assets, we invest a substantial percentage of our earning assets in our loan portfolio. Average loans for the years ended December 31, 2006, 2005 and 2004 were $314.6 million, $222.0 million, and $160.9 million, respectively. Total loans outstanding as of December 31, 2006, 2005 and 2004 were $379.5 million, $251.4 million and $188.5 million, respectively, before the allowance for loan losses.

The following table summarizes the composition of our loan portfolio for each of the five years ended December 31, 2006, (dollars in thousands).

	2006					2005					2004					2003					2002
	Amount			% of Total		Amount			% of Total		Amount			% of Total		Amount			% of Total		Amount			% of Total
Commercial and industrial	$	25,604		6.75	%	$	20,902		8.31	%	$	20,255		10.74	%	$	24,869		19.07	%	$	15,867		17.04	%
Commercial secured by real estate		261,961		69.03	%		152,726		60.75	%		104,339		55.35	%		57,622		44.18	%		53,659		57.63	%
Real estate—residential mortgages		86,022		22.67	%		71,900		28.60	%		59,322		31.47	%		42,830		32.84	%		19,174		20.59	%
Installment and other consumer loans		6,458		1.70	%		6,273		2.50	%		4,977		2.64	%		5,342		4.10	%		4,591		4.93	%
Unearned income		(555	)	(0.15	)%		(396	)	(0.16	)%		(386	)	(0.20	)%		(242	)	(0.19	)%		(185	)	(0.19	)%
Total loans, net of unearned income		379,490		100.00	%		251,405		100.00	%		188,507		100.00	%		130,421		100.00	%		93,106		100.00	%
Less—allowance for loan losses		(3,795	)	1.00	%		(2,719	)	1.08	%		(2,258	)	1.20	%		(1,630	)	1.25	%		(1,164	)	1.25	%
Total loans, net	$	375,695				$	248,686				$	186,249				$	128,791				$	91,942

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

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The increase in our commercial loans secured by real estate from 2005 to 2006 is due to the relatively higher paydowns on residential real estate loans and new commercial real estate lending in the Charleston, Greenville and Columbia markets due to our expansion in each of these markets.

The increase in our commercial loans secured by real estate from 2004 to 2005 is due to the relatively higher paydowns on residential real estate loans and new commercial real estate lending in the Charleston and Greenville markets due to the expansion of our loan production offices in each of these markets.

While our residential mortgages secured by real estate have increased each year, these loans have decreased relative to the overall loan portfolio each year since 2003. This decrease is due in part to the amortizing nature of these loans. In addition, the proportional decrease in residential mortgages secured by real estate is more than offset by the proportional increase in commercial real estate loans. We have significantly increased the number of our commercial lending officers over the last three years. We expect to continue to focus significant origination efforts in commercial real estate and commercial lending. The commercial real estate loans we originate are primarily secured by shopping centers, office buildings, warehouse facilities, retail outlets, hotels, motels and multi-family apartment buildings.

Commercial real estate lending entails significant additional risks compared to residential lending. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers. The payment experience of such loans is typically dependent upon the successful operation of the real estate project. These risks can be significantly affected by supply and demand conditions in the market for office and retail space and for apartments and, as such may be subject, to a greater extent, to adverse conditions in the economy. In dealing with these risk factors, we generally limit ourselves to a real estate market or to borrowers with which we have experience. We generally concentrate on originating commercial real estate loans secured by properties located within our market areas. In addition, many of our commercial real estate loans are secured by owner-occupied property with personal guarantees for the debt.

Maturities and Sensitivity of Loans to Changes in Interest Rates

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

The following table summarizes the loan maturity distribution by type and related interest rate characteristics as of December 31, 2006 (dollars in thousands):

	As of December 31, 2006
	One year or less		After one but within five years		After five years		Total
Commercial	$	10,034	$	5,480	$	1,189	$	16,703
Real estate—construction		118,173		25,627		—		143,800
Real estate—mortgage		20,784		167,549		20,395		208,728
Consumer and other		3,376		2,665		4,773		10,814
Total loans	$	152,367	$	201,321	$	26,357	$	380,045
Unearned income, net								(555	)
Total loans, net of unearned income							$	379,490
Loans maturing after one year with:
Fixed interest rates							$	62,875
Floating interest rates							$	164,803

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Provision and Allowance for Loan Losses

The allowance for loan losses represents an amount that we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans, including consideration of factors such as the balance of impaired loans; the quality, mix and size of our overall loan portfolio; economic conditions that may affect the borrower’s ability to repay; the amount and quality of collateral securing the loans; our historical loan loss experience; and a review of specific problem loans. We adjust the amount of the allowance periodically based on changing circumstances as a component of the provision for loan losses. We charge recognized losses against the allowance and add subsequent recoveries back to the allowance.

We calculate the allowance for loan losses for specific types of loans and evaluate the adequacy on an overall portfolio basis utilizing our credit grading system which we apply to each loan. We combine our estimates of the reserves needed for each component of the portfolio, including loans analyzed on a pool basis and loans analyzed individually. The allowance is divided into two portions: (1) an amount for specific allocations on significant individual credits and (2) a general reserve amount.

We analyze individual loans within the portfolio and make allocations to the allowance based on each individual loan’s specific factors and other circumstances that affect the collectibility of the credit. Significant individual credits classified as doubtful or substandard/special mention within our credit grading system require both individual analysis and specific allocation.

Loans in the substandard category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action such as declining or negative earnings trends and declining or inadequate liquidity. Loans in the doubtful category exhibit the same weaknesses found in the substandard loan; however, the weaknesses are more pronounced. These loans, however, are not yet rated as loss because certain events may occur which could salvage the debt such as injection of capital, alternative financing, or liquidation of assets.

We calculate our general reserve based on a percentage allocation for each of the categories of the following unclassified loan types: real estate, commercial, consumer, A&D/construction and mortgage. We apply general loss factors to each category and may adjust these percentages given consideration of local economic conditions, exposure to concentrations that may exist in the portfolio, changes in trends of past due loans, problem loans and charge-offs, and anticipated loan growth. The general estimate is then added to the specific allocations made to determine the amount of the total allowance for loan losses.

The following table sets forth the breakdown of the allowance for loan losses by loan category and the percentage of loans in each category to gross loans for each of the years in the five-year period ended December 31, 2006 (dollars in thousands):

	As of December 31,
	2006				2005				2004				2003				2002
Commercial	$	454	6.8	%	$	135	11.1	%	$	191	12.0	%	$	180	54.5	%	$	236	53.9	%
Real estate-construction		1,062	22.6	%		386	20.4	%		343	11.2	%		150	6.9	%		138	6.4	%
Real estate-mortgage		1,841	68.9	%		2,110	66.0	%		1,111	74.2	%		926	34.5	%		662	34.5	%
Consumer		58	1.7	%		48	2.5	%		30	2.6	%		33	4.1	%		32	5.2	%
Unallocated		380	N/A			40	N/A			584	N/A			341	N/A			96	N/A
Total allowance for loan losses	$	3,795	100.0	%	$	2,719	100.0	%	$	2,259	100.0	%	$	1,630	100.0	%	$	1,164	100.0	%

We believe that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of further losses and does not restrict the use of the allowance to absorb losses in any category.

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The provision for loan losses has been made primarily as a result of management’s assessment of general loan loss risk after considering historical operating results, as well as comparable peer data. Our evaluation is inherently subjective as it requires estimates that are susceptible to significant change. In addition, various regulatory agencies review our allowance for loan losses through their periodic examinations, and they may require us to record additions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations. Our losses will undoubtedly vary from our estimates, and there is a possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time. Please see Note 6-”Loans” in the Notes to Consolidated Financial Statements included in this report for additional information.

The following table sets forth the changes in the allowance for loan losses for each of the years in the five-year period ended December 31, 2006 (dollars in thousands).

	As of December 31,
	2006			2005			2004			2003			2002
Balance, beginning of year	$	2,719		$	2,258		$	1,631		$	1,164		$	800
Provision charged to operations		1,192			594			679			519			418
Loans charged-off
Commercial, financial and agricultural		(116	)		(38	)		(9	)		(36	)		(34	)
Real estate-construction		—			—			—			—			(8	)
Installment loans to individuals		(23	)		(106	)		(45	)		(17	)		(12	)
Total charge-offs		(139	)		(144	)		(54	)		(53	)		(54	)
Recoveries of loans previously charged-off		23			11			2			1			—
Balance, end of period	$	3,795		$	2,719		$	2,258		$	1,631		$	1,164
Allowance to loans, year end		1.00	%		1.08	%		1.20	%		1.25	%		1.25	%
Net charge-offs to average loans		0.04	%		0.06	%		0.03	%		0.05	%		0.07	%
Non-accrual loans	$	477		$	349		$	49		$	257		$	—
Past due loans in excess of 90 days on accrual status	$	—		$	—		$	—		$	—		$	—
Other real estate owned	$	—		$	—		$	—		$	—		$	—

Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as income when received. Since December 31, 2006, we have added approximately $3.4 million in loans on nonaccrual basis. The majority of these loans are secured by real estate, and based on our evaluation and assessment, we do not anticipate any loss on these loans in the future.

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Deposits

Our primary source of funds for loans and investments is our deposits. National and local market trends over the past several years suggest that consumers have moved an increasing percentage of discretionary savings funds into investments such as annuities, stocks, and fixed income mutual funds. Accordingly, it has become more difficult to attract deposits.

The following table shows the average balance amounts and the average rates paid on deposits held by us for the years ended December 31, 2006, 2005 and 2004 (dollars in thousands).

	As of December 31,
	2006				2005				2004
	Amount		Rate		Amount		Rate		Amount		Rate
Demand deposit accounts	$	23,056	—		$	18,009	—		$	15,641	—
NOW accounts		25,603	2.63	%		21,907	1.57	%		19,026	0.59	%
Money market and savings accounts		57,962	4.02	%		42,865	2.66	%		18,926	0.90	%
Time deposits		201,957	4.52	%		144,082	3.47	%		121,434	2.56	%
Total deposits	$	308,578	3.93	%	$	226,863	2.86	%	$	175,027	1.94	%

Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other interest-earning assets. Our core deposits were $242.0 million, $194.8 million, and $132.9 million as of December 31, 2006, 2005 and 2004, respectively. The maturity distribution of our time deposits of $100,000 or more as of December 31, 2006 and 2005, is as follows (dollars in thousands):

	As of December 31, 2006
Three months or less	$	31,559
Over three through six months		17,124
Over six through twelve months		28,882
Over twelve months		52,463
Total	$	130,028

The increase in time deposits of $100,000 or more for the year ended December 31, 2006, as compared to the balance as of December 31, 2005, primarily resulted from the utilization of deposits that were obtained from municipal depositors and brokered certificates of deposit from outside of our primary market. For the year ended December 31, 2006, our non-core deposits included wholesale funding in the form of brokered CDs of approximately $54 million. We generally obtain out-of-market time deposits of $100,000 or more through brokers with whom we maintain ongoing relationships. The guidelines governing our participation in brokered CD programs are part of our Asset Liability Management Program Policy, which is reviewed, revised and approved annually by the Asset Liability Committee. These guidelines limit our brokered CDs to 25% of total assets, dictate that our current interest rate risk profile determines the terms and that we only accept brokered CDs from approved correspondents. In addition, we do not obtain time deposits of $100,000 or more through the Internet. These guidelines allow us to take advantage of the attractive terms that wholesale funding can offer while mitigating the inherent related risk.

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Other Interest-Bearing Liabilities

The following tables outline our various sources of borrowed funds during the years ended December 31, 2006, 2005 and 2004, the amounts outstanding as of the end of each period, at the maximum point for each component during the periods and the average balance for each period, and the average interest rate that we paid for each borrowing source. The maximum balance represents the highest indebtedness for each component of borrowed funds at any time during each of the periods shown. See Note 9- “Lines of Credit”, Note 10- “FHLB Advances”, and Note 13-”Junior Subordinated Debentures” in the Notes to Consolidated Financial Statements included in this report for additional disclosures related to these types of borrowings (dollars in thousands).

	Ending Balance		Period-End Rate		Maximum Balance		Average for the Period
							Balance		Rate
As of or for the Year Ended December 31, 2006
FHLB advances	$	37,476	4.94	%	$	48,543	$	33,421	4.70	%
Federal funds purchased	$	7,970	5.41	%	$	14,391	$	2,612	5.51	%
Junior subordinated debentures	$	13,403	7.44	%	$	13,403	$	11,663	7.52	%
As of or for the Year Ended December 31, 2005
FHLB advances	$	26,612	3.99	%	$	30,436	$	27,966	3.31	%
Federal funds purchased	$	—	—		$	5,836	$	1,329	3.01	%
Junior subordinated debentures	$	6,186	7.33	%	$	6,186	$	6,186	6.14	%
As of or for the Year Ended December 31, 2004
FHLB advances	$	23,079	2.68	%	$	23,114	$	13,657	1.97	%
Federal funds purchased	$	—	—		$	7,250	$	549	1.82	%
Junior subordinated debentures	$	6,186	5.04	%	$	6,186	$	5,155	4.58	%

As of December 31, 2006, 2005 and 2004, we had short-term lines of credit with correspondent banks to purchase unsecured federal funds totaling $30.0 million, $23.5 million, and $19.5 million, respectively.

Capital Resources

On May 16, 2006, we issued our first stock dividend of 6% to shareholders of record as of May 1, 2006. As a result of this dividend, the common stock component of our shareholders equity increased approximately $2,000; additional paid in capital increased approximately $3.8 million, and our retained earnings decreased by an offsetting approximate $3.8 million.

Total shareholders’ equity amounted to $27.0 million and $22.0 million on December 31, 2006 and 2005, respectively. A portion of the increase between 2005 and 2006 resulted from the $4.1 million of net income earned during the year. Also contributing to the increase was the decrease in the unrealized loss on investment securities available for sale, net of tax, during 2006.

As of December 31, 2006, the unrealized loss on securities available for sale was recorded to reflect the change in the market value of these securities since December 31, 2005. We believe that the unrealized loss is attributable to changes in market interest rates, not in credit quality, and we consider these unrealized losses to be temporary. We use the securities available for sale to pledge as collateral to secure public deposits and for other purposes required or permitted by law, including as collateral for FHLB advances outstanding. Due to availability of numerous liquidity sources, we believe that we have the capability to hold these securities to maturity and do not anticipate the need to liquidate the securities and realize the related loss. See the “Liquidity” section for a more detailed discussion of our available liquidity sources. We currently expect that we will have sufficient cash flow to fund ongoing operations.

The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. The Federal Reserve guidelines contain an exemption from the

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

Under the capital adequacy guidelines, capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets plus trust preferred securities up to 25% of Tier 1 capital with the excess being treated as Tier 2 capital. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses subject to certain limitations. The bank is also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

We utilize trust preferred securities to meet our capital requirements up to regulatory limits. As of December 31, 2006, we had formed three statutory trust subsidiaries for the purpose of raising capital via this avenue. On December 19, 2003, FNSC Capital Trust I, a subsidiary of our holding company, was formed to issue $3 million in floating rate trust preferred securities. On April 30, 2004, FNSC Statutory Trust II was formed to issue an additional $3 million in floating rate trust preferred securities. On March 30, 2006, FNSC Statutory Trust III was formed to issue an additional $7 million in floating rate trust preferred securities. Under the provisions of Financial Accounting Standards Board, or “FASB,” Interpretation No. 46, we deconsolidated these entities from our consolidated financial statements as of December 31, 2004. The trust preferred securities qualify as Tier 1 capital up to 25% or less of Tier 1 capital with the excess includable as Tier 2 capital. As of December 31, 2006, approximately $8.7 million of the trust preferred securities qualified as Tier 1 capital, with approximately $4.3 million included as Tier 2 capital.

We are both subject to various regulatory capital requirements administered by the federal banking agencies. Under these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%. On November 30, 2005, we loaned our Employee Stock Ownership Plan (“ESOP”) $600,000 which was used to purchase 42,532 shares of our common stock. At December 31,

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2006, the ESOP owned 44,914 shares of our stock, of which 39,601 shares were pledged to secure the loan. The remainder of the shares was allocated to individual accounts of participants. In accordance with the requirements of the SOP 93-6, we presented the shares that were pledged as collateral as a deduction of $558,000 and $599,000 from shareholders’ equity at December 31, 2006 and 2005, respectively, as unearned ESOP shares in the accompanying consolidated balance sheets.

The following table sets forth the company’s and the bank’s various capital ratios as of December 31, 2006, 2005 and 2004. For all periods, the bank was considered “well-capitalized” and the company met or exceeded its applicable regulatory capital requirements. We are currently evaluating various options, such as issuing trust preferred securities or common stock, to increase the bank’s capital and related capital ratios in order to maintain the bank’s growth.

	December 31, 2006				December 31, 2005				December 31, 2004
	Holding Company		Bank		Holding Company		Bank		Holding Company		Bank
Total risk-based capital	11.13	%	10.01	%	13.16	%	11.35	%	12.21	%	11.83	%
Tier 1 risk-based capital	8.94	%	9.03	%	11.92	%	10.19	%	10.04	%	10.57	%
Leverage capital	9.02	%	8.05	%	9.09	%	7.75	%	7.90	%	8.34	%

The decrease in the capital ratios from December 31, 2005, to December 31, 2006, is due to proportionally increased risk-weighted assets and average total assets at December 31, 2006, compared to December 31, 2005.

As of December 31, 2006, construction on our leased operations center at our corporate headquarters in Spartanburg and our Greenville market headquarters was underway with construction costs to date totaling $1.0 million and $327,000, respectively. We anticipate total remaining related capital expenditures for both of these facilities in the near future to be approximately $2.5 million. In addition, our sixth full-service branch in Charleston was being extensively renovated at a cost of $394,000 with $313,000 of this contract to be incurred during 2007. We have exercised our option to purchase the land and building at our Mount Pleasant, South Carolina branch for a purchase price of $800,000. We plan to close this purchase during May of 2007. In addition, we are renovating an existing bank branch in Greer, South Carolina for an anticipated opening in the summer of 2007. We expect to incur $300,000 in related capital expenditures in 2007.

Since our inception, we have not paid cash dividends on our common stock. Our ability to pay cash dividends is dependent on receiving cash in the form of dividends from our bank. However, certain restrictions exist regarding the ability of our bank to transfer funds to us in the form of cash dividends. All dividends are subject to prior approval of the OCC and are payable only from the undivided profits of our bank. We distributed a 3 for 2 stock split on March 1, 2004, and January 18, 2006. We also distributed a 6% stock dividend on May 16, 2006. On December 1, 2006, the Company’s board of directors authorized a stock repurchase program of up to 50,000 of its 3,458,354 shares outstanding effective immediately for a period of six months ending May 31, 2007.

Return on Equity and Assets

The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio (equity divided by total assets) for the three years ended December 31, 2006:

	December 31, 2006		December 31, 2005		December 31, 2004
Return on average assets	1.05	%	1.01	%	0.87	%
Return on average equity	16.82	%	17.72	%	13.87	%
Equity to assets ratio	5.80	%	6.71	%	5.89	%

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Effect of Inflation and Changing Prices

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

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

Off-Balance Sheet Arrangements

Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of our business activities to meet the financing needs of customers. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. These commitments are legally binding agreements to lend money at predetermined interest rates for a specified period of time and generally have fixed expiration dates or other termination clauses. We use the same credit and collateral policies in making these commitments as we do for on-balance sheet instruments.

We evaluate each customer’s creditworthiness on a case-by-case basis and obtain collateral, if necessary, based on our credit evaluation of the borrower. In addition to commitments to extend credit, we also issue standby letters of credit that are assurances to a third party that they will not suffer a loss if our customer fails to meet its contractual obligation to the third party. The credit risk involved in the underwriting of letters of credit is essentially the same as that involved in extending loan facilities to customers.

As of December 31, 2006 and 2005, we had issued commitments to extend credit of $85.3 million, and $97.1 million, respectively, through various types of commercial and consumer lending arrangements, of which the majority are at variable rates of interest. Standby letters of credit totaled $461,000 and $575,000, as of December 31, 2006 and 2005, respectively. Past experience indicates that many of these commitments to extend credit will expire unused. However, we believe that we have adequate sources of liquidity to fund commitments that may be drawn upon by borrowers. In addition, we have $15 million in letters of credit at the FHLB pledged to a public depositor.

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

Liquidity

Liquidity management involves monitoring our sources and uses of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is fairly predictable and subject to a high degree of control at the time the investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. We measure and monitor liquidity frequently, allowing us to better understand, predict and respond to balance sheet trends. A comprehensive liquidity analysis provides a summary of anticipated changes in loans, core deposits and wholesale funds. We also have recently drafted and presented to the Asset Liability Committee a detailed liquidity contingency plan designed to successfully respond to an overall decline in the economic environment, the banking industry or a problem specific to our liquidity.

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As of December 31, 2006 and 2005, our liquid assets, consisting of cash and due from banks, interest-bearing bank balances and federal funds sold, amounted to $8.2 million, and $21.3 million, representing 1.76% and 6.48% of total assets, respectively. Investment securities provide a secondary source of liquidity, net of amounts pledged for deposits and FHLB advances. Our ability to maintain and expand our deposit base and borrowing capabilities also serves as a source of liquidity. The decrease in our liquidity from 2005 to 2006 to fund the growth of our loan production offices has challenged us to maximize the various funding options available to us. Our federal funds purchased lines of credit with correspondent banks represent a readily available source of short-term funds. Proactive and well-advised daily cash management ensures that these lines are accessed and repaid with careful consideration of all our available funding options as well as the associated costs. Our overnight lines are tested at least once quarterly to ensure ease of access, continued availability and that we consistently maintain healthy working relationships with each correspondent.

We plan to meet our future cash needs through the liquidation of temporary investments, the maturities of loans and investment securities, and the generation of deposits. We will rely on the wholesale funding market less as we expand our branch network and capitalize on existing and new deposit markets throughout the state. In addition, the bank maintains federal funds purchased lines of credit with correspondent banks that totaled $30.0 million as of December 31, 2006. The bank is also a member of the FHLB of Atlanta from which application for borrowings can be made for leverage purposes, up to available collateral, if so desired. FHLB advances also provide a liquidity option when we determine that these are the best source of funds to meet existing requirements. We consider advances from the FHLB to be a reliable and readily available source of funds both for liquidity purposes and asset liability management, as well as interest rate risk management strategies. A key component in taking advantage of funding from the FHLB is maintaining good quality collateral to pledge against our advances. We primarily rely on our existing loan portfolio for this collateral; we scrutinize each loan relying on FHLB guidelines before it is determine to qualify as collateral for an FHLB advance. We believe that our existing stable base of core deposits along with continued growth in this deposit base, coupled with our available short-term and long-term borrowing options, will enable us to meet our long-term liquidity needs.

In addition, other sources of regulatory capital may be accessed such as trust preferred securities or common stock to fund our liquidity needs. In February 2007, we participated in a sale/leaseback transaction with a group of several of our board members to generate funds for the sale of some of our land and buildings. A second sale/leaseback transaction is planned for the spring of 2007.

Interest Rate Sensitivity

Asset liability management is the process by which we monitor and control the mix and maturities of our assets and liabilities. The essential purposes of asset liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest-sensitive assets and liabilities to minimize potentially adverse impacts on earnings from changes in market interest rates. Our asset liability management committee (“ALCO”) monitors and considers methods of managing exposure to interest rate risk. The ALCO consists of members of the board of directors and senior management of the bank and meets quarterly. The ALCO is charged with the responsibility to maintain the level of interest rate sensitivity of the bank’s interest-sensitive assets and liabilities within board-approved limits.

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The following table sets forth information regarding our interest rate sensitivity as of December 31, 2006, for each of the time intervals indicated. The information in the table may not be indicative of our interest rate sensitivity position at other points in time. In addition, the maturity distribution indicated in the table may differ from the contractual maturities of the interest-earning assets and interest-bearing liabilities presented due to consideration of prepayment speeds under various interest rate change scenarios in the application of the interest rate sensitivity methods described above (dollars in thousands).

	Within three months			After three but within twelve months		After one but within five years		After five years	Total
Interest-earning assets:
Federal funds sold and other	$	—		5		—		—	5
Investment securities		2,576		10,765		17,595		32,437	63,373
Loans	$	316,520		23,568		36,461		2,941	379,490
Total interest-earning assets	$	319,096		34,338		54,056		35,378	442,868
Interest-bearing liabilities:
NOW accounts	$	17,574		—		30,414		—	47,988
Money market and savings		35,765		—		45,520		—	81,285
Time deposits		68,217		97,411		62,458		—	228,086
FHLB advances		10,000		10,000		15,571		1,905	37,476
Junior subordinated debentures	$	—		13,403		—		—	13,403
Total interest-bearing liabilities	$	131,556		120,814		153,962		1,905	408,238
Period gap	$	187,540		(86,476	)	(99,906	)	33,473	34,630
Cumulative gap	$	187,540		101,064		—		—	—
Ratio of cumulative gap to total interest-earning assets		2.43	%	1.40	%	—		—	—

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates that principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not normally arise in the normal course of our business. We actively monitor and manage our interest rate risk exposure.

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

As of December 31, 2006, we were asset sensitive over a one-year time frame. However, our gap analysis is not a precise indicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by management as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of interest-earning assets and interest-bearing liabilities.

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Recently Issued Accounting Pronouncements

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

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not believe that the adoption of SFAS No. 155 will have a material impact on our financial position, results of operations and cash flows.

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

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises’ financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently analyzing the effects of FIN 48 our financial position, results of operations and cash flows but do not believe that the adoption of SFAS No. 155 will have a material impact on our financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS No. 157 is effective for us on January 1, 2008, and is not expected to have a significant impact on our financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), which amends SFAS No. 87 and SFAS No. 106 to require

recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the

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balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date—the date at which the benefit obligation and plan assets are measured—is required to be the company’s fiscal year end. SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. We do not have a defined benefit pension plan. We do not believe that the adoption of SFAS No. 158 will have a material impact on our financial position, results of operations and cash flows.

In September, 2006, The FASB ratified the consensuses reached by the FASB’s Emerging Issues Task Force (“EITF”) relating to EITF 06-4 “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 addresses employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods and requires employers to recognize a liability for future benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, or Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus Opinion—1967”. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. We are currently evaluating the impact that adopting this standard will have, but we do not believe that the adoption of EITF 06-4 will have a material impact on our financial position, results of operations and cash flows.

In September 2006, the FASB ratified the consensus reached related to EITF 06-5, “Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.” EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact that adopting this standard will have, but we do not believe that the adoption of EITF 06-5 will have a material impact on our financial position, results of operations and cash flows.

In September 2006, the SEC issued Staff Accounting Bulleting No. 108 (“SAB 108”). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The adoption of SAB 108 did not have a material impact on our financial position, results of operations and cash flows.

In December 2006, the FASB issued a Staff Position (“FSP”) on EITF 00-19-2, “Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”). This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” If the

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transfer of consideration under a registration payment arrangement is probable and can be reasonably estimated at inception, the contingent liability under the registration payment arrangement is included in the allocation of proceeds from the related financing transaction (or recorded subsequent to the inception of a prior financing transaction) using the measurement guidance in SFAS No. 5. This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the issuance of the FSP. For prior arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006 and interim periods within those years. We do not believe the adoption of this FSP will have a material impact on our financial position, results of operations and cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities. SFAS 159 is effective for us on January 1, 2008. Earlier adoption is permitted in 2007 if we also elect to apply the provisions of SFAS 157, “Fair Value Measurement.” We are currently analyzing the fair value option provided under SFAS 159. We do not believe that adoption of this FASB will have a material impact on our financial position, results of operations and cash flows.

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Item 8. Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

First National Bancshares, Inc. and Subsidiary

Spartanburg, South Carolina

We have audited the accompanying consolidated balance sheets of First National Bancshares, Inc. and Subsidiary (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income, and cash flows for each of the years in the three year period ended December 31, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First National Bancshares, Inc. and Subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

Greenville, South Carolina

March 16, 2007

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FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2006 and 2005

(dollars in thousands)

	2006			2005
Assets
Cash and due from banks	$	8,200		$	2,691
Interest-bearing bank balances		5			1,937
Federal funds sold		—			16,678
Securities available for sale		63,374			45,151
Loans, net of allowance for loan losses of $3,795 and $2,719, respectively		375,695			248,686
Premises and equipment, net		6,906			4,977
Other		11,202			8,559
Total assets	$	465,382		$	328,679
Liabilities and Shareholders’ Equity
Liabilities:
Deposits
Noninterest-bearing	$	31,321		$	18,379
Interest-bearing		345,380			253,316
Total deposits		376,701			271,695
FHLB advances		37,476			26,612
Junior subordinated debentures		13,403			6,186
Federal funds purchased		7,970			—
Accrued expenses and other liabilities		2,842			2,157
Total liabilities		438,392			306,650
Commitments and contingencies—Notes 16 and 17
Shareholders’ equity:
Preferred stock, par value $.01 per share, 10,000,000 shares authorized, no shares issued or outstanding		—			—
Common stock, par value $.01 per share, 10,000,000 shares authorized; 3,700,439 and 3,130,767 shares issued and outstanding, respectively		37			31
Additional paid-in capital		26,906			18,189
Unearned ESOP shares		(558	)		(599	)
Retained earnings		1,071			5,080
Accumulated other comprehensive loss		(466	)		(672	)
Total shareholders’ equity		26,990			22,029
Total liabilities and shareholders’ equity	$	465,382		$	328,679

The accompanying notes are an integral part of these consolidated financial statements.

2006 shares outstanding, common stock, additional paid-in capital and retained earnings reflect the 7% stock dividend to be distributed on March 30, 2007.

58

FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Income

For the Years Ended December 31, 2006, 2005 and 2004

(dollars in thousands, except share data)

	2006		2005		2004
Interest income:
Loans	$	26,237	$	15,461	$	8,926
Taxable securities		1,977		1,319		1,190
Nontaxable securities		352		262		230
Federal funds sold and other		320		299		78
Total interest income		28,886		17,341		10,424
Interest expense:
Deposits		12,134		6,484		3,397
FHLB advances		1,570		925		269
Junior subordinated debentures		877		380		236
Federal funds purchased		144		41		10
Total interest expense		14,725		7,830		3,912
Net interest income		14,161		9,511		6,512
Provision for loan losses		1,192		594		679
Net interest income after provision for loan losses		12,969		8,917		5,833
Noninterest income:
Service charges and fees on deposit accounts		1,080		961		866
Gain on sale of guaranteed portion of SBA loans		322		441		348
Loan service charges and fees		220		163		127
Mortgage loan fees from correspondent bank		179		135		103
Gain on sale of securities available for sale		33		—		160
Other		245		155		167
Total noninterest income		2,079		1,855		1,771
Noninterest expense:
Salaries and employee benefits		5,128		3,744		2,783
Occupancy and equipment expense		1,046		660		562
Public relations		609		378		308
Data processing and ATM expense		587		487		378
Telephone and supplies		295		211		137
Professional fees		284		251		231
Other		952		745		567
Total noninterest expense		8,901		6,476		4,966
Net income before income taxes		6,147		4,296		2,638
Provision for income taxes		2,095		1,461		823
Net income	$	4,052	$	2,835	$	1,815
Net income per share
Basic	$	1.12	$	0.90	$	0.59
Diluted	$	0.94	$	0.73	$	0.49
Weighted average shares outstanding
Basic		3,615,022		3,142,035		3,067,182
Diluted		4,324,561		3,933,760		3,728,736

All share and per share amounts reflect the 3 for 2 stock split distributed on January 18, 2006, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007.

See Note 1 to the Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

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FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income

For the Years Ended December 31, 2006, 2005 and 2004

(dollars in thousands)

	Common Stock				Additional Paid-In Capital			Unearned ESOP Shares			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total Shareholders’ Equity
	Shares		Amount
Balance, December 31, 2003	2,704,275		$	27	$	11,801		$	—		$	430		$	(29	)	$	12,229
Cash in lieu of fractional shares	(6	)		—		—			—			—			—			—
Grant of employee stock options	—			—		9			—			—			—			9
Comprehensive income:
Net income	—			—		—			—			1,815			—			1,815
Change in net unrealized loss on securities available for sale, net of income tax of $127	—			—		—			—			—			(247	)		(247	)
Reclassification adjustment for gains included in net income, net of income tax of $54	—			—		—			—			—			106			106
Total comprehensive income	—			—		—			—			—			—			1,674
Balance, December 31, 2004	2,704,269		$	27	$	11,810		$	—		$	2,245		$	(170	)	$	13,912
Grant of employee stock options	—			—		32			—			—			—			32
Proceeds from exercise of employee stock options	1,575			—		12			—			—			—			12
Proceeds from sale of stock, net of offering costs of $460	424,923			4		6,335			—			—			—			6,339
Shares issued to leveraged ESOP	—			—		—			(600	)		—			—			(600	)
Allocation of ESOP shares	—			—		—			1			—			—			1
Comprehensive income:
Net income	—			—		—			—			2,835			—			2,835
Change in net unrealized loss on securities available for sale, net of income tax of $259	—			—		—			—			—			(502	)		(502	)
Total comprehensive income	—			—		—			—			—			—			2,333
Balance, December 31, 2005	3,130,767		$	31	$	18,189		$	(599	)	$	5,080		$	(672	)	$	22,029
Grant of employee stock options	—			—		73			—			—			—			73
Proceeds from exercise of employee stock options/director stock warrants	139,999			1		590			—			—			—			591
Shares issued from the 6% stock dividend	187,588			2		3,784			—			(3,786	)		—			—
Shares to be distributed with the 7% stock dividend	242,085			3		4,272			—			(4,275	)		—			—
Cash paid in lieu of fractional shares	—			—		(4	)		—			—			—			(4	)
Allocation of ESOP shares	—			—		2			41			—			—			43
Comprehensive income:
Net income	—			—		—			—			4,052			—			4,052
Change in net unrealized loss on securities available for sale, net of income tax of $117	—			—		—			—			—			228			228
Reclassification adjustment for gains included in net income, net of income tax of $11	—			—		—			—			—			(22	)		(22	)
Total comprehensive income	—			—		—			—			—			—			4,258
Balance, December 31, 2006	3,700,439		$	37	$	26,906		$	(558	)	$	1,071		$	(466	)	$	26,990

All share and per share amounts reflect the 3 for 2 stock split distributed on January 18, 2006, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007.

See Note 1 to the Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

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FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2006, 2005 and 2004

(dollars in thousands)

	2006			2005			2004
Cash flows from operating activities:
Net income	$	4,052		$	2,835		$	1,815
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,192			594			679
Provision for deferred income tax benefit		(384	)		(66	)		(95	)
Depreciation		409			269			245
Premium amortization, net		33			86			103
Gain on sale of securities available for sale		(33	)		—			(160	)
Gain on sale of guaranteed portion of SBA loans		(322	)		(441	)		(348	)
Origination of residential mortgage loans held for sale		(18,215	)		(12,196	)		(91	)
Proceeds from sale of residential mortgage loans held for sale		18,849			11,653			—
Employee stock options granted		73			32			9
Allocation of ESOP shares		43			1			—
Changes in deferred and accrued amounts:
Prepaid expenses and other assets		(1,120	)		(1,321	)		(323	)
Accrued expenses and other liabilities		486			548			71
Net cash provided by operating activities		5,063			1,994			1,905
Cash flows from investing activities:
Proceeds from maturities/prepayment of securities available for sale		6,543			6,514			8,671
Proceeds from sale of securities available for sale		5,601			—			14,375
Proceeds from sale of guaranteed portion of SBA loans		5,650			6,188			3,354
Purchases of securities available for sale		(30,055	)		(16,347	)		(23,193	)
Loan originations, net of principal collections		(134,039	)		(68,137	)		(61,109	)
Investment in common securities of Trusts		(217	)		—			(93	)
Net purchases of premises and equipment		(2,338	)		(972	)		(139	)
Redemption of FHLB and other stock		—			357			305
Purchase of FHLB and other stock		(953	)		(744	)		(1,236	)
Net cash used by investing activities		(149,808	)		(73,141	)		(59,065	)
Cash flows from financing activities:
Proceeds from issuance of junior subordinated debentures		7,217			—			3,093
Proceeds from secondary stock offering, net of offering expenses		—			6,339			—
Shares issued to leveraged ESOP		—			(600	)		—
Increase in federal funds purchased		7,970			—			—
Increase in FHLB advances		28,400			14,100			36,730
Repayment of FHLB advances		(17,536	)		(10,566	)		(23,151	)
Proceeds from exercise of employee stock options/director stock warrants		591			12			—
Cash paid in lieu of fractional shares		(4	)		—			—
Net increase in deposits		105,006			79,884			37,078
Net cash provided by financing activities		131,644			89,169			53,750
Net increase (decrease) in cash and cash equivalents		(13,101	)		18,022			(3,410	)
Cash and cash equivalents, beginning of year		21,306			3,284			6,694
Cash and cash equivalents, end of year	$	8,205		$	21,306		$	3,284

All share and per share amounts reflect the 3 for 2 stock split distributed on January 18, 2006, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007.

See Note 1 to the Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

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FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

Note 1—Summary of Significant Accounting Policies and Activities

Business Activity and Organization—First National Bancshares, Inc. (the “Company”) was incorporated on July 14, 1999, under the laws of the state of South Carolina for the purpose of operating as a bank holding company pursuant to the federal Bank Holding Company Act of 1956, as amended, and to purchase 100% of the capital stock of First National Bank of Spartanburg (the “Bank”). The Bank was organized as a national bank under the laws of the United States of America with the purpose of becoming a new bank to be located in Spartanburg County, South Carolina. The Bank began transacting business on March 27, 2000, and provides full personal and commercial banking services to customers and is subject to regulation by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. During 2002, the Company adopted a resolution changing the legal name of the Bank to First National Bank of the South. The Bank continues to do business in Spartanburg County as First National Bank of Spartanburg.

The Bank opened two additional full service branches in Spartanburg in 2000 and 2001. In August 2002, the Bank began offering trust and investment management services through Colonial Trust Company, the oldest private trust company in South Carolina. In March 2004, the Bank established a loan production office in Greenville County which includes the operations of its small business lending division, First National Business Capital. This division originates small business loans under the U. S. Small Business Administration’s (“SBA’s”) various loan programs. In October of 2005, the Bank successfully converted its loan production office that opened in October 2004 in Mount Pleasant, South Carolina to its fourth full-service branch, its first in the Charleston market.

In January 2006, the Bank opened a loan production office in Columbia, South Carolina and in February 2006, the Bank added the Daniel Island loan production office to its Charleston market operations. In September 2006, the Bank opened its fifth full-service branch, its first in the Greenville market. This branch is currently housed in a temporary location until the construction of the permanent branch and market headquarters on Pelham Road in Greenville is completed in early 2007. Upon completion, First National Business Capital will relocate to this facility.

The Company has received regulatory approval to open its sixth full-service branch in a leased facility located at 140 East Bay Street in downtown Charleston, South Carolina. Renovations are currently under way at this location, with the opening of this branch anticipated in the spring of 2007.

Additionally, the Bank has announced plans to expand its banking operations into York and Lancaster Counties of South Carolina beginning with a loan production office in Rock Hill, which opened in February 2007. Finally, construction of a new 14,500 square foot Operations Center located adjacent to the existing corporate headquarters in Spartanburg is scheduled for completion in spring 2007.

The Company offered its common stock for sale to the public under an initial public offering which began on November 10, 1999, in which 3.1 million shares of common stock were sold, including 1,235,400 shares sold to the Company’s directors and executive officers at $3.92 per share. The offering raised approximately $11,800,000, net of underwriting discounts and commissions and offering expenses, and was completed on February 10, 2000. These per share and share amounts reflect each of the 3 for 2 stock splits distributed on January 18, 2006, and March 1, 2004, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007. The Company used $11 million of the proceeds to capitalize the Bank.

The Company offered its common stock for sale to the public under a best efforts offering which began on October 14, 2005, in which 628,529 shares of common stock were sold, including 32,804 shares sold to meet

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oversubscriptions. The shares were sold by the Company’s officers and directors at a price of $14.10 per share. Total net proceeds to the Company from the offering were approximately $6.3 million after deducting expenses and the net proceeds paid to the selling shareholder from the sale of its 146,312 shares included in the offering which was completed in December 2005. These per share and share amounts reflect the 3 for 2 stock split distributed on January 18, 2006, the 6% stock dividend distributed on May 16, 2006 and the 7% stock dividend to be distributed on March 30, 2007. The Company used the net proceeds from the offering for general corporate purposes and to enhance the Bank’s capital and liquidity.

Principles of Consolidation—The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America “GAAP”) and to general practices in the banking industry.

Use of Estimates—The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of income and expense during the reporting period. Actual results could differ from these estimates.

Concentration of Credit Risk—The Company, through the Bank, makes loans to individuals and small- to mid-sized businesses for various personal and commercial purposes primarily in Spartanburg, Greenville, Richland and Charleston Counties in South Carolina through its recent expansion. The Company has a diversified loan portfolio and the Company’s loan portfolio is not dependent on any specific economic segment. The Company regularly monitors its credit concentrations based on loan purpose, industry and customer base. As of December 31, 2006, there were no material concentrations of credit risk within the Company’s loan portfolio.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk that could arise from potential 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. Additionally, 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). These loans are underwritten and monitored to manage the associated risks. Management has determined that the Company has a concentration of non-1-to-4-family residential loans that exceed supervisory limits for loan to value ratios. This segment of loans is generally described as the “commercial basket” and may not exceed thirty percent of total regulatory capital. The commercial basket totals $12.4 million at December 31, 2006, representing 45.8% of total equity and 3.26% of loans, net of unearned income. At December 31, 2005, this concentration totaled $13.6 million representing 61.9% of total equity and 5.4% of loans, net of allowance for loan losses. The Company experienced no loan losses related to this identified risk during the years ended December 31, 2006, 2005, and 2004.

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

Cash and Cash Equivalents—In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 95, “Statement of Cash Flows”, the Company considers cash and cash equivalents to be those amounts included in the balance sheet captions “Cash and due from banks”, “Interest-bearing bank balances” and “Federal funds sold”.

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Investment Securities—Investment securities are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Management classifies securities at the time of purchase into one of three categories as follows: (1) Securities Held to Maturity—securities which the Company has the positive intent and ability to hold to maturity, which are reported at amortized cost; (2) Trading Securities—securities that are bought and held principally for the purpose of selling them in the near future, which are reported at fair value with unrealized gains and losses included in earnings; and (3) Securities Available for Sale—securities that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity as accumulated other comprehensive income. The amortization of premiums and accretion of discounts on investment securities are recorded as adjustments to interest income. Gains or losses on sales of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Unrealized losses on securities, reflecting a decline in value or impairment judged by the Company to be other than temporary, are charged to earnings in the consolidated statements of income.

Loans and Interest Income—Loans of the Bank are carried at principal amounts, reduced by an allowance for loan losses. The Bank recognizes interest income daily based on the principal amount outstanding using the simple interest method. The accrual of interest is generally discontinued on loans of the Bank which become 90 days past due as to principal or interest or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. Management may elect to continue accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balances and accrued interest and the loan is in the process of collection. Amounts received on nonaccrual loans generally are applied against principal prior to the recognition of any interest income. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.

The Bank also originates loans to small businesses under the United States Small Business Administration (“SBA”) loan programs. These loans are solicited from the Company’s market areas and are generally underwritten in the same manner as conventional loans generated for the Bank’s portfolio. The portion of loans that are secured by the guaranty of the SBA is usually sold in the secondary market to provide additional liquidity and to provide a source of noninterest income. Deferred gains on the sale of the guaranteed portion of SBA loans are amortized over the lives of the underlying loans using the interest method. Excess servicing is recognized as an asset and is amortized in proportion to and over the period of the estimated net servicing income and is subject to periodic assessment. Excess servicing at December 31, 2006 and 2005 of $320,000 and $299,000, respectively is included in the balance sheet caption “other assets.” The guaranteed amount of loans sold to the SBA serviced by the Company was approximately $14.7 million and $8.7 million at December 31, 2006 and 2005, respectively.

Residential Mortgage Loans Held for Sale—Mortgage loans originated for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations. The Company obtains commitments from the secondary market investors prior to closing of the loans; therefore, no gains or losses are recognized when the loans are sold. The Company receives origination fees received from the secondary market investors. At December 31, 2006, there were no residential mortgage loans held for sale compared to approximately $634,000 at December 31, 2005, which is included in loans, net of allowance for loan losses on the Consolidated Balance Sheets.

Impairment of Loans—Loans are considered to be impaired when, in management’s judgment, the collection of all amounts of principal and interest is not probable in accordance with the terms of the loan agreement. The Company accounts for impaired loans in accordance with the terms of SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended by SFAS No. 118 in the areas of disclosure requirements and methods of recognizing income. SFAS No. 114 requires that impaired loans be recorded at fair value, which is determined based upon the present value of expected cash flows discounted at the loan’s effective

64

interest rate, the market price of the loan, if available, or the value of the underlying collateral. All cash receipts on impaired loans are applied to principal until such time as the principal is brought current. After principal has been satisfied, future cash receipts are applied to interest income, to the extent that any interest has been foregone. The Bank determines which loans are impaired through a loan review process.

Allowance for Loan Losses—The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan, or the fair value of the collateral securing the loan, is lower then the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimated of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. In particular, the unallocated component also reflects environmental issues unique to our institution and the markets we serve.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

Loan Fees—Loan origination fees and direct costs of loan originations are deferred and recognized as an adjustment of yield by the interest method based on the contractual terms of the loan. Loan commitment fees are deferred and recognized as an adjustment of yield over the related loan’s life, or if the commitment expires unexercised, recognized in income upon expiration.

Off-Balance Sheet Commitments—In the ordinary course of business, the Bank enters into off-balance sheet financial instruments consisting of legally binding commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they are funded.

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Premises and Equipment—Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization, computed principally by the straight line method over the estimated useful lives of the assets as follows: building, 40 years; furniture and fixtures, 7 to 10 years; and computer hardware and software, 3 to 5 years. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the estimated useful life of the asset or the term of the operating lease. Additions to premises and equipment and major replacements and betterments are added at cost. Maintenance, repairs and minor replacements are included in operating expense. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income.

Income Taxes—Income taxes are accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes”. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets if it is determined to be “more likely than not” that all or some portion of the potential deferred tax asset will not be realized.

Reclassifications—Certain prior year amounts have been reclassified to conform with the current year presentation. These reclassifications have no effect on previously reported shareholders’ equity or net income. Share and per share data reflect the 3 for 2 stock split distributed on January 18, 2006, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007, discussed below under “Net Income Per Share”.

Stock Compensation Plans—At December 31, 2006, the Company has several stock-based employee compensation plans, which are more fully described in Notes 14 and 15. On January 1, 2006, we adopted the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) SFAS No. 123(R), Accounting for Stock-Based Compensation, to account for compensation costs under our stock compensation plans. We previously accounted for our stock compensation plans under the provisions of SFAS No. 148, Accounting for Stock-Based Compensation, which are consistent with the provisions of SFAS No. 123(R) but allowed us to use the prospective method of adoption since we did so by December 31, 2003. Prior to our adoption of SFAS No. 148, we utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issues to Employees (as amended) (“APB 25”). Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for our stock options granted in years prior to 2003 because the option exercise price in our plans equals the market price on the date of grant. Prior to January 1, 2006, we only disclosed the pro forma effects on net income and earnings per share as if the fair value recognition provisions of SFAS 123(R) had been utilized for all options granted prior to January 1, 2003. Since January 1, 2003, we have used the fair value method to record the compensation expense for stock options granted after January 1, 2003, over the vesting period of these grants under the prospective method.

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In adopting SFAS No. 123(R), we elected to use the modified prospective method to account for the transition. Under the modified prospective method, compensation cost is recognized from the adoption date forward for all stock options granted after the date of adoption and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards for the periods prior to adopting SFAS No. 123(R) on January 1, 2006 (in thousands, except per share amounts):

Pro Forma Disclosure for Net Income and Net Income per Share

	2005		2004
Net income—as reported	$	2,835	$	1,815
Net income—pro forma		2,773		1,565
Net income per share—basic
As reported	$	0.90	$	0.59
Pro forma		0.88		0.51
Net income per share—diluted
As reported	$	0.73	$	0.49
Pro forma		0.70		0.41

These amounts have been adjusted for the 3 for 2 stock split distributed on January 18, 2006, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007.

The weighted average fair value per share of options granted in 2006, 2005 and 2004 amounted to $7.14, $6.99, and $1.90, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants: expected volatility of 24.16%, 39.46% and 6.0%, for 2006, 2005 and 2004, respectively; risk-free interest rate of 5.25%, 4.25% and 2.25% for 2006, 2005 and 2004, respectively, and expected lives of the options of seven years in all years presented. There were no cash dividends in any years presented. A 6% stock dividend was distributed on May 16, 2006. The weighted average fair value amounts reflect this dividend, as well as the 3 for 2 stock splits distributed on January 18, 2006, and March 1, 2004.

Net Income Per Share—Basic income per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.

The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for net income for the years ended December 31, 2006, 2005 and 2004:

	2006				2005				2004
	BASIC		DILUTED		BASIC		DILUTED		BASIC		DILUTED
Net income	$	4,052	$	4,052	$	2,835	$	2,835	$	1,815	$	1,815
Grant of employee stock options		—		—		32		32		9		9
Adjusted net income	$	4,052	$	4,052	$	2,867	$	2,867		1,824		1,824
Weighted average shares outstanding		3,615,022		3,615,022		3,142,035		3,142,035		3,067,182		3,067,182
Effect of Dilutive Securities:
Stock options & warrants		—		663,121		—		739,930		—		618,275
		3,615,022		4,278,143		3,142,035		3,881,965		3,067,182		3,685,457
Per share amount	$	1.12	$	0.94	$	0.90	$	0.73	$	0.59	$	0.49

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Antidilutive instruments were excluded from the calculation of diluted earnings per share above.

On March 2, 2007, the Company’s board of directors declared a 7% stock dividend to shareholders of record on March 16, 2007. The 7% stock dividend will be paid on March 30, 2007. The 2006 shareholders’ equity, share and per share data reflect the 7% dividend. The number of outstanding shares will increase from 3,458,354 to 3,700,439.

On April 18, 2006, the Company’s board of directors approved a 6% stock dividend on the Company’s outstanding stock. The dividend was distributed on May 16, 2006. The number of outstanding shares increased from 3,130,767 to 3,318,355. All share amounts for periods prior to the dividend have been restated to reflect this dividend, as well as the two 3 for 2 splits.

On December 30, 2005, the Company’s board of directors approved a 3 for 2 split of the Company’s outstanding stock. The split was distributed on January 18, 2006. The number of outstanding shares increased from 2,087,178 to 3,130,767.

On January 20, 2004, the Company’s board of directors approved a 3 for 2 split of the Company’s outstanding stock. The split was distributed on March 1, 2004. The number of outstanding shares increased from 1,802,846 to 2,704,269.

Comprehensive Income—Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Recently Adopted Accounting Standards—In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 155 will have any impact on its financial position, results of operations and cash flows.

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

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In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently analyzing the effects of FIN 48 but does not anticipate that adoption of this standard will have a material impact.

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

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”), which amends SFAS No. 87 and SFAS No. 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date—the date at which the benefit obligation and plan assets are measured—is required to be the company’s fiscal year end. SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which area effective for fiscal years ending after December 15, 2008. The Company is currently analyzing the effects of SFAS No. 158 but does not expect its implementation will have a significant impact on the Company’s financial conditions or results of operations.

In September 2006, the FASB ratified the consensuses reached by the FASB’s Emerging Issues Task Force (EITF) relating to EITF 06-4 “Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. EITF 06-4 addresses employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion—1967”. EITF 06-4 is effective for fiscal years beginning after December 15, 2006. Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The Company is currently analyzing EITF 06-4 but does not believe the adoption of this standard will have a material impact on its financial position, results of operations or cash flows.

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

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Note 2—Supplemental Noncash Investing and Financing Data

The following summarizes supplemental cash flow data for the years ended December 31 (dollars in thousands):

	2006		2005			2004
Interest paid	$	14,126	$	7,747		$	3,813
Cash paid for income taxes		2,313		1,387			1,075
Change in fair value of securities available for sale, net of income tax		206		(502	)		(141	)

Note 3—Restrictions on Cash and Due from Banks

The Bank is required to maintain average reserve balances, net of vault cash, with the Federal Reserve Bank (“FRB”) based upon a percentage of deposits. The amount of the required reserve balance which is reported in “Cash and due from banks” on the accompanying consolidated balance sheets at December 31, 2006 and 2005, was $1,593,000 and $269,000, respectively.

Note 4—Investment Securities

The amortized cost, fair value and gross unrealized holding gains and losses of securities available for sale at December 31, 2006 and 2005, consisted of the following (dollars in thousands):

	2006
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale:
U.S. Government/government sponsored agencies	$	13,969	$	—	$	(236	)	$	13,733
Mortgage-backed		36,729		120		(572	)		36,277
Municipal		13,382		35		(53	)		13,364
Total	$	64,080	$	155	$	(861	)	$	63,374

	2005
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities available for sale:
U.S. Government/government sponsored agencies	$	9,500	$	—	$	(331	)	$	9,169
Mortgage-backed		28,070		3		(695	)		27,378
Municipal		8,600		50		(46	)		8,604
Total	$	46,170	$	53	$	(1,072	)	$	45,151

At December 31, 2006 and 2005, securities with a carrying value of approximately $61.3 million and $34.3 million respectively, were pledged to secure public deposits and for other purposes required or permitted by law, including as collateral for FHLB advances outstanding.

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The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2006 (dollars in thousands).

	Securities available for sale:
	Less than 12 Months					12 Months or More					Total
	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government/government sponsored agencies	$	1,967	$	(2	)	$	8,267	$	(233	)	$	10,234	$	(236	)
Mortgage-backed		4,482		(18	)		20,477		(554	)		24,959		(572	)
Municipal		4,681		(26	)		1,576		(28	)		6,257		(53	)
Total	$	11,130	$	(46	)	$	30,320	$	(815	)	$	41,450	$	(861	)
	Securities available for sale:
	Less than 12 Months					12 Months or More					Total
	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Government/government sponsored agencies	$	2,937	$	(63	)	$	6,232	$	(268	)	$	9,169	$	(331	)
Mortgage-backed		11,931		(204	)		13,388		(491	)		25,319		(695	)
Municipal		2,307		(11	)		1,336		(35	)		3,643		(46	)
Total	$	17,175	$	(278	)	$	20,956	$	(794	)	$	38,131	$	(1,072	)

At December 31, 2006, forty-three individual securities had been in a continuous loss position for twelve months or more. At December 31, 2005, thirty individual securities had been in a continuous loss position for twelve months or more. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. The Company believes, based on industry analyst reports and the credit ratings of the securities, that the deterioration in value is attributable to changes in market interest rates and not in the credit quality of the issuer and, therefore, these losses are not considered other-than-temporary.

The amortized cost and estimated fair value of investment securities available for sale at December 31, 2006 by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or repay obligations with or without prepayment penalties. Fair value of securities was determined using quoted market prices (dollars in thousands).

	2006
	Amortized Cost		Fair Value
Due after one year, through five years	$	9,000	$	8,787
Due after five years, through ten years		8,562		8,510
Due after fifteen years		9,789		9,800
Subtotal	$	27,351	$	27,097
Mortgage-backed securities		36,729		36,277
Total	$	64,080	$	63,374

Note 5—Investments Required by Law

The Bank, as a member of the FRB and the Federal Home Loan Bank (“FHLB”) is required to own capital stock in these organizations. The Bank’s equity investments required by law are included in the accompanying consolidated balance sheets in “Other assets”. The amount of FRB stock owned is based on the Bank’s capital

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levels and totaled $602,000 and $448,000 at December 31, 2006 and 2005, respectively. The amount of FHLB stock owned is determined based on the Bank’s balances of commercial loans, residential mortgages and advances from the FHLB and totaled $2,356,000 and $1,674,000 at December 31, 2006 and 2005, respectively. No ready market exists for these stocks and they have no quoted market value. However, redemption of these stocks has historically been at par value. Accordingly, the carrying amounts are deemed to be a reasonable estimate of fair value.

Note 6—Loans

A summary of loans by classification at December 31 is as follows (dollars in thousands):

	December 31, 2006					December 31, 2005
	Amount			% of Total		Amount			% of Total
Commercial and industrial	$	25,604		6.75	%	$	20,902		8.31	%
Commercial secured by real estate		261,961		69.03	%		152,726		60.75	%
Real estate—residential mortgages		86,022		22.67	%		71,900		28.60	%
Installment and other consumer loans		6,458		1.70	%		6,273		2.50	%
Unearned income		(555	)	(0.15	)%		(396	)	(0.16	)%
Total loans, net of unearned income	$	379,490		100.00	%	$	251,405		100.00	%
Less—allowance for loan losses		(3,795	)	1.00	%		(2,719	)	1.08	%
Total loans, net	$	375,695				$	248,686

Approximately $300,101,000 of the loans were variable interest rate loans at December 31, 2006. The remaining portfolio was comprised of fixed interest rate loans.

At December 31, 2006 and 2005, $477,000 and $349,000 in loans were on nonaccrual status, respectively. Foregone interest income on these nonaccrual loans and other nonaccrual loans charged off during the year was approximately $24,000, $21,600, and $1,800 in 2006, 2005, and 2004, respectively. There were no loans contractually past due in excess of 90 days and still accruing interest at December 31, 2006 or 2005. There were no foreclosed loans or other real estate owned at December 31, 2006 or 2005. There were impaired loans of $776,000 and $1.7 million with related valuation allowances of $167,000 and $252,000 at December 31, 2006 and 2005, respectively.

Qualifying loans held by the bank and collateralized by 1-4 family residences of $27,360,000 were pledged as collateral for FHLB advances outstanding of $26,612,000 at December 31, 2005. At December 31, 2006, qualifying loans held by the bank and collateralized by 1-4 family residences, HELOC’s and commercial properties totaling $57,678,000 were pledged as collateral for FHLB advances outstanding of $37,476,000.

Changes in the allowance for loan losses for the years ended December 31 were as follows (dollars in thousands):

	2006			2005			2004
Balance, beginning of year	$	2,719		$	2,258		$	1,631
Provision charged to operations		1,192			594			679
Loans charged off		(139	)		(144	)		(54	)
Recoveries on loans previously charged off		23			11			2
Balance, end of year	$	3,795		$	2,719		$	2,258

Directors, executive officers and associates of such persons are customers of and have transactions with the Bank in the ordinary course of business. Included in such transactions are outstanding loans and commitments,

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all of which are made under substantially the same credit terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility.

The aggregate dollar amount of these outstanding loans was approximately $12.93 million and $14.25 million at December 31, 2006 and 2005, respectively. During 2006, new loans and advances on these lines of credit totaled approximately $5.63 million and payments on these loans and lines totaled approximately $6.95 million. At December 31, 2006, there were unfunded commitments and commitments to extend additional credit to related parties in the amount of approximately $348,000.

Under current Federal Reserve regulations, the Bank is limited to the amount it may loan to the Company. Loans made by the Bank may not exceed 10% and loans to all affiliates may not exceed 20% of the Bank’s capital, surplus and undivided profits, after adding back the allowance for loan losses. There were no loans outstanding between the Bank and the Company at December 31, 2006 or 2005.

Note 7—Premises and Equipment

A summary of premises and equipment at December 31 is as follows (dollars in thousands):

	2006		2005
Land	$	1,793	$	1,374
Building and improvements		3,088		3,057
Furniture, fixtures and equipment		2,077		1,657
Construction in progress		1,446		36
Subtotal	$	8,404	$	6,124
Accumulated depreciation		1,498		1,147
Total	$	6,906	$	4,977

Depreciation expense charged to operations totaled $409,000, $269,000, and $245,000 in 2006, 2005, and 2004, respectively. At December 31, 2006, construction was ongoing at various locations, with costs incurred to date totaling $1.4 million and another $2.5 million currently estimated to be spent completing these projects.

The Bank entered into a long-term land operating lease during 2000, which had an initial term of 20 years and various renewal options under substantially the same terms. Rent expense charged to operations totaled $53,000, $51,000 and $48,000 for each of the years ended December 31, 2006, 2005, and 2004, respectively. In addition, the Bank currently has short-term operating leases for certain branch facilities and loan production offices. The annual minimum rental commitments under the terms of the Company’s noncancellable leases at December 31, 2006 are as follows (dollars in thousands):

2007	$	230
2008		189
2009		175
2010		180
2011		186
Thereafter		1,042
Total	$	2,002

Note 8—Deposits

The aggregate amount of time deposits with a minimum denomination of $100,000 was approximately $130.0 million and $76.9 million at December 31, 2006 and 2005, respectively.

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The scheduled maturities of time deposits at December 31 are as follows (dollars in thousands):

	2006		2005
One year or less	$	165,181	$	107,496
From one year to three years		62,043		35,885
After three years		843		31,408
Total	$	228,067	$	174,789

Note 9—Lines of Credit

At December 31, 2006 and 2005, the Bank had short-term lines of credit with correspondent banks to purchase unsecured federal funds totaling $30.0 million and $23.5 million, respectively. The interest rate on any borrowings under these lines would be the prevailing market rate for federal funds purchased.

Note 10—FHLB Advances

The Bank has the ability to borrow up to 20% of its total assets from the FHLB as of December 31, 2006, limited to qualifying collateral. Borrowings under this arrangement can be made with various terms and repayment schedules and with fixed or variable rates of interest. The borrowings under this arrangement are available by pledging collateral and may require additional purchases of stock in the FHLB.

Qualifying loans held by the bank and collateralized by 1-4 family residences of $27,360,000 were pledged as collateral for FHLB advances outstanding of $26,612,000 at December 31, 2005. At December 31, 2006, qualifying loans held by the bank and collateralized by 1-4 family residences, home equity lines of credit (“HELOC’s”) and commercial properties totaling $57,678,000 were pledged as collateral for FHLB advances outstanding of $37,476,000, and letters of credit totaling $15 million pledged to a public depositor.

At December 31, 2006, fixed rate FHLB advances outstanding ranged from $1 million to $2.1 million with initial maturities of five to seven years and rates of 3.91% to 4.70%. At December 31, 2006, advances totaling $12.5 million were subject to call features at the option of the FHLB with call dates ranging from April 2007 to March 2008 and current rates of 2.92% to 4.95%. Advances totaling $20 million at December 31, 2006, were at variable rates based on three-month LIBOR and prime and were priced from 5.38% to 5.40% as of year end, depending on the reset date.

The following table lists a summary of the terms and maturities for the advances as of December 31, 2006 (dollars in thousands).

	2006 Amount
Due in 2007	$	5,000
Due in 2008		10,000
Due in 2009		1,000
Due in 2010		—
Due in 2011		7,071
Thereafter		14,405
	$	37,476

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Note 11—Income Taxes

The following is a summary of the items which caused recorded income taxes to differ from taxes computed using the statutory tax rate for the periods ended December 31 (dollars in thousands):

	2006			2005			2004
Income tax expense at federal statutory rate of 34%	$	2,090		$	1,461		$	897
Change in valuation allowance		—			—			—
State income tax, net of federal effect		146			89			62
Tax-exempt securities income		(108	)		(89	)		(70	)
Bank-owned life insurance earnings		(42	)		(35	)		(43	)
Other, net		9			35			(23	)
Income tax expense	$	2,095		$	1,461		$	823

The provision for income taxes for the years ended December 31 is as follows (dollars in thousands):

	2006			2005			2004
Current:
Federal	$	2,258		$	1,393		$	827
State		221			134			92
Total	$	2,479		$	1,527		$	919
Deferred:
Federal	$	(384	)	$	(68	)	$	(98	)
State		—			2			3
Total		(384	)		(66	)		(95	)
Provision for income taxes	$	2,095		$	1,461		$	824

The components of the deferred tax assets and liabilities at December 31 are as follows (dollars in thousands):

	2006		2005
Deferred tax liability:
Net deferred loan costs	$	93	$	45
Prepaid expenses deducted currently for tax		62		85
Tax depreciation in excess of book		166		166
Loan servicing rights		109		101
Total deferred tax liability		430		397
Deferred tax asset:
Allowance for loan losses		1,221		804
Unrealized loss on securities available for sale		240		346
Other		1		1
Deferred tax asset before valuation allowance		1,462		1,151
Valuation allowance				—
Net deferred tax asset	$	1,032	$	754

The net deferred tax asset is included in “Other assets” in the accompanying consolidated balance sheets.

The Company has not recorded a valuation allowance for the net deferred tax asset as management believes the realization of this asset is determined to be more likely than not based on the Company’s ability to generate future taxable income during the periods in which temporary differences become deductible.

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A portion of the change in the net deferred tax asset relates to the change of $106,000 in the tax effect of the unrealized loss on securities available for sale. The remainder of the change in the net deferred tax asset is due to the current period deferred tax benefit of $384,000.

Note 12—Regulatory Capital Requirements and Dividend Restrictions

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

The Company and the Bank are required to maintain minimum amounts and ratios of total risk-based capital, Tier 1 capital, and Tier 1 leverage capital (as defined in the regulations) as set forth in the following table. Management believes, as of December 31, 2006, that the Company and the Bank meet all capital adequacy requirements to which they are subject. At December 31, 2006, the Bank is categorized as “well capitalized” under the regulatory framework for prompt corrective action. There are no current conditions or events that management believes would change the Company’s or the Bank’s category.

The following table presents the Company’s and the Bank’s actual capital amounts and ratios at December 31, 2006 and 2005, as well as the minimum calculated amounts for each regulatory-defined category (dollars in thousands).

	Actual				For Capital Adequacy Purposes				Minimum to be Categorized as Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2006
The Company
Total capital to risk-weighted assets	$	43,244	11.13	%	$	31,091	8.00	%		N/A	N/A
Tier 1 capital to risk-weighted assets	$	34,728	8.94	%	$	15,546	4.00	%		N/A	N/A
Tier 1 capital to average assets	$	34,728	9.02	%	$	15,397	4.00	%		N/A	N/A
The Bank
Total capital to risk-weighted assets	$	38,891	10.01	%	$	31,081	8.00	%	$	38,852	10.00	%
Tier 1 capital to risk-weighted assets	$	35,096	9.03	%	$	15,541	4.00	%	$	23,311	6.00	%
Tier 1 capital to average assets	$	35,096	8.05	%	$	17,439	4.00	%	$	21,799	5.00	%
As of December 31, 2005
The Company
Total capital to risk-weighted assets	$	30,886	13.16	%	$	18,781	8.00	%		N/A	N/A
Tier 1 capital to risk-weighted assets	$	27,981	11.92	%	$	9,391	4.00	%		N/A	N/A
Tier 1 capital to average assets	$	27,981	9.09	%	$	12,313	4.00	%		N/A	N/A
The Bank
Total capital to risk-weighted assets	$	26,551	11.35	%	$	18,715	8.00	%	$	23,393	10.00	%
Tier 1 capital to risk-weighted assets	$	23,832	10.19	%	$	9,357	4.00	%	$	14,036	6.00	%
Tier 1 capital to average assets	$	23,832	7.75	%	$	12,302	4.00	%	$	15,378	5.00	%

The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and

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regulatory capital requirements. The approval 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 Bank’s net profits (as defined by the Comptroller) for that year combined with its retained net profits (as defined by the Comptroller) for the two preceding calendar years. As of December 31, 2006, no cash dividends have been declared or paid by the Bank.

Note 13—Junior Subordinated Debentures

The Company issued trust preferred securities totaling $13 million through its statutory trust subsidiaries, FNSC Capital Trust I, FNSC Statutory Trust II and FNSC Statutory Trust III, during 2003, 2004 and 2006, respectively. On December 19, 2003, FNSC Capital Trust I issued and sold floating rate trust preferred securities having an aggregate liquidation amount of $3 million to institutional buyers in a private placement of trust preferred securities. On April 30, 2004, FNSC Statutory Trust II, issued an additional $3 million through a pooled offering of trust preferred securities. On March 30, 2006, FNSC Statutory Trust III (collectively with FNSC Capital Trust I and FNSC Statutory Trust II [the “Trusts”]), issued an additional $7 million through a pooled offering of trust preferred securities. The Trusts also issued common securities having an aggregate liquidation amount of approximately 3% of the total capital of the Trusts, or $403,000, to the Company.

The 2003, 2004 and 2006 trust preferred securities accrue and pay cumulative distributions quarterly in arrears at a rate per annum equal to 90-day LIBOR plus 292 basis points, 90-day LIBOR plus 270 basis points and 90-day LIBOR plus 145 basis points, respectively. The Company has the right, subject to events of default, to defer payments of interest on the trust preferred securities for a period not to exceed 20 consecutive quarters from the date of issuance. The Company has no current intention to exercise this right. At December 31, 2006, the distribution rates on the 2003, 2004 and 2006 issuances were 8.29%, 8.06% and 6.81%, respectively.

The 2003, 2004 and 2006 trust preferred securities issues are mandatorily redeemable upon maturity on December 19, 2033, April 30, 2034, and March 30, 2036, respectively. The Company has the right to redeem them in whole or in part, on or after December 19, 2008, April 30, 2009, and March 29, 2018, and at any time thereafter, respectively. If they are redeemed on or after these dates, the redemption price will be 100% of the principal amount plus accrued and unpaid interest. In addition, the Company may redeem any of these issuances in whole (but not in part) at any time within 90 days following the occurrence of a tax event, an investment company event, or a capital treatment event at a special redemption price (as defined in the indenture). The Trusts invested the gross proceeds of $13 million from the issuance of the trust preferred securities and $403,000 from the issuance of the common securities in an equivalent amount of floating rate junior subordinated debentures of the Company or $13,403,000. The Company contributed the net proceeds from the issuance of the subordinated debentures of $13 million after purchase of the common securities for $403,000 to the Bank for general corporate purposes. Issuance costs from the 2003 and 2004 transactions totaling $104,000 and $15,000, respectively are being amortized over the anticipated life.

The junior subordinated debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into guarantees, which together with its obligations under the junior subordinated debentures and the declaration of trusts governing the Trusts, provides full and unconditional guarantees of the trust preferred securities.

The common securities owned by the Company rank equal to the trust preferred securities in priority of payment. The common securities generally have sole voting power on matters to be voted upon by the holders of the Trusts’ securities.

The junior subordinated debentures and the common securities are presented in the Company’s financial statements as liabilities and other assets, respectively. The trust preferred securities are a part of the financial statements of the Trusts and they are not reflected in the Company’s financial statements under the provisions of FIN 46r.

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Note 14—Stock Compensation Plans

Effective March 6, 2000, the Company adopted the First National Bancshares, Inc. 2000 Stock Incentive Plan (the “Plan”). Under the Plan, options are periodically granted to employees and directors by the Company’s Board of Directors at the recommendation of its Personnel Committee at a price not less than the fair market value of the shares at the date of grant. Options granted are exercisable for a period of ten years from the date of grant and become exercisable at a rate of 20% each year on the first five anniversaries of the date of grant. The Plan authorizes the granting of stock options up to a maximum of 459,351 shares of common stock. As of December 31, 2006, 111,284 option shares were available to be granted under the Plan. These amounts reflect each of the 3 for 2 stock splits distributed on January 18, 2006, and March 1, 2004, the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007.

Upon consummation of the initial public offering, the organizers were issued stock warrants to purchase 747,300 shares of common stock for $3.92 per share, of which 697,533 remain unexercised. These warrants vested ratably over a five-year period beginning February 10, 2000, and are exercisable in whole or in part during the ten-year period following that date.

The following is a summary of the activity under the plans for the years ended December 31:

	2006				2005				2004
	Shares		Weighted Average Exercise Price Per Share		Shares		Weighted Average Exercise Price Per Share		Shares		Weighted Average Exercise Price Per Share
Outstanding, beginning of period	1,113,501		$	4.37	1,086,705		$	4.02	1,093,085		$	4.01
Granted	31,715			3.79	32,325			15.12	27,646			11.31
Forfeited	(4,169	)		4.16	(3,743	)		8.46	(34,026	)		9.52
Exercised	(149,799	)		3.95	(1,786	)		6.93	—			—
Outstanding, December 31	991,248			4.14	1,113,501			4.37	1,086,705			4.02
Exercisable, December 31	921,592		$	4.75	1,057,272		$	3.97	842,567		$	3.93

The following table summarizes information about stock options and warrants outstanding under the stock-based option plans at December 31, 2005:

	Outstanding				Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$  4.19	894,033	3.12	$	3.92	894,033	$	3.92
$  4.53	8,931	4.83		4.23	8,931		4.23
$  5.66 - $  5.97	3,827	6.32		5.49	3,061		5.49
$  7.86 - $10.07	8,933	7.44		7.93	3,827		7.90
$12.14 - $16.04	48,912	7.67		12.99	9,357		12.84
$16.25 - $18.08	17,730	8.03		15.57	1,701		15.58
$18.24 - $20.00	8,882	9.54		17.87	681		17.05
$  4.19 - $20.00	991,248	3.24	$	4.75	921,592	$	4.07

The above information reflects each of the 3 for 2 stock splits distributed on January 18, 2006, and March 1, 2004, as well as the 6% stock dividend distributed on May 16, 2006, and the 7% stock dividend to be distributed on March 30, 2007.

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Note 15—Employee Benefit Plans

The Company maintains an employee benefit plan for all eligible employees of the Company and the Bank under the provisions of Internal Revenue Code Section 401(k). The First National Retirement Savings Plan (the “Savings Plan”) allows for employee contributions and, upon annual approval of the Board of Directors, the Company matches 50% of employee contributions up to a maximum of six percent of annual compensation. A total of $68,000, $45,000 and $37,000 was charged to operations in 2006, 2005, and 2004, respectively, for the Company’s matching contribution. Employees are immediately vested in their contributions to the Savings Plan and become fully vested in the employer matching contribution after five years of service.

On May 31, 2004, the Company adopted a leveraged Employee Stock Ownership Plan (“ESOP”) for the exclusive benefit of employee participants. Employees become vested in their account balances after seven years of service. In the following discussion, share and per share values have been adjusted for the 7% stock dividend to be distributed on Marc 30, 2007.

On November 30, 2005, the Company loaned the ESOP $600,000 which was used to purchase 42,532 shares of the Company’s common stock. The ESOP shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to eligible employees, based on the proportion of debt service paid in the year. At December 31, 2006, the ESOP owned 44,914 shares of the Company’s stock, of which 39,600 shares were pledged to secure the loan to the Company. The remainder of the shares was allocated to individual accounts of participants. In accordance with the requirements of the SOP 93-6, the Company presented the shares that were pledged as collateral as a deduction of $558,000 and $599,000 from shareholders’ equity at December 31, 2006 and 2005, respectively, as unearned ESOP shares in the accompanying consolidated balance sheets. The Board of Directors approved a $24,000 discretionary contribution paid to the ESOP for the year ended December 31, 2005, which the Company recorded as compensation expense. The Company also recorded $42,400 and $1,700 of expense during the years ended December 31, 2006 and 2005, respectively, to reflect the fair market value of the shares allocated to eligible employees. The fair market value of the unallocated shares was $592,160 as of December 31, 2006.

The Company made contributions during December 31, 2006 and 2005, of $68,740 and $2,400, respectively, equal to the ESOP annual debt service. The note payable to the ESOP requires annual principal payments plus interest at a fixed interest rate of 4.79%. Future principal payments will be $40,000 until a final payment will be made on December 31, 2020.

During 2004, the Company also adopted a formal incentive compensation plan, the First National Incentive Plan (the “FNIP”) for members of its management team. Approximately $711,000 $492,000 and $380,000 was expensed in 2006, 2005 and 2004, respectively, and paid in the subsequent year based on achievement of individual and corporate performance goals.

Note 16—Commitments and Contingencies

On September 10, 2004, the Company entered into a new employment agreement with its President and Chief Executive Officer that includes an annually renewable three-year compensation term, annual bonus, incentive program, stock option plan and a one-year non-compete agreement upon termination. On January 31, 2005, the Company entered into employment agreements with each of its three Executive Vice Presidents that include an annually renewing two-year compensation term and one-year non-compete agreements upon termination.

In the normal course of business, the Company and the Bank are periodically subject to various pending or threatened lawsuits in which claims for monetary damages may be asserted. At December 31, 2006, the Company and the Bank were not involved with any litigation matters.

See Note 7 for specifics on the Company’s lease commitments.

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Note 17—Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments.

The Company uses the same credit and collateral policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

At December 31, 2006, the Company’s commitments to extend additional credit totaled approximately $85.3 million, the majority of which are at variable rates of interest and expire within one year. Included in the Company’s total commitments are standby letters of credit. Letters of credit are commitments issued by the Company to guarantee the performance of a customer to a third party and totaled $461,000 at December 31, 2006. The credit risk involved in the underwriting of letters of credit is essentially the same as that involved in extending loan facilities to customers. Also included in the Company’s total commitments are $15 million in letters of credit pledged to a public depositor.

Note 18—Fair Value of Financial Instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of fair value information, whether or not recognized in the statement of financial position, when it is practicable to estimate fair value. SFAS No. 107 defines a financial instrument as cash, evidence of an ownership interest in an entity, or contractual obligations which require the exchange of cash or other financial instruments. Certain items which are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

Fair value approximates book value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, interest-bearing bank balances, federal funds sold, other stock investments, accrued interest receivable, short-term FHLB advances, federal funds purchased and accrued interest payable. Fair value of investment securities is estimated based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Fair value for variable rate loans that reprice frequently and for loans that mature in less than one year is based on the carrying value, reduced by an estimate of credit losses inherent in the portfolio. Fair value of fixed rate real estate, consumer, commercial and other loans maturing after one year is based on the discounted present value of the estimated future cash flows, reduced by an estimate of credit losses inherent in the portfolio. Discount rates used in these computations approximate the rates currently offered for similar loans of comparable terms and credit quality.

Fair value for demand deposit accounts and variable rate interest-bearing accounts with no fixed maturity date is equal to the carrying value. Certificate of deposit accounts maturing during 2007 are valued at their carrying value. Certificate of deposit accounts maturing after 2007 are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. Fair value for long-term FHLB advances is based on discounted cash flows using the current market rate. Fair value for the floating rate junior subordinated debentures is based on the carrying value.

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The estimated fair market value of commitments to extend credit and standby letters of credit are equal to their carrying value as the majority of these off-balance sheet instruments have relatively short terms to maturity and are generally written with variable rates of interest.

The Company has used management’s best estimate of fair values based on the above assumptions. Thus, the fair values presented may not be the amounts which could be realized in an immediate sale or settlement of the instrument. In addition, any income tax or other expense which would be incurred in an actual sale or settlement is not taken into consideration in the fair value presented.

The estimated fair values of the Company’s financial instruments at December 31 are as follows (dollars in thousands):

	2006				2005
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and due from banks	$	8,200	$	8,200	$	2,691	$	2,691
Interest-bearing bank balances		5		5		1,937		1,937
Federal funds sold		—		—		16,678		16,678
Securities available for sale		63,374		63,374		45,151		45,151
Investment in FHLB/FRB stock		3,075		3,075		2,122		2,122
Loans, net		375,695		375,426		248,686		248,617
Accrued interest receivable and other		11,202		11,202		8,559		8,559
Financial liabilities:
Deposits	$	376,701	$	390,366	$	271,695	$	271,870
FHLB advances		37,476		37,476		26,612		26,710
Junior subordinated debentures		13,403		13,403		6,186		6,186
Federal funds purchased		7,970		7,970		—		—
Accrued interest payable and other		2,842		2,842		2,157		2,157

Note 19—Parent Company Financial Information

The following is condensed financial information of First National Bancshares, Inc. (parent company only) at December 31, 2006 and 2005, and for each of the years in the three year period ended December 31, 2006.

First National Bancshares, Inc.

Condensed Balance Sheets

(dollars in thousands)

	2006		2005
Assets:
Cash	$	3,865	$	3,843
Investment in bank subsidiary		35,836		23,880
Investment in Trust subsidiaries		403		186
Other assets		329		306
Total	$	40,433	$	28,215
Liabilities and shareholders’ equity:
Junior subordinated debentures	$	13,403	$	6,186
Other liabilities		40		—
Shareholders’ equity		26,990		22,029
Total	$	40,433	$	28,215

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First National Bancshares, Inc.

Condensed Statements of Income

(dollars in thousands)

	2006			2005			2004
Interest income	$	84		$	16		$	11
Interest expense on junior subordinated debentures		877			391			236
Net interest income/(expense)		(793	)		(375	)		(225	)
Professional fees		11			25			9
Shareholder relations		85			21			31
Data processing		13			—			—
Other		—			—			1
Noninterest expense		109			46			41
Equity in undistributed net income of bank subsidiary		4,750			3,113			1,990
Net income before income taxes		3,848			2,692			1,724
Income tax benefit		(204	)		(143	)		(91	)
Net income	$	4,052		$	2,835		$	1,815

First National Bancshares, Inc.

Condensed Statements of Cash Flows

(dollars in thousands)

	2006			2005			2004
Operating activities:
Net income	$	4,052		$	2,835		$	1,815
Adjustments to reconcile net income to net cash used for operating activities:
Equity in undistributed net income of bank subsidiary		(4,750	)		(3,113	)		(1,990	)
Compensation expense for ESOP shares allocated		43			1			—
Compensation expense for employee stock options		73			32			9
(Increase) decrease in other assets		(5	)		15			(7	)
Increase (decrease) in other liabilities		40			—			(6	)
Increase in intercompany receivable		(18	)		(138	)		(91	)
Net cash used for operating activities		(565	)		(368	)		(270	)
Investing activities:
Investment in common securities of Trusts		(217	)		—			(93	)
Capital contribution to bank subsidiary		(7,000	)		(2,000	)		(2,997	)
Net cash used for investing activities		(7,217	)		(2,000	)		(3,090	)
Financing activities:
Proceeds from exercise of employee stock options		591			12			—
Proceeds from secondary stock offering, net of offering expenses		—			6,339			—
Shares issued to leveraged ESOP		—			(600	)		—
Cash paid in lieu of fractional shares		(4	)		—			—
Proceeds from junior subordinated debentures		7,217			—			3,093
Net cash provided by financing activities		7,804			5,751			3,093
Net increase (decrease) in cash and cash equivalents		22			3,383			(267	)
Cash, beginning of year		3,843			460			727
Cash, end of year	$	3,865		$	3,843		$	460

For a complete discussion of the junior subordinated debentures, common securities and the related trust preferred securities, see Note 13—Junior Subordinated Debentures.

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Note 20—Selected Quarterly Financial Data (unaudited)

Following is a summary of operations by quarter (dollars in thousands, except share and per share data):

2006

	Quarters ended
	March 31		June 30		September 30		December 30
Interest income	$	5,860	$	6,882	$	7,622	$	8,522
Interest expense		2,855		3,397		3,967		4,506
Net interest income		3,005		3,485		3,655		4,016
Provision for loan losses		343		354		243		252
Noninterest income		517		410		471		681
Noninterest expenses		2,127		2,121		2,204		2,449
Income before provision for income taxes		1,052		1,420		1,679		1,996
Income tax expense		355		516		596		628
Net income	$	697	$	904	$	1,083	$	1,368
Earnings per share:
Basic	$	0.19	$	0.25	$	0.30	$	0.37
Diluted	$	0.16	$	0.20	$	0.25	$	0.31
Weighted average common shares:
Basic		3,652,729		3,585,079		3,610,632		3,700,439
Diluted		4,390,683		4,410,401		4,293,718		4,380,310
2005
	Quarters ended
	March 31		June 30		September 30		December 30
Interest income	$	3,435	$	4,070	$	4,687	$	5,149
Interest expense		1,392		1,782		2,206		2,450
Net interest income		2,043		2,288		2,481		2,699
Provision for loan losses		271		161		74		88
Noninterest income		357		455		487		556
Noninterest expenses		1,410		1,495		1,659		1,912
Income before provision for income taxes		719		1,087		1,235		1,255
Income tax expense		237		377		423		424
Net income	$	482	$	710	$	812	$	831
Earnings per share:
Basic	$	0.16	$	0.23	$	0.26	$	0.25
Diluted	$	0.12	$	0.18	$	0.21	$	0.20
Weighted average common shares:
Basic		3,067,182		3,068,301		3,068,968		3,361,258
Diluted		3,863,356		3,865,302		3,870,450		4,136,356

All share and per share amounts reflect the January 18, 2006, 3 for 2 stock split and the 6% stock dividend distributed on May 16, 2006.

Note 21—Stock Repurchase Program

On December 1, 2006, the Company’s board of directors authorized a stock repurchase program of up to 50,000 of its 3,458,354 shares outstanding effective immediately for a period of six months ending May 31, 2007.

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Note 22—Subsequent Events

On January 29, 2007, the Bank created a wholesale mortgage division as an addition to its current banking operations. The division will operate from leased office space located at 200 North Main Street in downtown Greenville, South Carolina, and will employ a staff of ten individuals. The division will offer a wide variety of conforming and non-conforming programs with fixed and variable rate options, as well as FHA/VA and construction/permanent products.

On February 16, 2007, the Bank entered into a definitive agreement (the “Agreement”) to sell, purchase and lease its real properties located at 215 N. Pine Street and 3090 Boiling Springs Road in Spartanburg, South Carolina (the “Properties”) to First National Holdings, LLC (the “Purchaser”). The Board of Directors for the Bank approved the agreement. The real property located at 215 N. Pine Street consists of the Bank’s corporate headquarters, a full-service branch, and the corporate operations center that is currently under construction and is scheduled to be completed in the spring of 2007. The real property located at 3090 Boiling Springs Road is a full-service branch. In connection with the execution of the Agreement, the Bank also executed a Blanket Transfer, Assignment and Post-Closing Actions Agreement (the “Blanket Transfer Agreement”) which makes the Bank liable for all remaining construction costs for the corporate operations center. The sales price for the transaction is $5,450,000 due and payable at closing which occurred simultaneously with the execution of the Agreement.

In connection with the sale, the Bank agreed to lease back the Properties from the Purchaser for an initial term of twenty-five years with one five-year option to renew at the option of the Bank. The terms of the lease portion of the Agreement call for monthly rental payments of $38,604 during the initial term under a triple-net lease that will be accounted for as an operating lease under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases (as amended).” If the Bank exercises the option to renew the lease as described above, the monthly rental payments will be adjusted to reflect the increase, if any, in the Consumer Price Index between the date of the Agreement and the date of commencement of the renewal term. The Bank estimates that the sale-leaseback transaction will result in a gain of approximately $70,000 on a pre-tax basis, based on the Bank’s current estimate of the costs involved in completing the construction of the corporate operations center. The Bank will recognize the gain on a straight-line basis over the initial lease term of twenty-five years.

On March 2, 2007, the Company’s board of directors declared a 7% stock dividend to shareholders of record on March 16, 2007. The 7% stock dividend will be paid on March 30, 2007. The 2006 shareholders’ equity, share and per share data reflect the 7% dividend. The number of outstanding shares will increase from 3,458,354 to 3,700,439.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

There was no change in or disagreement with our accountants related to our accounting and financial disclosures.

Item 9a. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of December 31, 2006. There have been no significant changes in our internal controls over financial reporting during the fourth fiscal quarter ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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

Item 9b. Other Information

None.

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Part III.

Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

In response to this Item, the information contained on page 18 of our Proxy Statement for the 2006 Annual Meeting of Shareholders to be held on April 17, 2007, is incorporated herein by reference.

Item 11. Executive Compensation

In response to this Item, the information contained in the Compensation of Directors and Executive Officer Section of our Proxy Statement for the Annual Meeting of Shareholders to be held on April 17, 2007, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

In response to this Item, the information contained in the Security Ownership of Certain Beneficial Owners and Management section of our Proxy Statement for the Annual Meeting of Shareholders to be held on April 17, 2007, is incorporated herein by reference.

The following table sets forth equity compensation plan information at December 31, 2006.

Equity Compensation Plan Information

Plan Category	Number of securities to be issued upon exercise of outstanding options warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (c) (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	293,715	$	6.71	111,284
Equity compensation plans not approved by security holders(1)	697,533	$	3.92	—
Total	991,248	$	4.75	111,284

⁽¹⁾ Each of our organizers received, for no additional consideration, a warrant to purchase two shares of common stock for $3.92 per share (adjusted for 3 for 2 stock splits distributed on January 18, 2006, and March 1, 2004, and 6% stock dividend distributed May 16, 2006 and the 7% stock dividend to be distributed on March 30, 2007) for every three shares purchased during our initial public offering. The warrants are represented by separate warrant agreements. One-fifth of the warrants vest on each of the first five anniversaries of the completion of the offering and they are exercisable in whole or in part during the ten-year period following that date. The warrants may not be assigned, transferred, pledged or hypothecated in any way. The shares issued pursuant to the exercise of such warrants are transferable, subject to compliance with applicable securities laws. If the Office of the Comptroller of the Currency 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 13. Certain Relationships and Related Transactions

In response to this Item, the information contained on pages 11 and 12 of our Proxy Statement for the Annual Meeting of Shareholders to be held on April 17, 2007, is incorporated herein by reference.

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Item 14. Independent Registered Public Accounting Firm Fees and Services

In response to this Item, the information contained on page 11 of our Proxy Statement for the Annual Meeting of Shareholders to be held on April 17, 2007, is incorporated herein by reference.

Item 15. Exhibits

The following documents are filed as part of this report:

3.1	Articles of Incorporation(1)
3.2	Bylaws (1)
4.1	Form of Certificate of Common Stock(1)
10.1	Employment Agreement dated September 10, 2004 between First National Bancshares, Inc., First National Bank of the South and Jerry Calvert.(2)*
10.2	Form of Stock Warrant Agreement, as amended(3)*
10.3	2000 First National Bancshares, Inc. Stock Incentive Plan and form of Agreement(4)*
10.4	Employment Agreement dated January 31, 2005 between First National Bancshares, Inc., First National Bank of the South and Kitty B. Payne(5)*
10.6	Employment Agreement dated January 31, 2005 between First National Bancshares, Inc., First National Bank of the South and David H. Zabriskie(5)*
10.7	Employment Agreement dated January 31, 2005 between First National Bancshares, Inc., First National Bank of the South and Robert Murdoch(5)*
10.8	Amendment No. 1 to the Stock Incentive Plan(3)*
10.9	Agreement to Sale, Purchase and Lease between First National Bank of the South and First National Holdings, LLC for sale/leaseback transaction dated February 16, 2007.
10.10	Blanket Transfer Agreement between First National Bank of the South and First National Holdings, LLC for sale/leaseback transaction dated February 16, 2007.
13	2006 Company Annual Report
21	Subsidiaries
24	Power of Attorney (included on signature page)
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.
32	Section 1350 Certifications.

⁽¹⁾ Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on September 21, 1999.

⁽²⁾ Incorporated by reference to the Company’s Form 8-K filed on September 16, 2004.

⁽³⁾ Incorporated by reference to the Company’s Form 8-K filed on August 22, 2005.

⁽⁴⁾ Incorporated by reference to the Company’s 10-QSB for the quarter ended March 31, 2000, filed on May 15, 2000.

⁽⁵⁾ Incorporated by reference to the Company’s Form 8-K filed on February 4, 2005.

^* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-KSB.

The Exhibits listed above will be furnished to any security holder free of charge upon written request to Ms. Kitty B. Payne, Chief Financial officer, First National Bancshares, Inc., Post Office Box 3508, Spartanburg, South Carolina, 29304.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FIRST NATIONAL BANCSHARES, INC.
Date: March 16, 2007	By:	/s/    JERRY L. CALVERT
		President and Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jerry L. Calvert and Gaines W. Hammond, Jr., M.D. as the true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-KSB, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/    C. DAN ADAMS         C. Dan Adams	Director	March 16, 2007
/s/    MELLNEE G. BUCHHEIT         Mellnee G. Buchheit	Director	March 16, 2007
/s/    JERRY L. CALVERT         Jerry L. Calvert	Director, Vice Chairman, President, Chief Executive Officer	March 16, 2007
/s/    MARTHA CLOUD CHAPMAN         Martha Cloud Chapman	Director	March 16, 2007
/s/    W. RUSSEL FLOYD, JR.         W. Russel Floyd, Jr.	Director	March 16, 2007
/s/    C. TYRONE GILMORE, SR.         C. Tyrone Gilmore, Sr.	Director	March 16, 2007
/s/    GAINES W. HAMMOND, JR., MD         Gaines W. Hammond, Jr., M.D.	Director, Chairman of the Board	March 16, 2007
/s/    BENJAMIN R. HINES         Benjamin R. Hines	Director	March 16, 2007
/s/    WILLIAM A. HUDSON         William A. Hudson	Director	March 16, 2007

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Signature	Title	Date
/s/    KITTY B. PAYNE         Kitty B. Payne	Chief Financial Officer, Principal Financial and Accounting Officer	March 16, 2007
/s/    NORMAN F. PULLIAM         Norman F. Pulliam	Director, Chairman Emeritus	March 16, 2007
/s/    PETER E. WEISMAN         Peter E. Weisman	Director	March 16, 2007
/s/    DONALD B. WILDMAN         Donald B. Wildman	Director	March 16, 2007
/s/    COLEMAN L. YOUNG, JR.         Coleman L. Young, Jr.	Director	March 16, 2007

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INDEX TO EXHIBITS

Exhibit Number	Description
3.1	Articles of Incorporation(1)
3.2	Bylaws(1)
4.1	Form of Certificate of Common Stock(1)
10.1	Employment Agreement dated September 10, 2004 between First National Bancshares, Inc., First National Bank of the South and Jerry Calvert.(2)*
10.2	Form of Stock Warrant Agreement, as amended(3)*
10.3	2000 First National Bancshares, Inc. Stock Incentive Plan and form of Agreement(4)*
10.4	Employment Agreement dated January 31, 2005 between First National Bancshares, Inc., First National Bank of the South and Kitty B. Payne(5)*
10.6	Employment Agreement dated January 31, 2005 between First National Bancshares, Inc., First National Bank of the South and David H. Zabriskie(5)*
10.7	Employment Agreement dated January 31, 2005 between First National Bancshares, Inc., First National Bank of the South and Robert Murdoch(5)*
10.8	Amendment No. 1 to the Stock Incentive Plan(3)*
10.9	Agreement to Sale, Purchase and Lease between First National Bank of the South and First National Holdings, LLC for sale/leaseback transaction dated February 16, 2007.
10.10	Blanket Transfer Agreement between First National Bank of the South and First National Holdings, LLC for sale/leaseback transaction dated February 16, 2007.
13	2006 Company Annual Report
21	Subsidiaries
24	Power of Attorney (included on signature page)
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer.
32	Section 1350 Certifications.

⁽¹⁾ Incorporated by reference to the Company’s Registration Statement on Form SB-2 filed on September 21, 1999.

⁽²⁾ Incorporated by reference to the Company’s Form 8-K filed on September 16, 2004.

⁽³⁾ Incorporated by reference to the Company’s Form 8-K filed on August 22, 2005.

⁽⁴⁾ Incorporated by reference to the Company’s 10-QSB for the quarter ended March 31, 2000, filed on May 15, 2000.

⁽⁵⁾ Incorporated by reference to the Company’s Form 8-K filed on February 4, 2005.

^* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-KSB.

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EX-10.9

EXHIBIT 10.9

STATE OF SOUTH CAROLINA    )

                                                              )

COUNTY OF SPARTANBURG      )

AGREEMENT TO SELL, PURCHASE AND LEASE

THIS AGREEMENT made this 16th day of February, 2007 between First National Holdings, LLC, having an office c/o Donald B. Wildman, 220 North Church Street, Spartanburg, SC 29306 (hereinafter referred to as “Purchaser”), and First National Bank of the South, a/k/a First National Bank of Spartanburg, a division of First National Bank of the South, having an office at 215 North Pine Street, Spartanburg, SC 29304 (hereinafter referred to as “Seller”).

For and in consideration of $10.00, the mutual covenants and agreements herein contained, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller agrees to sell to Purchaser, and Purchaser agrees to purchaser from Seller the Premises (as hereinafter defined) subject to the terms and conditions set forth in this Agreement.

1. Definitions

For the purpose of this Agreement, the terms set forth below shall be defined as follows:

(a) Land. All of that certain plot or parcel of land described in Exhibit A annexed hereto and made a part hereof.

(b) Net Lease. That certain agreement of lease entered into between Purchaser, as landlord, and Seller, as tenant, concurrently with the closing of title hereunder, which lease shall be in the form of Exhibit B annexed hereto.

(c) Tenant. The Seller.

(d) Closing Date. The date on which title to the Premises is delivered to Purchaser pursuant to this Agreement, which date shall be a date no later than (i) in the event all of the Construction Completion Certificates, as defined in and in accordance with Paragraph 4(j) hereof, shall have been theretofore issued, a date selected by Purchaser on at least three (3) days prior notice to Seller, which date shall not be later than ninety (90) days following the date hereof (the Final Scheduled Closing Date), or (ii) in the event any of the Construction Completion Certificates shall not have been so issued on or before the Final Scheduled Closing Date, a date selected by Purchaser on at least three (3) days prior notice to Seller, which date shall not be later than thirty (30) days following the date on which all of the Construction Completion Certificates shall have been so issued, time being of the essence for the performance of Seller’s obligations hereunder. Notwithstanding anything to the contrary contained herein, Purchaser shall, subject only to the provisions of Paragraph 2(d) hereof, have the right in its sole discretion to terminate this Agreement in the event all of the Construction Completion Certificates shall not have been issued or waived in accordance with Paragraph 4(j) hereof by the Final Scheduled Closing Date.

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(e) Improvements. The structures, buildings, and improvements now existing or to be constructed on the Premises.

(f) Governmental Authorities. Any board, bureau, commission, department, or body of any municipal, county, state, or federal governmental or quasi-governmental unit, or any subdivision thereof, having, asserting, or acquiring jurisdiction over the Premises or the management, operation, use, or improvement thereof.

(g) Premises. The Land, the Improvements, the Personal Property, and the Appurtenances.

(h) Personal Property. The fixtures and equipment, and other tangible personal property listed in the attached Schedule to Exhibit E which are now and will be on the Closing Date or upon the issuance of all the Construction Completion Certificates (i) located on the Premises and used in connection with the operation thereof, including, those items of Personal Property described in Schedule to Exhibit E or (ii) attached to or appurtenant to the Premises or used in connection with the operation of the Premises and purchased for the Premises pursuant to the Construction Contract by and between the Seller and Roebuck Building Co., originally dated June 5, 2006 as amended from the date hereof and the Closing Date, but excluding all furnishings, office equipment, trade fixtures and other tangible personal property used by Seller for the operation of its business on the Premises, including, without limitation, all vaults, telecommunication and data processing equipment on the Premises.

(i) Appurtenances. All right, title, and interest of Seller in and to strips, gores, easements, rights of way, privileges, appurtenances, and rights to the same belonging to and inuring to the benefit of the Premises; and all right, title, and interest, if any, of Seller in and to (A) any land lying in the bed of any street, road, or avenue opened or proposed in front of or adjoining the Premises, and (B) any award or payment made, or to be made, (x) for any taking in condemnation, eminent domain, or agreement in lieu thereof of land adjoining all or any part of the Premises, (y) for damage to the Premises or any part thereof by reason of change of grade or closing of any such street, road, highway, or avenue, and (z) for any taking in condemnation or eminent domain of any part of the Premises.

(j) Title Company. Stewart Title Guaranty/ First American Title Insurance Company.

2. Purchase Price

The purchase price (the Purchase Price) for the Premises shall be Five Million Four Hundred Fifty Thousand and No/100 ($5,450,000.00) Dollars, payable as follows:

(a) Ten and No/100 ($10.00) Dollars on the signing of this Agreement, to be paid by the delivery of a check drawn on a recognized financial institution (the “Deposit”), receipt of which Deposit is hereby acknowledged. The Deposit shall be held in escrow as hereinafter provided.

(b) The balance of the Purchase Price, Five Million Four Hundred Forty Nine Thousand Nine Hundred Ninety ($5,449,990.00) Dollars shall be paid by cash, certified, cashier’s, or bank check, or by wire transfer of immediately available federal funds (which funds shall be deemed available upon notice to Seller of a federal wire number therefor) through escrow payable to the order of Seller on the execution, acknowledgement, and delivery of the Deed and Net Lease to Purchaser on the Closing Date.

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(c) Notwithstanding anything to the contrary, if, on the Closing Date, all of the Construction Completion Certificates, as hereinafter defined, have not been issued in accordance with the terms of this Agreement, then, on the Closing Date, Purchaser shall therefor not have the right to terminate this Agreement provided that Seller agrees to complete all remaining construction of the Premises in accordance with that certain Agreement between First National Bank of Spartanburg as Owner and Roebuck Buildings Company as Contractor dated June 5, 2006 (the “Construction Contract”) and all other matters necessary and sufficient to, and which will, cause the issuance of all of the Construction Completion Certificates in accordance with the terms of this Agreement and the Lease.

3. Matters to Which the Sale is Subject

The title to the Premises shall be subject only to the following (the “Permitted Encumbrances”):

(a) Real estate taxes, personal property taxes, and water and sewer charges, provided same are not yet due and payable.

(b) Those restrictions, covenants, agreements, easements, matters, and things affecting title to the Premises and more particularly described in Exhibit C annexed hereto and by this reference made a part hereof.

(c) Building, building line, use or occupancy restrictions; state of facts shown on surveys set forth and enumerated in Exhibit D annexed hereto and by this reference made a part hereof, and any additional state of facts which a current survey delivered in accordance with Paragraph 12(b) hereof the Premises discloses, provided same do not render title to the Premises unmarketable, and; rights, if any, of record in favor of any utility company to maintain and operate lines, cables, poles, distribution boxes and the like in, under, over, and upon the Premises, to the extent that such restrictions, facts, or rights:

(i) are not now violated;

(ii) do not and/or will not adversely affect the use of the Premises for the purposes set forth in, or constitute a violation under, the Net Lease;

(iii) are not and/or will not be violated by the Improvements;

(iv) do not grant to third parties any right to require the removal, alteration, or relocation of any of the structures, improvements, and/or appurtenances comprising the Premises;

(v) do not permit any third party to acquire an interest in or lien on the Premises; and

(vi) do not require the performance of any act for the benefit of another party which, if not performed, would result in any liability, expense, or damage;

and provided further that the title insurance company selected by Purchaser insuring Purchaser’s title to the Premises (the “Title Company”) shall affirmatively insure Purchaser as to items (i) through (vi) above.

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(d) Zoning and building laws and ordinances of any Governmental Authority.

4. Representations and Covenants

A. Seller warrants, represents, covenants, and agrees that the following are true as of the date hereof and will be true on the Closing Date:

(a) Seller has good, indefeasible, and marketable title to the Premises, free and clear of all liens, matters, agreements, and encumbrances other than the Permitted Encumbrances.

(b) Seller has full power and authority to enter into this Agreement and to assume and perform all of its obligations hereunder in accordance with all of the terms and conditions hereof. The execution and delivery of this Agreement and the performance by Seller of its obligations hereunder in accordance with all of the terms and conditions hereof and under all documents contemplated by this Agreement require no further action or approval in order to constitute this Agreement as a fully binding and enforceable obligation of Seller.

(c) As of the Closing Date, Seller shall not have received any written notice of, and, to the best knowledge of Seller, there shall exist no, violations of any law, municipal ordinance, or other governmental requirement of any Governmental Authority and Seller has no reason to believe that any governmental, quasi- governmental, or other such authority contemplates issuing same.

(d) There do not exist (i) any pending or, to the best knowledge of Seller, any contemplated annexation or condemnation proceedings, or private purchase in lieu thereof, affecting or which may affect the Premises, or any part thereof, (ii) any proposed or pending proceeding to change or redefine the zoning classification of all or any part of the Premises, (iii) any proposed or pending special assessments affecting the Premises or any portion thereof, (iv) any penalties or interest due with respect to real estate taxes assessed against the Premises and (v) any proposed change(s) in any road patterns or grades with respect to the roads providing a means of ingress and egress to the Premises. Seller agrees to furnish Purchaser with a copy of any notice of any such proceeding, assessment, penalty, interest, or change within ten (10) days after receipt thereof.

(e) Upon the Closing Date, there shall be no circumstances, state of facts, or other matters which, with the passage of time or the giving of notice, or both, would constitute an event of default under the terms of the Net Lease.

(f) Except for the Net Lease and Permitted Encumbrances, to the best knowledge of Seller, there are no instruments, matters, or agreements, and Seller is not a party to any instrument, matter, or agreement, which will in any way encumber, bind, or otherwise affect the Premises or Purchaser on the Closing Date. Seller has neither done nor failed to do anything, nor has suffered anything to be done, as a result of which the Premises or any part thereof have been or will be encumbered or title thereto has been or will be affected in any way and no person, firm, or entity has any present, conditional, or contingent rights to acquire all or any portion of the Premises.

(g) The Net Lease shall be a valid, subsisting, binding, and fully enforceable obligation to the Tenant according to all the terms thereof from and after the Closing Date.

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(h) All work to be performed and payments to be made pursuant to the terms of the Permitted Encumbrances, any insurance contract or any other instrument, agreement, or contract affecting the Premises or any part thereof, shall be completely performed and paid for prior to the Closing Date and there shall be no outstanding requirements or recommendations by (i) the insurance company(s) which issued the insurance policies insuring the Premises, or (ii) any board of fire underwriters or other body exercising similar functions, requiring or recommending any repairs or work to be done on the Premises.

(i) Seller shall have fully paid on or before the Closing Date, all taxes and all installments of assessments and all other charges of any kind imposed or levied by any Governmental Authority which shall have become due and payable or constitute a lien at or prior to the Closing Date, together with all interest and penalties due thereon.

(j) On the Closing Date, Seller shall be in possession and occupancy of at least sixty (60%) percent of the Premises and the Premises shall on the Closing Date be legally occupied and finally and unconditionally approved by all Governmental Authorities, and all required certificates of occupancy, building permits, certificates of environmental impact approval, underwriters’ certificates relating to electrical work, all zoning, building, housing, safety, fire, and health approvals, and all permits and licenses required by any Governmental Authority and necessary or advisable to operate, occupy, or use the Premises for the purposes permitted under the Net Lease (collectively, the “Construction Completion Certificates”) have been issued, are unexpired, permanent, and unconditional, and, without cost or risk to Purchaser, will be assigned, to the extent assignable, to Purchaser on the Closing Date, and will not be modified or rescinded prior to the Closing Date and will be in full force and effect on the Closing Date. In the event that, as of the Closing Date, the Seller shall have failed to obtain all of the Construction Completion Certificates or in the event any of the Construction Completion Certificates shall fail to be unexpired, permanent, or unconditional, then, provided that Seller complies with the provisions of Paragraph 2(c) hereof, such failure shall not constitute a default by Seller hereunder. Seller shall notify Purchaser of the issuance of the Construction Completion Certificates within three (3) days of the issuance thereof. No liens, matters, easements, agreements, or encumbrances affecting the Premises or any part thereof and, to the best knowledge of Seller, no zoning law, use regulation, ordinance, or any other requirement of any Governmental Authority have been or will be violated by the Improvements or any contemplated use of the Premises as permitted under the Net Lease. As of the Closing Date, Seller shall have obtained all necessary approvals, permits, and licenses from any Governmental Authority, including but not limited to any subdivision and zoning approvals, if any, required for the sale of the Premises as contemplated by this Agreement.

(k) There is now and shall be on the Closing Date, fully paid and enforceable fire, liability, and other forms of insurance in such amounts and covering such risks as are required under the Net Lease and to protect, to a reasonable and prudent extent, all owners of the Premises against any loss, damage, claim, or liability. Seller warrants and represents that such insurance policy or policies comply with the requirements, if any, of the Permitted Encumbrances.

(1) There are no labor disputes, litigation, or other such proceedings pending or threatened against or related to the Seller, the Premises, or the operation thereof, or the zoning or municipal status thereof, nor does Seller know of any basis for any such action.

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(m) All construction on or at the Premises is being and will be performed in a good and workmanlike manner and shall be completed and paid for in all respects and in accordance with the requirements of all Governmental Authorities and all applicable governmental and insurance rating board rules, requirements, and regulations prior to the Closing Date. All bills and claims for labor performed and materials or services furnished to or for the benefit of the Premises will be paid in full on the Closing Date or, in the event any such bill or claim is not due or payable on or before the Closing Date, such payment will be reserved against or otherwise assured by Seller on the Closing Date in a manner reasonably satisfactory to Purchaser.

(n) The Personal Property is now owned and will on the Closing Date be owned by Seller free and clear of any conditional bills of sale, chattel mortgages, security agreements or financing statements, or other security interests of any kind.

(o) To the best knowledge of Seller, there are no interior or exterior, structural, or other defects in any portion of the Premises. The Improvements and the Personal Property shall on the Closing Date be in good working order, condition, and repair.

(p) All public utilities including, but not limited to, electric, gas, sewer, and water, and other utilities required for the operation of the Premises either enter the Premises through adjoining public streets or, if they pass through adjoining private land, do so in accordance with valid public easements or private easements which will inure to the benefit of Purchaser. All of such public utilities are installed and operating, and all installation and connection charges have been fully paid. All access to the Premises is over publicly dedicated streets or through valid, indefeasible easements of record.

(q) Seller agrees to indemnify and hold Purchaser harmless against all claims, liabilities, losses, deficiencies, and damages as well as reasonable expenses (including attorney’s fees), interest, and penalties related thereto, asserted by any third party against, or incurred by Purchaser, by reason of or resulting from any breach, inaccuracy, incompleteness, or nonfulfillment of the covenants, representations, and warranties of Seller contained in this Agreement.

(r) The Premises are not currently in violation of or subject to: (i) any existing, pending or threatened investigation or inquiry by any governmental authority; or (ii) any remedial obligation under any environmental law or regulation (hereafter referred to as an Applicable Environmental Law), including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Resource Conservation and Recovery Act of 1976 (RCRA). Seller has taken all steps necessary to determine and has determined that no hazardous substances or solid wastes have been disposed of or otherwise released on the Premises.

B. Purchaser warrants, represents, covenants, and agrees that the following are true as of the date hereof and will be true on the Closing Date:

(i) Purchaser has full power and authority to enter into this Agreement and to assume and perform all of its obligations hereunder in accordance with all of the terms and conditions hereof. The execution and delivery of this Agreement and the performance by Purchaser of its obligations hereunder in accordance with all of the terms and conditions hereof and under all documents contemplated by this Agreement require no further action or approval in order to constitute this Agreement as a fully binding and enforceable obligation of Purchaser.

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(ii) The Net Lease shall be a valid, subsisting, binding, and fully enforceable against the Purchaser as landlord according to all the terms thereof from and after the Closing Date.

5. Documents of Conveyance

(a) The Premises will be transferred to Purchaser by Seller executing, acknowledging, and delivering to Purchaser on the Closing Date a Special Warranty Deed with grantor’s covenants in proper statutory form for recording so as to convey to Purchaser good and marketable title to the fee simple of the Premises, free and clear of all liens and encumbrances, except the Permitted Encumbrances (the Deed).

(b) Seller shall assign and convey to Purchaser on the Closing Date all right, title, and interest, if any, of Seller in and to any unpaid condemnation award or purchase money proceeds in lieu thereof, including, without limitation, any unpaid award for damage to the Premises by reason of the change of grade of any street.

(c) Seller shall assign, convey, and deliver to Purchaser on the Closing Date all of Seller’s right, title, and interest in and to any unpaid claim for insurance proceeds relating to the Premises,

6. Maintenance of Premises Prior to Closing

Between the date hereof and the Closing Date, Seller covenants and agrees as follows:

(a) No liability shall be incurred nor any transaction entered into relating to the Premises except in the ordinary course of business as presently conducted by Seller, or as contemplated by this Agreement.

(b) If, prior to the Closing Date, Seller shall have received any notice from any insurance company which issued a policy with respect to the Premises or any board of fire underwriters or other body exercising similar functions requiring or recommending any repair order and condition work to be done in the Premises, Seller will do the same expeditiously and diligently at its own cost and expenses prior to the Closing Date.

(c) Seller will maintain the Premises in good repair, order, and condition and comply with all laws, ordinances, regulations, orders, or notices of violations of or issued by any Governmental Authority.

(d) Seller shall not remove any Personal Property located in or on the Premises, except as may be required for repair and replacement. All replacements shall be free and clear of liens and encumbrances and shall be of quality at least equal to the replaced items and shall be deemed included in this sale, without cost or expense to Purchaser.

(e) Up to and including the Closing Date, Seller agrees to maintain and keep all insurance policies as described in Paragraph 4(A)(k) hereof in full force and effect.

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(f) Seller shall, between the dale hereof and the Closing Date, at all reasonable times and upon reasonable notice, permit Purchaser and its authorized representatives to inspect the Premises.

(g) Seller shall pay or cause to be paid as of the Closing Date all amounts of real estate taxes, personal property taxes, and water and sewer charges due and payable on or before the Closing Date with respect to the Premises.

7. Conditions Precedent to Purchaser’s and Seller’s Obligations

(a) The obligation of Purchaser to consummate the transaction contemplated by this Agreement is subject to the following conditions precedent being complied with in full prior to or on the Closing Date, each of which conditions may be waived or modified in whole or in part by Purchaser in its sole discretion;

(i) All documents and proceedings of Seller with respect to the transactions contemplated hereby shall be reasonably satisfactory to Purchaser’s counsel and shall be satisfactory to the Title Company.

(ii) The representations and warranties made by the Seller shall be true, complete, accurate, and correct with the same force and effect as though such representations and warranties had been made on and as of the Closing Date.

(iii) The Seller shall have performed all covenants and obligations and complied with all conditions required by this Agreement to be performed or complied with by it on the Closing Date or earlier if and as provided herein,

(iv) The fee simple title to the Premises shall be insurable in accordance with the provisions of paragraph 14 hereof in the amount of the Purchase Price by the Title Company.

(v) No petition in bankruptcy, insolvency proceeding, or petition for reorganization or for the appointment of a receiver or trustee shall have been filed by or against Seller unless, in the event of an involuntary process, such petition is withdrawn, dismissed, cancelled, or terminated within sixty (60) days; Seller shall not have made an assignment for the benefit of creditors or filed a petition for an arrangement or entered into an arrangement with creditors admitted in writing its inability to pay its debts as they become due; and there shall not have been any material adverse change in the financial condition of Seller from its financial condition as represented in financial statements delivered to Purchaser on or before the date hereof.

(vi) The Purchaser shall have obtained a loan in the amount of at least Five Million Dollars ($5,000,000) with an interest rate not to exceed 130 basis points over the average U.S. Treasury rate, an amortization and maturity of 25 years and limited recourse to the Borrower and its Guarantors.

(b) The obligation of Seller to consummate the transaction contemplated by this Agreement is subject to the following conditions precedent being complied with in full prior to or on the Closing Date, each of which conditions may be waived or modified in whole or in part by Seller in its sole discretion:

(i) The representations and warranties made by the Purchaser shall be true, complete, accurate, and correct with the same force and effect as though such representations and warranties had been made on and as of the Closing Date,

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(ii) The Purchaser shall have performed all covenants and obligations and complied with all conditions required by this Agreement to be performed or complied with by it on the Closing Date or earlier if and as provided herein.

(iii) No petition in bankruptcy, insolvency proceeding, or petition for reorganization or for the appointment of a receiver or trustee shall have been filed by or against Purchaser unless, in the event of an involuntary process, such petition is withdrawn, dismissed, cancelled, or terminated within sixty (60) days; Purchaser shall not have made an assignment for the benefit of creditors or filed a petition for an arrangement or entered into an arrangement with creditors or admitted in writing its inability to pay its debt as they become due.

8. Items to be Delivered by Seller and Purchaser on the Closing Date

(a) On the Closing Date, Seller, at its sole cost and expense, will deliver or cause to be delivered to Purchaser the following documents in connection with the Premises:

(i) The Deed.

(ii) The Net Lease together with a memorandum of lease, both in quadruplicate, duly executed and acknowledged by Seller as Tenant and in recordable form.

(iii) A Bill of Sale for the Personal Property in the form of Exhibit E annexed hereto.

(iv) A cashier’s check to the order of Purchaser in the amount of the Security Deposit as provided under the Net Lease. At the election of Purchaser, such amount may be allotted to Purchaser as a credit against the Purchase Price.

(v) A Seller’s Affidavit in customary form and such other documents as required by the Title Company, executed by Seller certifying against any work done or supplies delivered to the Premises which might be grounds for a materialmen’s or mechanic’s lien under or pursuant to the law of the state in which the Premises are situated, in form sufficient to enable the Title Company affirmatively to insure Purchaser against any such lien,

(vi) An affidavit in the form satisfactory to the Title Company sworn to by Seller and an opinion letter of Seller’s counsel, addressed to and intended to be relied upon by Purchaser, and its successors and assigns, setting forth that: (A) Seller is a national bank duly organized and existing under the laws of the United States of America and it has duly qualified to do business in the state in which the Premises is located; (B) Seller has the power to own its properties, to transact the business in which it is engaged and to enter into the transactions contemplated by this Agreement, including, without limitation, Seller’s conveyance of the Premises to Purchaser and entering into the Net Lease; (C) All actions required to authorize the transactions contemplated by this Agreement have been duly accomplished by Seller;

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(D) All documents required to effectuate the transactions contemplated by this Agreement have been duly executed and delivered by Seller to Purchaser and constitute binding obligations of Seller, enforceable against Seller and the Premises in accordance with the terms and provisions thereof, subject to (i) such limitations as may result from any applicable bankruptcy, insolvency, reorganization, moratorium, or other similar laws relating to or affecting the enforcement of creditors’ rights generally, and (ii) the qualification that certain remedies afforded by such documents may be limited by applicable state law, none of which limitations will materially interfere with the practical realization of the rights of the Purchaser thereunder; and (E) the consummation of the transactions contemplated herein shall not violate or be prohibited or restricted in any way by any law or decision of the state wherein the Premises is located, nor any by-law, article or organization, resolution, agreement, contract, or other obligation or duty of Seller.

(vii) Any and all affidavits and other instruments and documents which the Title Company shall reasonably require in order to insure title to Purchaser, subject to no exceptions other than the Permitted Encumbrances and the Net Lease.

(viii) All architectural, structural, mechanical and electrical plans and specifications, surveys, and other materials (the Plans) for the Improvements, if the same are in the possession of Seller or are capable of being procured by Seller.

(ix) The Title Policy, as hereinafter defined.

(x) The Construction Completion Certificates.

(xi) All proper instruments as shall be required for the assignment of the Appurtenances.

(xii) Certified resolutions of the Board of Directors of Seller authorizing all the transactions contemplated in this Agreement.

(xiii) An incumbency certificate with respect to those officers of Seller executing any documents or instruments in connection with the transactions contemplated herein.

(xiv) Certificates from authorized governmental officer in which Seller is organized and the state in which the Premises are located, to the effect that Seller is a national banking organization in good standing, licensed to do business.

(xv) Policies or certificates of insurance and any endorsements thereto required under the Net Lease, which policies shall be endorsed naming Purchaser as an insured thereunder and shall be fully paid on the Closing Date.

(xvi) A collateral assignment, effective upon any default by Tenant under the Net Lease or upon the request of any Mortgagee, as defined therein, of all warranties and guarantees, if any, (including, without limitations, roof bonds) received from contractors for services rendered in connection with, or for equipment and materials installed in the Improvements.

(xvii) Evidence that the Premises are not located in a flood hazard area, or, if the Premises are located in a flood hazard area, evidence of compliance with the provisions of Paragraph 4(p) hereof.

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(xviii) Evidence that the Premises are or will be separately and fully assessed for real estate taxing purposes commencing the tax year 2007.

(xix) The certificate of engineer respecting the structure of the Premises, certified to Seller, Purchaser and Purchaser’s Lender satisfactory to Purchaser’s Lender.

(xx) An affidavit of Seller (or an authorized officer of the Seller), sworn to under penalty of perjury, setting forth the Seller’s United States tax identification number, and stating that the Seller is not a foreign person and is a United States Person as defined in the Internal Revenue Code of 1986, as amended, in such form and substance as shall relieve Purchaser from any obligation to withhold any portion of the Purchase Price.

(xxi) All other instruments, documents, and agreements reasonably required by Purchaser to effect or confirm the transactions contemplated herein.

(xxii) On the Closing Date, Seller shall, at no cost or liability to Purchaser, cause the Title Company to irrevocably undertake and agree that the Title Company, for itself and its successors and assigns, shall, for the benefit of Purchaser and its successors and assigns, and for the benefit of any Mortgagee, Superior Lessor, or Superior Landlord, all as defined in the Net Lease, issue Policy(s) subject only to Permitted Encumbrances.

(b) On the Closing Date, Purchaser, at its sole cost and expense, will deliver or cause to be delivered to Seller the following documents:

(i) Certified resolutions of the management board or committee of Purchaser authorizing all the transactions contemplated in this Agreement.

(ii) An incumbency certificate with respect to those officers of Purchaser executing any documents or instruments in connection with the transactions contemplated herein.

(iii) Certificates from the Secretary of State or other authorized governmental officer of the State in which Purchaser is organized and the state in which the Premises are located, to the effect that Purchaser is a limited liability company in good standing, licensed to do business in said State(s).

(xx) An affidavit of Purchaser (or an authorized officer of the Seller) setting forth the Seller’s United States tax identification number.

9. Adjustments

As between Seller and Purchaser, there shall be no adjustments or apportionments at the closing hereunder, including, without limitation, adjustments and apportionments with respect to premiums on insurance policies, real estate taxes and other governmental levies and charges, water, fuel and utility charges, wages of employees, social security and payroll taxes, amounts prepaid or due on service contracts, and any other similar items whether or not customarily the subject of adjustments or apportionment, and Purchaser shall have no liability to Seller with respect to adjustments.

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10. Unpaid Taxes and Assessments and Other Charges

The amount of any unpaid taxes, assessments, water charges, and other such liens, which Purchaser is not required to take title subject to, with the interest and penalties thereon to a date not less than two (2) business days after the Closing Date, may, at the option of Seller, be allowed to the Purchaser out of the Purchase Price, provided official bills therefor, with interest and penalties thereon figured to said date, are furnished by the Seller at least five (5) business days prior to the Closing Date. If there are any other liens, agreements, or encumbrances affecting the Premises subject to which Purchaser is not obligated to take title, Seller may use any portion of the balance of the Purchase Price to terminate or discharge the same, provided Seller shall notify Purchaser at least five (5) business days prior to the Closing Date of the amount of the Purchase Price to be used to terminate or discharge said liens, agreements, and encumbrances. Furthermore, Seller shall deliver to Purchaser at closing instruments in recordable form sufficient to terminate or discharge such liens, agreements, and encumbrances of record, together with the cost of recording or filing said instruments. Seller’s obligations hereunder shall survive the closing of title to the Premises.

11. Expenses

Seller and Purchaser shall each pay its own legal fees incident to the preparation and execution of this Agreement, whether or not the transaction contemplated hereby is consummated. Seller shall pay or cause to be paid all costs and expenses, other than owner’s and lender’s title insurance premiums and costs, of whatever kind and nature incurred in connection with the transactions contemplated herein including, without limitation, survey costs, brokerage commissions, documentary stamps, fees for recording and filing the deed and the memorandum of Net Lease, all taxes (including, but not limited to, transfer, sales, conveyance, leasing, and recording taxes, but excluding any income or franchise taxes payable by Purchaser in connection herewith), and such other customary and reasonable expenses (whether incurred prior to or after the Closing Date) as are normally and reasonably incurred in connection with the type of transactions described herein, except only Purchaser’s legal fees and any engineering costs incurred in connection with the Purchaser’s or Purchaser’s Lender’s inspection of the Premises. The Seller shall pay all costs and expenses of whatever kind and nature necessary and sufficient to obtain the Title Policy, as hereinafter defined, insuring Purchaser’s fee interest in the Premises in accordance with the terms hereof, including, without limitation, the provisions of Paragraph 14 hereof, and Purchaser shall, at its option, pay any excess over such amount to be paid hereunder by Seller which shall be necessary and sufficient to obtain a lender’s title insurance policy as required by Purchaser.

12. Copies of Documents

(a) Prior to the Closing Date, Seller agrees to deliver to Purchaser or its representatives, promptly after the Purchaser’s request, but not less than ten (10) days prior to the Closing Date, true, accurate, and complete copies of:

(i) All documents described in Paragraph 8(a) hereof; and

(ii) Any document or instrument to which any representation, warranty, term, condition, or covenant hereunder relates or makes reference; and

(b) Seller agrees to provide Purchaser within forty-five (45) days from the date hereof with six (6) prints of a currently certified “as-built” survey (the Survey) of the Premises prepared in accordance with the Minimum Standard Detail Requirements for Land Title Surveys, including any Flood Plain designations, adopted by the American Land Title Association and the

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American Congress on Surveying and Mapping (1962), certified to Purchaser, Purchaser’s lender(s), and to the Title Company, showing the location of all Improvements, the location of all easements, and showing no encroachments other than as specifically approved herein or by Purchaser, in writing,

(c) All plans with respect to all Improvements upon the Premises and all other plans with respect to the Premises in Seller’s possession.

13. Broker

Seller and Purchaser respectively represent and warrant that it has dealt with no brokers, finders, or salesmen in connection with this transaction, and agrees to indemnify, defend, and hold Purchaser harmless from and against any and all loss, cost, damage, liability, or expense, including reasonable attorneys’ fees, which Purchaser may sustain, incur, or be exposed to by reason of any claim for brokerage or finder’s fees or commissions which arise in connection with the transaction contemplated hereunder. The provisions of this paragraph shall survive the Closing Date and any termination of this Agreement.

14. Title Report

Seller, at no cost or liability to Purchaser (except as provided in Paragraph 11 hereof), will provide Purchaser with a commitment for an owner’s and lender’s policy of title insurance from the Title Company pursuant to which the Title Company shall agree to insure title to the Premises, in the amount of the purchase price (at a standard rate for such insurance) in the name of Purchaser and Purchaser’s lender, after delivery of the Deed, by a standard Owners and Lenders Policy, with the endorsements as reasonable requested by such parties, free and clear of all liens, agreements, matters, and encumbrances other than the Permitted Encumbrances and the Net Lease, and with all survey exceptions deleted, insuring against all mechanics’ and laborers’ liens and claims on account of any work performed on the Premises through the Closing Date (including, but not limited to, unfiled and inchoate liens and claims) and otherwise in accordance with the provisions of this Agreement (the Title Policy). The Title Company shall provide affirmative insurance that any restrictive covenants set forth in the Permitted Encumbrances have not been violated, and that any future violation thereof will not result in a forfeiture or reversion of title, shall provide that the exception for taxes shall apply only to the current and subsequent years, shall provide that any exception as to easements not shown by public records shall be either deleted or limited to such matters or conditions as are shown on the Survey. Seller shall use its best efforts to cause to be furnished to Purchaser true, correct, and legible copies of all instruments referred to in said commitment as conditions or exceptions to title to the Premises. Purchaser shall have the right to notify Seller of any matters which render the title uninsurable, and Seller shall, as provided herein, have the opportunity to remove such matters. Nothing herein contained shall be deemed a waiver by Purchaser of any objections or exceptions to or defects in the title.

15. Casualty Loss

(a) If, prior to the Closing Date, any part of the Premises is damaged as the result of fire or other casualty, and the estimated cost of repair of the damage exceeds $500,000.00, Purchaser shall have the option to (i) accept title to the Premises without any abatement of the purchase price whatsoever, in which event, on the Closing Date, all of the insurance proceeds shall be assigned by Seller to Purchaser, any monies theretofore received by Seller in connection with such fire or other casualty shall be paid over to Purchaser, and Seller shall reimburse Purchaser an amount equal to the Insurance Deficiency Amount, as

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hereinafter defined; or (ii) terminate this Agreement. In the event that the estimated cost of repair of the damage does not exceed $500,000.00, this Agreement shall remain in full force and effect and Purchaser shall have the option to (i) require Seller to restore the Premises to the same condition they were in immediately prior to such damage or (ii) have all of the insurance proceeds payable as a result of such damage assigned to Purchaser or applied to the Tenant as provided under the Net Lease, and any monies theretofore received by Seller in connection with such damage shall be paid over to Purchaser, and Seller shall reimburse Purchaser an amount equal to the Insurance Deficiency Amount, as hereinafter defined. For all purposes hereof, the term Insurance Deficiency Amount shall mean the sum of all deductibles and other such charges payable by the insured with respect to all insurance policies for which proceeds may or will be payable as a result of damage to the Premises.

(b) Seller shall not settle any fire or casualty loss claims in connection with the Premises without obtaining Purchaser’s prior reasonable consent in each case.

(c) Seller hereby agrees to furnish Purchaser with written notification of any such fire or casualty within five (5) days of such event or such shorter time period as may be required by the carrier insuring such fire or casualty for providing such notification to such carrier.

16. Rights of Inspection Prior to Closing; Right to Terminate

The Purchaser, and its representatives, agents, or designee, shall have the right to inspect all or any part of the Premises after the date hereof, provided that it shall first give the Seller reasonable advance notification of its intention to conduct any such inspection and that such inspection shall not unreasonably impede the normal day-to-day business operations of the Premises. The Purchaser, and its representatives, agents, or designees, shall have the right to inspect all documents, agreements, or other instruments annexed hereto, referred to herein or otherwise related to the Premises or any portion thereof, and to make any and all inquiries and investigations which Purchaser deems necessary or appropriate, and Seller shall cooperate with Purchaser in making available for inspection all of such instruments to Purchaser and shall assist with all such inquiries and investigations of Purchaser; provided, however, that Seller shall not be obligated to incur any cost or expense hereunder this Paragraph. Purchaser may disapprove of the results of any such inspection, inquiry, or investigation for any reason or for no reason and any disapproval thereof need not specify the reason for such disapproval. Purchaser shall have the right to terminate this Agreement if Purchaser, in its sole discretion, deems the Premises or any aspect thereof, or any instrument or the result of any inquiry or investigation, to be unsatisfactory in any way or for any reason whatsoever; provided, however, that Purchaser may only exercise such right by giving Seller written notice of such termination on or before sixty (60) days after the date of execution of this Agreement (the Inspection Contingency Date), In addition, in the event the Survey referred to in Paragraph 12(b) hereof is not delivered to both the Purchaser and the Title Company at least ten (10) days prior to the Inspection Contingency Date, then the Purchaser shall have the right to terminate this Agreement if Purchaser, in its sole discretion, deems the Survey or any aspect thereof or any fact disclosed or contained therein to be unsatisfactory in any way or for any reason whatsoever; provided, however, that Purchaser may only exercise such right by giving Seller written notice of such termination on or before ten (10) days following the date on which the Survey is delivered to both the Purchaser and the Title Company.

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17. Condemnation

In the event of the institution of any proceedings, judicial, administrative, or otherwise, which shall relate to the proposed taking of any portion of the Premises by eminent domain prior to the Closing Date thereof, or in the event of the taking of any portion of the Premises by eminent domain prior to the Closing Date therefore, Purchaser shall have the right and option to terminate this Agreement by giving the Seller written notice to such effect at any time after its receipt of written notification of any such occurrence. In the event Purchaser shall not elect to terminate this Agreement, Seller shall assign all proceeds of such taking to Purchaser to be used and applied as provided in the Net Lease, and the same shall have the sole right to settle any claim in connection with the Premises.

18. Failure to Convey

(a) In the event of any default on the part of Purchaser, Seller waives any claim, at law or in equity, either against Purchaser or against any person, known or unknown, disclosed or undisclosed, except that, upon a default by Purchaser hereunder, provided Seller is not in default hereunder, Seller shall be entitled to terminate this Agreement and to retain the Deposit as liquidated damages and such retention shall constitute Seller’s role and absolute remedy at law and in equity.

(b) In the event that for any reason Seller is unable or unwilling to convey title to the Premises in accordance with the terms of this Agreement, then Purchaser, in its sole discretion, may elect either to: (a) terminate this Agreement, or (b) accept such title as Seller can convey, and waive any conditions to Purchaser’s obligations hereunder, in which event Seller shall make the deliveries provided for herein to Purchaser to the extent that Seller is able to do so, without reduction in the Purchase Price. In the event of any refusal or inability on the part of Seller to convey title pursuant hereto or to convey such title as it is able to deliver and is acceptable to Purchaser, then, in addition to all other rights hereunder, Purchaser shall be entitled to pursue any and all remedies available to Purchaser at law or in equity including, without limitation, an action for specific performance to compel Seller to convey the Premises pursuant to this Agreement and any claim for damages, whether incidental or consequential,

19. Closing

The closing and delivery of the Deed (the Closing) shall take place at the offices of Johnson Smith Hibbard and Wildman Law Firm, L.L.P. at 220 N. Church Street Spartanburg, SC 2Q306 on or prior to the Outside Closing Date of January 30, 2007 at 11:00 a.m. or at such earlier time and at such other place as mutually shall be agreed upon.

20. Notices

All notices which may be required to be or are given by either party to the other hereunder shall be in writing and shall be sent by Federal Express or other similar national, reputable, overnight courier which provides proof of delivery, to the parties at the addresses listed below:

(i)	to the Purchaser as follows:
	First National Holdings, LLC
	c/o Donald B. Wildman, Manager
	220 North Church Street, Suite 4
	Spartanburg, SC 29306
	Telephone: (864) 582-8121
	Facsimile: (864) 585-5328

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(ii)	to the Seller as follows:
	First National Bank of the South,
	a/k/a First National Bank of Spartanburg, a
	division of First National Bank of the South
	Attn: Jerry Calvert, President
	215 North Pine Street
	Spartanburg, SC 29302
	Telephone: (864) 594-5690
	Facsimile; (864) 594-5688

The parties may at any time change the addresses or the attorneys to whom the copies of the notices should be mailed by sending written notice to the other party of such change in the manner hereinabove provided. Notices shall be deemed to be received on the next business day after the day of sending.

21. Escrow

Intentionally Omitted.

22. Miscellaneous

(a) This Agreement constitutes the entire agreement between the parties and incorporates and supersedes all prior negotiations and discussions between the parties.

(b) This Agreement cannot be amended, waived, or terminated orally, but only by agreement in writing signed by the parties hereto.

(c) This Agreement, being negotiated and prepared in the State of South Carolina, shall be interpreted and governed by the laws of said State, except with respect to title issues, in which case the law of the jurisdiction in which the Premises are located shall govern.

(d) Whenever in this Agreement there is a provision for the return or disbursement of the Deposit, the provision shall be deemed to include all interest earned thereon.

(c) This Agreement may be assigned by Purchaser without the consent of Seller and, upon such assignment, Purchaser shall have no further liability hereunder.

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(f) The Caption headings in this Agreement are for convenience only and are not intended to be part of this Agreement and shall not be construed to modify, explain, or alter any of the terms, covenants, or conditions herein contained.

(g) All of the representations and warranties, if any, made by Purchaser and Seller in this Agreement shall survive the closing hereunder and shall not be merged therein. Notwithstanding anything to the contrary, Seller hereby acknowledges and agrees that Purchaser has made no representation or warranty with respect to any transaction contemplated hereby except as specifically and expressly set forth in Paragraph 4(B) hereof and Purchaser has no obligation to perform any covenant or obligation or to comply with any condition in connection with this Agreement except as specifically and expressly set forth in this Agreement.

(h) Notwithstanding anything to the contrary contained herein, in the event that at any time between the date hereof and the Closing Date, Seller suffers or there otherwise occurs with respect to Seller any material adverse economic or financial change, Purchaser may elect to terminate this Agreement upon two (2) days’ prior notice to Seller.

(i) On the Closing Date and from time to time thereafter, Seller shall execute and deliver or cause the execution and delivery to Purchaser of such assignments, deeds, agreements, consents, instruments, documents, and further assurances as may be required by Purchaser in order to effect or confirm any of the provisions of this Agreement, or the transactions intended to be accomplished in connection herewith or to carry out the intent and purposes hereof.

(j) If any instrument or deposit is necessary in order to obviate a defect in or objection or exception to title, the following shall apply: (a) any such instrument shall be in such form and shall contain such terms and conditions as may be required by the Title Company to omit any defect, objection, or exception to title, (b) any such deposit shall be made with the Title Company, and (c) Seller agrees to execute, acknowledge, and deliver any such instrument or cause the execution, acknowledgement, and delivery thereof and to make any such deposit.

(k) This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors, and assigns.

(1) All exhibits and schedules annexed hereto are hereby incorporated by reference herein.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

[SIGNATURES ON FOLLOWING PAGE]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

WITNESSES:	PURCHASER:
	FIRST NATIONAL HOLDINGS, LLC
	By:	(Seal)
	Name:	Donald B. Wildman
	Title	Manager
WITNESSES:	SELLER:
	FIRST NATIONAL BANK OF THE SOUTH
	By:	(Seal)
	Name:	Jerry L. Calvert
	Title	President & C.E.O.
		Also known as:
	FIRST NATIONAL BANK OF SPARTANBURG, a division of First National Bank of the South
	By:	(Seal)
	Name:	Jerry L. Calvert
	Title	President & C.E.O.

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EXHIBIT “A”

LEGAL DESCRIPTIONS

North Pine Street Property:

ALL those lots, pieces or parcels of land with improvements located thereon, located, lying and being in the City of Spartanburg, Spartanburg County, South Carolina on the western side of North Pine Street US Highway 176 (R/W varies), containing 2.98 acres, more or less, and being more particularly shown on plat of survey made for First National Holdings, LLC dated November 15, 2006, last revised January 11, 2007, by Site Design, Inc. (Joe F. Gosnell, P.L.S. S. C. Reg. No. 16501) recorded February     , 2007 in Plat Book                 , at Page                  in the Spartanburg County Register of Deeds Office, to which plat reference is hereby made for a more complete and particular description and with the following metes and bounds, to-wit:

COMMENCING at an old nail in curb located 412.3 feet more or less, from that intersection of the rights of way of North Pine Street US Highway 176 and Saint John Street along a tie line of N 26-40-00 W said point being the POINT OF BEGINNING (P.O.B.);

From said P.O.B. and leaving the right of way of North Pine Street, thence S. 89-45-19 W. 107.01 feet to IPO ½” rebar; thence S. 38-31-44 W. 166.32 feet to IPO ½” rebar; thence S. 12-59-37 W. 25.33 feet to IPO ½” rebar; thence S. 35-29-00 W. 75.79 feet to IPO ½” rebar; thence S. 52-05-04 E. 32.61 feet to IPO ½” rebar; thence S. 13-06-08 W. 51.59 feet to IPO ½” rebar located on the right of way of Saint John Street; thence along the right of way of Saint John Street N 66-50-29 W 38.22 feet to a point; thence N. 67-50-04 W. 59,33 feet to an Old Nail & Cap; thence leaving the right of way of Saint John Street N. 18-46-19 E. 26.44 feet to an Old Nail & Cap; thence N. 18-43-06 E. 35.75 feet to old RR Spike; thence N. 15-39-05 E. 67.76 feet to old RR Spike; thence N. 14-44-54 E. 35.50 feet to Old RR Spike; thence N, 12-24-45 E. 10.53 feet to Mag Nail Set; thence N. 04-54-04 E. 59,93 feet to Old Nail & Cap; thence S. 06-09-50 W. 24.47 feel to a point; thence S. 69-55-21 W. 56.48 feet to IPO 3/8” rebar; thence N, 13-27-48 W. 56,90 feet to IPO 1/4” SR Bent; thence N. 69-25-42 E. 75.13 feet to Mag Nail Set; thence N. 06-09-50 E. 75.15 feet to point; thence S. 68-36-40 W. 103.38 feet to IPO ½” rebar; thence N. 13-16-11 W. 54.19 feet to IPO ½” RB Bent; thence N. 13-18-21 W. 68.46 feet to IPO ½” rebar; thence N. 70-10-40 E. 68.16 feet to IPS 5/8” rebar; thence N. 14-34-32 W. 16.95 feet to IPO 5/8” solid rod; thence N. 16-19-51 W. 49.62 feet to an IPO ½” solid rod; thence N. 68-31-30 E. 28,22 feet to IPO ½” rebar; thence N. 14-14-23 W. 127.74 feet to Old Mag Nail; thence along the right of way of Greenleaf Street 20’ R/W, thence N. 75-43-34 E. 50.38 feet to IPO ½” rebar, thence N. 77-29-16 E. 50.95 feet to IPO ½” rebar, thence N. 74-51-16 E. 9.39 feet to IPO ½” R. B. Bent located on the right of way of North Pine Street US Highway 176; thence along the right of way of North Pine Street US Highway 176 the following two (2) calls: S. 28-35-12 E. 113.16 feet to IPO ½” rebar; S. 26-40-00 E. 414,60 feet to Old Nail in Curb and the P.O.B.

Derivations:

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg, Div. of First National Bank of the South by deed of Robbin Waldrop and Gracie Sue Waldrop recorded on February 8, 2005 in Deed Book 82-G, at Page 702, aforesaid records.

Tax Map Number:

7-12-07-158.00

A portion of the above described property was heretofore conveyed to First National Bank of the South by deed of Bobby J. Crump recorded October 13, 2005 in Deed Book 84-D, at Page 524, aforesaid records.

Tax Map Number: 7-12-07-161.00

A portion of the above described property was heretofore conveyed to First National Bank of the South by deeds recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 72-G at Page 464; Deed Book 72-G at Page 465; and Deed Book 72-G at Page 466.

Tax Map Numbers: P/O 7-12-07-147.00; P/0 7-12-07-147.01 and also 7-12-07-157.00

A portion of the above described property was heretofore conveyed to FIRST NATIONAL BANK OF SPARTANBURG by deed of HBJ PROPERTIES, A SOUTH CAROLINA GENERAL PARTNERSHIP, dated February 22, 2000, recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 71-N, at Page 609.

Tax Map Number: 7-12-07-168.00

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg by deed recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 83-G at Page 402.

Portions of the above described property was heretofore conveyed to First National Bank of Spartanburg by Road Closure Order recorded in Deed Book 72-F at Page 624.)

Tax Map Number: 7-12-07-156.00

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg by deed recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 84-E at Page 180.

Portions of the above described property was heretofore conveyed to First National Bank of Spartanburg by Road Closure Order recorded in Deed Book 84-P at Page 302.)

Tax Map Numbers: 7-12-7-153.00 and 7-12-7-154.00

Boiling Springs Road Property:

ALSO: ALL that lot, piece or parcel of land located in the State of South Carolina, County of Spartanburg, at Boiling Springs, located at the northeastern quadrant of the intersection of Boiling Springs Road (S. C. Highway No. 9) and Swain Avenue, containing 0.946 acres, more or less, and being more particularly shown on plat of survey made for First National Bank of Spartanburg dated August 15, 2000 by John Robert Jennings, P.L.S., Surveyor, recorded December 27, 2000 in Plat Book 149, at Page 360 in the Office of the Register of Deeds for Spartanburg County, S. C, See also “ALTA / ACSM Land Title Survey” prepared for First National Holdings, LLC by Joe F. Gosnell, P.L.S., South Carolina Reg. No. 16501 of Site Design, Inc., dated November 7, 2006, last revised on February 8, 2007 (the “Survey”) showing said parcel as having the following metes and bounds, to-wit:

Commencing at an iron pin old 3/4” open top located on the right of way of Boiling Springs Road (SC Hwy 9) (45’ R/W from C/L) as shown on said Survey and being the Point of Beginning (POB).

From said POB, thence along the Boiling Springs Road right of way the following three calls: N. 32-57-13 W. 93.14 feet to IPS 5/8” rebar, N. 33-39-21 W. 84.29 feet to IPS 5/8” rebar, N. 07-29-08 E. 11.91 feet to IPS 5/8” rebar; thence along the 40’ right of way of Swain Avenue the following two calls: N. 49-22-15 E. 172.49 feet to Mag Nail Set, N. 49-24-00 E. 44.51 feet to IPS; thence leaving said right of way and running S. 33-18-35 E. 184.79 feet to IPO 1/2” rebar; thence S. 49-09-22 W. 21.53 feet to IPO 1/2” rebar; thence S. 49-13-08 W. 203.46 feet to IPO 3/4” open top and POB, and containing 41,214 square feet, 0.95 acres, more or less.

This being the same property heretofore conveyed to FIRST NATIONAL BANK OF SPARTANBURG by deed of PATRICK A. T1NSLEY dated December 21, 2000, recorded December 27, 2000 in Deed Book 73-D, at Page 422, aforesaid records.

Tax Map Number: 2-44-10-053.00

Property Address: 3090 Boiling Springs Road; Boiling Springs, SC

EXHIBIT “A” LEGAL DESCRIPTION CONTINUED:

THESE BEING THE SAME PROPERTIES HERETOFORE CONVEYED TO FIRST NATIONAL HOLDINGS, LLC, A SOUTH CAROLINA LIMITED LIABILITY COMPANY, BY DEED OF FIRST NATIONAL BANK OF THE SOUTH, ALSO KNOWN AS FIRST NATIONAL BANK OF SPARTANBURG, A DIVISION OF FIRST NATIONAL BANK OF THE SOUTH DATED FEBRUARY 6, 2007, AND RECORDED IN THE OFFICE OF THE REGISTER OF DEEDS FOR SPARTANBURG COUNTY, S. C. IN DEED BOOK                     , at PAGE                     .

EXHIBIT “B”

Form of Net Lease

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State of South Carolina	)
	)
County of Spartanburg	)

LEASE

THIS LEASE entered into this 16th day of February, 2007, by and between First National Holdings, LLC, having an office c/o Donald B. Wildman, 220 North Church Street, Spartanburg, SC 29306, (hereinafter called the “Landlord”) and First National Bank of the South, having an office at c/o President, 215 North Pine Street, Spartanburg, SC 29304, (hereinafter called the “Tenant”).

Upon the terms and subject to the conditions hereinafter set forth, the Landlord leases to the Tenant and the Tenant leases from the Landlord, the property hereinafter described:

1. The Leased Premises

(a) The property hereby leased to the Tenant is the tract or tracts of land (the Land) situated in the County of Spartanburg and State of South Carolina more particularly described in Exhibit A annexed hereto and by this reference made a part hereof, together with buildings with its usable space depicted in Schedule A annexed hereto and other improvements now or hereafter located thereon (collectively, the Improvements).

The Land and Improvements leased hereunder, together with all Landlord’s right, title, and interest, if any, in and to all easements and other appurtenances thereto, hereinafter sometimes collectively referred to as the Leased Premises, are demised and let subject to (a) the rights of any parties in possession thereof and the existing state of the title thereof as of the commencement of the term of this Lease, (b) any state of facts which an accurate survey or physical inspection thereof might show, (c) all zoning regulations, restrictions, rules, and ordinances, building restrictions and other laws and regulations now in effect or hereafter adopted by any governmental authority having jurisdiction, and (d) with respect to the Improvements, their condition as of the commencement of the term of this Lease, without representation or warranty by Landlord. Tenant represents to Landlord that Tenant has examined the title to and the physical condition of the Leased Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory for all purposes hereof, and Tenant accepts the title and condition of the Leased Premises in their respective, present condition “as is”.

Landlord makes no representation or warranty with respect to the condition of the Leased Premises or its fitness or availability for any particular use, and Landlord shall not be liable for any latent or patent defect therein. Tenant shall be liable for the completion of all remaining construction of the Premises in accordance with that certain Agreement between First National Bank of Spartanburg as Owner and Roebuck Buildings Company as Contractor dated June 5, 2006 (the “Construction Contract”).

2. Term and Extension Options

(a) The Initial Term of this Lease shall be for a period commencing on the commencement date of this Lease as mutually agreed upon by the parties and terminating on the twentieth-fifth (25th) anniversary thereof, plus the number of

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days necessary to end the term on the last day of a calendar month or on such earlier date upon which said term may expire or be terminated pursuant to any of the conditions of limitation or other provisions of this Lease, or pursuant to the provisions of any present or future constitution, law, statute, ordinance, rule, regulation, other governmental order, or controlling judicial determination of any federal, state, local, municipal, or other governmental body, agency, or authority having or asserting jurisdiction, and all departments, commissions, boards, and officers thereof (collectively, the Laws).

(b) Provided the Tenant shall keep, observe, and perform all of the terms, covenants, and conditions of this Lease on Tenant’s part to be kept, observed, and performed, Tenant shall have the right to extend the term of this Lease for one (1) consecutive period of five (5) Lease Years (hereinafter referred to as the First Extended Term), provided Tenant shall notify Landlord, in writing, by registered or certified mail, return receipt requested, not less than twelve (12) months prior to the expiration of the then existing term hereof, that Tenant elects to extend the term of this Lease, and provided further that this Lease, as extended, shall be upon the same terms, covenants, and conditions as are contained herein, except as to the duration of the term hereof, the fixed annual Minimum Rental rate amount and any other provisions of this Lease which by their terms are applicable only to any portions of the term and excluding any further option of extension. Failure to comply with the provisions of this paragraph shall be deemed a complete waiver of the options herein granted.

3. Fixed Annual Minimum Rental

Tenant covenants to pay Landlord, without previous demand therefor, and without any setoff or deduction whatsoever, a net fixed annual minimum rent (the Minimum Rental) for each year of the Initial Term and any Extended Term of this Lease, payable in equal monthly installments, in advance on or before the first (1st) day of each and every calendar month during the term of this Lease in amounts as provided on Schedule B annexed hereto and by this reference made a part hereof. The Minimum Rental for the Extended Term, if the option to extend is exercised by the Tenant, shall be calculated based upon the formula as set forth in Schedule B annexed hereto and by reference made a part hereof.

In the event that the term of this Lease does not commence on the first day of a calendar month, the installment of Minimum Rental for the partial calendar month at the commencement of the term of this Lease shall be prorated on the basis of the number of days of the term within such calendar month. The first installment of Minimum Rental shall be paid simultaneously with the execution of this Lease. Landlord may, at its option, upon fifteen (15) days’ prior notice, direct Tenant to pay all or any portion of the Minimum Rental directly to the holder of any mortgage on the Leased Premises and to pay the balance of the Minimum Rental, if any, to Landlord.

4. Utilities

Tenant shall furnish, at its own expense, all utilities of every type and nature required by it in its use of the Leased Premises and shall pay or cause to be paid, when due, all bills for water, sewerage, heat, gas, electricity, and other utilities, if any, used on, in connection with, or chargeable against the Leased Premises until the termination of this Lease, and all bills for utility charges relating to the Leased Premises or the use thereof and imposed on users of utilities, whether or not such charges shall relate to services or benefits available to the Tenant during the term of this Lease, and the Tenant shall indemnify and save harmless the Landlord from and against any loss, cost, and expense in connection therewith.

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5. Additional Rent

(a) It is the purpose and intent of the Landlord and Tenant that the rent payable hereunder shall be net to the Landlord so that this Lease shall yield, net to the Landlord, the rents specified herein in each year during the term of this Lease. Tenant shall pay promptly when due or make reimbursement to Landlord, as additional rent, for all taxes imposed upon Tenant’s rent, lease and business operation, including, without limitation, all sales taxes, value added taxes, documentary taxes, stamp taxes and other taxes assessed upon the consideration to be received by Landlord for this Lease.

(b) Tenant also covenants to pay, before any fine, penalty, interest, or cost may be added thereto for the non-payment thereof, as additional rent, all taxes imposed upon the Leased Premises whether or not a result of Tenant’s rent, lease and business operation, including, without limitation, all sales taxes, value added taxes, documentary taxes, stamp taxes, real estate taxes, all other taxes and assessments (including but not limited to, all assessments for public improvements or benefits, whether or not commenced or completed within the term of this Lease), water, sewer, and other rents, rates, and charges, charges for public utilities, excises, levies, license, permit, and inspection fees and other governmental charges, general and special, ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever, which at any time prior to or during the term of this Lease may have been or may be assessed, levied, confirmed, imposed upon, or grow or become due or payable out of or in respect of, or become a lien on, the Leased Premises or any part thereof or any appurtenance thereto, any personal property, the rent and income received by Tenant from subtenants, any use, possession, or occupation of the Leased Premises, or rentals or sales therefrom or activity conducted therein, such franchises as may be appurtenant to the use or occupation of the Leased Premises, this transaction or any document to which Tenant is a party creating or transferring any right, title, or interest or estate in the Leased Premises (all of the foregoing, together with any and all penalties and/or interest thereon, and together with any and all premiums, being hereinafter sometimes collectively referred to as Impositions, and any of the same being hereinafter sometimes referred to as an Imposition).

Nothing herein contained shall require Tenant to pay income taxes assessed against Landlord, or any capital levy, corporation franchise, excess profits, estate, succession, inheritance, or transfer taxes of Landlord, unless such taxes are imposed or levied upon or assessed as a total or partial substitute for, or in lieu of, any other Imposition required to be paid by Tenant pursuant to this Section 5(b), in which event same shall be deemed Impositions and shall be paid by Tenant; provided, however, that if at any time during the term of this Lease, the method of taxation shall be such that there shall be levied, assessed, or imposed on Landlord a capital levy, gross receipts, or other tax directly on the rents received therefrom and/or a franchise tax or an assessment, levy, or charge measured by or based, in whole or in part, upon such rents, the Leased Premises (including, but not limited to, the acquisition, leasing, use, or value thereof) or the present or any future Improvements on the Leased Premises or the construction thereof and/or measured in whole or in part by Landlord’s income from the Leased Premises, if in computing such income there is not allowed as a deduction any significant portion of the depreciation or interest deductions allowed for federal income tax purposes, then all such taxes, assessments, levies, and charges, or the part thereof so measured or based, shall be deemed to be included within the term Imposition for the

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purposes hereof, but only to the extent that such taxes would be payable if the Leased Premises were the only property of Landlord, and Tenant shall pay and discharge the same as herein provided in respect of the payment of Impositions. Tenant shall furnish to Landlord, promptly after payment of any real estate taxes or premiums, and, with respect to any other Impositions, promptly upon request of Landlord, official receipts or other satisfactory proof evidencing payment of such Imposition. Upon Tenant’s failure to pay such Impositions, or failure to provide proof of such payment, as above provided, or otherwise if, as, and when required by a Mortgagee, Landlord shall have the right, at Landlord’s option, to require Tenant to: (i) promptly deposit with Landlord funds for the payment of current Impositions required to be paid by Tenant hereunder; and (ii) also deposit one-twelfth (1/12th) of the current annual or annualized Impositions as the case may be, or those of the preceding years if the current amounts thereof have not been fixed, on the first day of each month in advance, except that all additional funds required for any payments thereof shall also be deposited as aforesaid on the first day of the month during which, or at the end of which, an Imposition is due and payable without interest, penalty, or liability, and any interest made available to Landlord earned on such funds shall accrue for the benefit of Tenant.

(c) Notwithstanding anything to the contrary, additional rent shall not include the following:

(i) Principal or interest payments on late fees, points, closing cost, and any other charges paid by Landlord for any mortgages, deeds of trust, or other financing encumbrances;

(ii) Leasing commissions payable by Landlord and advertising and promotional expenditures associated with marketing space in the project;

(iii) Deductions for depreciation for the project;

(iv) Any attorneys’ fees and disbursements, recording costs, mortgage recording taxes, title insurance premiums, title closurer’s gratuity and other similar cost, incurred in connection with any mortgage financing or refinancing or execution, modification or extension of any ground lease; loan repayment penalty, premiums, fees or charges;

(v) Salaries and all other compensation (including fringe benefits and other direct and indirect personnel costs) of partners, officers and executives above the grade of superintendent or building manager of Landlord or the managing agent;

(vi) Costs of repairs, replacements and alterations for which and to the extent that Landlord is actually reimbursed therefor from any source;

(vii) Costs and expenses directly resulting from the gross negligence or willful misconduct of Landlord, its managing agent or its direct employees;

(viii) Sums paid by Landlord for any indemnity, damages, fines, late charges, penalties or interest for any late payment or to correct violations of building codes or other laws, regulations or ordinances applicable to the project, except for expenditures for repairs, maintenance and replacement

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or other items that would otherwise reasonably constitute a part of additional rent or which are caused by or incurred as a result of Tenant’s use of the Premises hereunder;

(ix) Costs and expenses incurred by Landlord in connection with damage, casualty or condemnation of all or a portion of the project.; provided, however, that Landlord may include such cost and expenses as additional rent if Landlord actually makes such repair and an insurance claim in connection therewith is not made or insurance does not pay such claim as a result of Tenant’s actions or omissions;

(x) Costs actually reimbursed under the warranty of any general contractor, subcontractor or supplies and realized by Landlord;

(xi) Attorneys’ fees and disbursements, brokerage commissions, transfer taxes, recording costs and taxes, title insurance and other similar charges incurred in connection with the sale or transfer of an interest in Landlord or the project.

6. Use

(a) Tenant shall be permitted to use the Leased Premises for a commercial office building, subject, to zoning ordinances, Laws, the orders, rules, and regulations of the Board of Fire Insurance Underwriters and any similar bodies having or asserting jurisdiction thereof now in effect or hereafter adopted by any governmental authority having or asserting jurisdiction, and such conditions, restrictions, and other encumbrances, if any, to which the Leased Premises are subject at the time of execution and delivery hereof.

(b) Tenant shall not use or occupy or permit the Leased Premises to be used or occupied, nor do or permit anything to be done in or on the Leased Premises or any part thereof, in a manner that would in any way violate any of the Laws or any certificate of occupancy affecting the Leased Premises or make void or voidable any insurance then in force with respect thereto, or that may make it impossible to obtain fire or other insurance thereon required to be furnished hereunder by Tenant, or that will cause or be likely to cause structural injury to any of the Improvements, or that will constitute a public or private nuisance or waste. Nothing contained in this Lease and no action or inaction by Landlord shall be deemed or construed to mean that Landlord has granted to Tenant any right, power, or permission to do any act or to make any agreement that may create, give rise to, or be the foundation for, any right, title, interest, lien, charge, or other encumbrance upon the estate of Landlord in the Leased Premises.

7. Compliance With Laws and Agreements

(a) Tenant shall, throughout the term of this Lease, and at Tenant’s sole cost and expense, promptly comply, or cause compliance: (i) with all Laws, whether present or future, foreseen or unforeseen, ordinary or extraordinary, and whether or not the same shall be presently within the contemplation of Landlord and Tenant or shall involve any change of governmental policy, or require structural or extraordinary repairs, alterations, or additions, and irrespective of the cost thereof, which may be applicable to the Leased Premises, and (ii) with any agreements, contracts, easements, and restrictions (collectively, the Restrictions) affecting the Leased Premises or any part thereof or the ownership, occupancy,

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or use thereof (x) existing on the date hereof, other than, except as otherwise provided herein, any Mortgage given by Landlord, or (y) hereafter created by Tenant, or consented to or requested by Tenant.

(b) Except as expressly provided in subsection 12(f) of this Lease, no abatement, diminution, or reduction in Minimum Rental, additional rent, or any other charges required to be paid by Tenant pursuant hereto shall be claimed by or allowed to Tenant for any inconvenience or interruption, cessation, or loss of business caused directly or indirectly, by any present or future Laws, or by priorities, rationing, or curtailment of labor or materials, or by war, civil commotion, strikes, or riots, or any manner or thing resulting therefrom, or by any other cause or causes beyond the control of Landlord or Tenant, nor shall this Lease be affected by any such causes; and, except as expressly provided in subsection 12(f) of this Lease, no diminution in the amount of the space used by Tenant caused by legally required changes in the construction, equipment, fixtures, motors, machinery, operation, or use of the Leased Premises shall entitle Tenant to any abatement, diminution, or reduction of the rent or any other charges required to be paid by Tenant pursuant to the terms of this Lease.

(c) The Tenant shall keep and maintain the Leased Premises in compliance with, and shall not cause or permit the Leased Premises to be in violation of, any federal, state, or local laws, ordinances or regulations relating to industrial hygiene or to the environmental conditions (Hazardous Materials Laws) on, under, about, or affecting the Leased Premises. The Tenant shall not use, generate, manufacture, store, or dispose of on, under, or about the Leased Premises or transport to or from the Leased Premises any flammable explosives, radioactive materials, hazardous wastes, toxic substances, or related materials, including without limitation any substances defined as or included in the definition of hazardous substances, hazardous wastes, hazardous materials, or toxic substances under any applicable federal or state laws or regulations (collectively referred to hereinafter as Hazardous Materials).

The Tenant shall be solely responsible for, and shall indemnify and hold harmless the Landlord, its directors, officers, employees, agents, successors, and assigns from and against, any loss, damage, cost, expense, or liability directly or indirectly arising out of or attributable to the use, generation, storage, release, threatened release, discharge, disposal, or presence of Hazardous Materials on, under or about the Leased Premises, including without limitation: (i) all foreseeable consequential damages; (ii) the costs of any required or necessary repair, cleanup, or detoxification of the Leased Premises, and the preparation and implementation of any closure, remedial, or other required plans; and (iii) all reasonable costs and expenses incurred by the Lender in connection with clauses (i) and (ii), including, but not limited to, reasonable attorneys’ fees. The Tenant shall, upon the request of the Landlord, provide the Landlord with a bond or letter of credit, in form and substance satisfactory to the Landlord, in an amount sufficient to cover the costs of any required cleanup.

The Tenant shall, at its expense, take all necessary remedial action(s) in response to the presence of any Hazardous Materials on, under, or about the Leased Premises.

8. Maintenance and Repair

(a) Tenant shall promptly, throughout the term of this Lease, at Tenant’s cost and expense, take good care of and maintain the Leased Premises and all parking areas, roadways, sidewalks, and curbs, if any (to the extent the same are subject to Tenant’s control and if, as, and when required by law), on, adjacent, and appurtenant thereto, in

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good order and repair, and shall promptly remove all accumulated snow, ice, and debris from any and all parking areas, roadways, sidewalks, and curbs located upon or appurtenant to the Leased Premises and from any and all other sidewalks and curbs adjacent to the Leased Premises.

(b) Tenant shall not commit or suffer to be committed any waste upon or about the Leased Premises, and shall promptly at Tenant’s cost and expense, make all necessary replacements, restorations, renewals, and repairs to the Leased Premises and appurtenances thereto, whether interior or exterior, structural or non-structural, ordinary or extraordinary, and foreseen or unforeseen, ordinary wear and tear excepted. Repairs, restorations, renewals, and replacements shall, to the extent possible, be at least equivalent in quality to the original work or the property replaced, as the case may be. Tenant shall not make any claim or demand upon or bring any action against the Landlord for any loss, cost, injury, damage, or other expense caused by any failure or defect, structural or non-structural, of the Leased Premises or any part thereof.

(c) Landlord shall not under any circumstances be required to build any improvements on the Leased Premises, or to make any repairs, replacements, alterations, or renewals of any nature or description to the Leased Premises or to any of the Improvements, whether interior or exterior, ordinary or extraordinary, structural or non-structural, foreseen or unforeseen, or to make any expenditure whatsoever in connection with this Lease or to inspect or maintain the Leased Premises in any way. By way of example and not to limit this provision, the Landlord shall not under any circumstances be required to repair or replace the roof. Tenant hereby waives the right to make repairs, replacements, renewals, or restorations at the expense of Landlord pursuant to any Laws.

(d) Tenant, at Tenant’s sold cost and expense, shall regularly monitor the premises for the presence of mold or any conditions that reasonably can be expected to give rise to mold (“Mold Conditions”), including, but not limited to, observed or suspected instances of water damage, mold growth, repeated complaints of respiratory ailments by Tenant’s employees or other occupants of the Leased Premises, or any notice from a governmental agency of complaints regarding the indoor air quality at the Leased Premises and shall promptly notify Landlord in writing if Tenants suspects mold or Mold Conditions to exist at the Leased Premises. In the event mold or Mold Conditions exist at the Leased Premises, then Tenant, at Tenant’s sole cost and expense, shall promptly ensure that mold remediation is conducted pursuant to applicable governmental laws, regulations or guidelines and shall notify Landlord of the actions Tenant is taking.

9. Changes, Alterations, and New Construction by the Tenant

(a) Tenant, at its sole cost and expense, shall have the right, at any time and from time to time during the term of this Lease, to make changes and alterations to the building or buildings on the Leased Premises or to construct new buildings thereon or repair or replace any building or buildings damaged, destroyed, or taken (all of the foregoing are hereinafter collectively called Tenant Changes, and any of the foregoing is called a Tenant Change), subject, however, in all cases, to the following:

(i) Landlord’s prior written consent shall be required in each instance of any Tenant Change involving the structure or exterior of any building (which consent shall not be unreasonably withheld; it shall not be unreasonable for Landlord to withhold such consent if the same shall be in violation of any Mortgage, or if any Mortgagee shall not give its consent to the same where its consent is required by the terms of its Mortgage).

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(ii) In addition to the consent required under Section 9(a) (i) above, any Tenant Change or Tenant Changes, whether or not structural or exterior, involving an estimated cost of more than Fifty Thousand ($50,000.00) Dollars shall require the prior written consent of any Mortgagee, if and as required by such Mortgagee, and the prior written reasonable consent of the Landlord.

(iii) No Tenant Change shall be undertaken until the Tenant shall have procured and paid for all required permits and authorizations of all municipal departments and governmental subdivisions having jurisdiction; and, at Tenant’s expense, the Landlord shall join in application for such permits and authorizations whenever such action is necessary.

(iv) Any Tenant Change involving an estimated cost of more than Two Hundred Twenty Five Thousand ($225,000.00 ) Dollars to the N. Pine Street Premises shall be conducted under the supervision of a licensed architect or engineer selected by Tenant and shall be made in accordance with detailed plans and specifications (the Plans and Specifications) and cost estimates prepared by such architect or engineer and approved in writing by the Landlord, which approval Landlord agrees not unreasonably to withhold. Any Tenant Change involving an estimated cost of more than Fifty Thousand ($50,000.00) Dollars to the Boiling Springs Premises shall be conducted under the supervision of a licensed architect or engineer selected by Tenant and shall be made in accordance with detailed plans and specifications (the Plans and Specifications) and cost estimates prepared by such architect or engineer and approved in writing by the Landlord, which approval Landlord agrees not unreasonably to withhold.

(v) Any Tenant Change shall be made promptly and in a good workmanlike manner and in compliance with all applicable permits and authorizations and building and zoning laws and all Laws and in accordance with the orders, rules, and regulations of the Board of Fire Insurance Underwriters and any other body hereafter exercising similar functions having or asserting jurisdiction over the Leased Premises.

(vi) The cost of any Tenant Change shall be paid in cash or its equivalent by the Tenant, so that the Leased Premises shall at all times be free of liens for labor or materials supplied or claimed to have been supplied to the Leased Premises,

(vii) Except with respect to any Tenant’s Property, any such Tenant Change shall immediately upon incorporation into the Leased Premises be and become the property of the Landlord, subject to the leasehold rights of the Tenant hereunder.

(viii) Tenant shall carry all necessary Workers’ Compensation Insurance and shall furnish Landlord with evidence of any and all such coverage upon request,

(ix) If any Tenant Change is undertaken by Tenant pursuant to the provisions of Section 11 or 12 of this Lease, then each request for payment shall be made on thirty (30) days’ prior notice to Landlord and Mortgagee and shall be accompanied by a certificate to be made by the supervising architect or engineer, stating (a) that all of the work completed has been done in material compliance with the approved Plans and Specifications, (b) that the sum requested is justly required to reimburse the Tenant for payments by the Tenant to, or is justly due to, the contractor,

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subcontractors, materialmen, laborers, engineers, architects, or other persons rendering services or materials for the work (giving a brief description of such services and materials), and that, when added to all sums previously paid out by the Landlord, it does not exceed ninety (90%) percent of the value of the work done to the date of such certificate, with final payment of the balance of the cost of the work to be made upon certification by the supervising architect or engineer, and by the Mortgagee’s architect, as to completion materially in accordance with the approved Plans and Specifications, and (c) that the amount of such proceeds remaining in the hands of the Landlord will be sufficient on completion of the work to pay for the same in full (giving in such reasonable detail as Landlord may require an estimate of the cost of such completion);

(x) If any Tenant Change involving an estimated cost in excess of Fifty Thousand ($50,000.00) Dollars is undertaken by Tenant pursuant to the provisions of Section 11 or 12 of this Lease, then each request for reimbursement shall be accompanied by waivers of lien and/or sworn statements which shall be satisfactory to Landlord and Mortgagee, covering that part of the work for which payment or reimbursement is being requested, and by a search prepared by a title company or by other evidence, satisfactory to Landlord and Mortgagee, that there has not been filed with respect to any part of the Leased Premises any mechanics’ or other lien or instrument for the retention of title in respect of any of the work not discharged of record, and, if and as requested by, and satisfactory to, Landlord or any Mortgagee, title policy endorsements sufficient to evidence the foregoing and insure the priority of the requesting party’s interest in the Leased Premises;

(xi) If any Tenant Change involving an estimated cost in excess of Two Hundred Twenty Five Thousand ($225,000.00) Dollars is undertaken by Tenant pursuant to this Section 9 of this Lease relating to the N. Pine Street Premises, then the request for any payment after the work has been completed shall be accompanied by such certificates, permits, and licenses required by any Laws and such other instruments and agreements as Landlord or any Mortgagee shall reasonably require; and if any Tenant Change involving an estimated cost in excess of Fifty Thousand ($50,000.00) Dollars is undertaken by Tenant pursuant to this Section 9 of this Lease relating to the Boiling Springs Premises, then the request for any payment after the work has been completed shall be accompanied by such certificates, permits, and licenses required by any Laws and such other instruments and agreements as Landlord or any Mortgagee shall reasonably require;

(xii) No Tenant Change shall tie-in or connect the Leased Premises or any Improvements thereon with any property outside the Leased Premises without the prior written consent of the Landlord; and

(xiii) No Tenant Change shall reduce the value of the Leased Premises or impair the structural integrity of any building comprising a part of the Leased Premises.

(xiv) In connection with any Tenant Change undertaken pursuant to the provisions of Section 11 or 12 of this Lease, or in connection with any Tenant Change involving an estimated cost in excess of Two Hundred Twenty Five Thousand ($225,000.00) Dollars relating to the N. Pine Street Premises and Fifty Thousand ($50,000.00) Dollars relating to the Boiling Springs Premises undertaken pursuant to the provisions of Section 9 of this Lease, Landlord may, and, in connection with any Tenant Change undertaken pursuant to the provisions of this Section 9 or of

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Section 11 or 12 of this Lease, any Mortgagee may, require Tenant to post a bond or other security reasonably satisfactory to Landlord and satisfactory to Mortgagee, as the case may be, to insure the completion of such Tenant Change.

(xv) Whenever in this Section 9 of this Lease the consent or approval of Landlord is required, or the Landlord is otherwise entitled to exercise any right in connection with any Tenant Change undertaken pursuant to the provisions of this Section 9 involving an estimated cost in excess of a certain amount (each such amount, a Tenant Change Threshold Amount), such Tenant Change Threshold Amount shall be deemed to have been increased or decreased, as the case may be, as of the first day of each Lease Period, by an amount equal to the change, expressed as a percentage, between the Base Price Index and the Price Index as of the last day of the calendar month immediately preceding such Lease Period, without regard to any prior adjustments undertaken pursuant to this subparagraph. Notwithstanding anything to the contrary, no Tenant Change Threshold Amount as provided in this Section 9 shall be deemed to have been increased or decreased for purposes of determining whether the consent or approval of any Person other than Landlord is required or whether any person other than Landlord is entitled to exercise any other right in connection with any Tenant Change, it being the intent and understanding of Tenant that no right or privilege of any other Person other than the Landlord shall be, or be deemed to be or have been, affected, altered, changed, or modified in any way whatsoever as a result of the operation of this subparagraph. For purposes of this Section, Base Price Index shall mean the Price Index as it exists on the last day of the calendar month in which this Lease is executed. For purposes of this Section, Price Index shall mean the Consumer Price Index (All Urban Consumers, U.S. City Average, All Items(CPI-U)), issued by the Bureau of Labor Statistics of the United States Department of Labor. In the event the CPI-U is discontinued, Landlord will select another nationally recognized published index of similar statistical information.

(b) Notwithstanding anything to the contrary contained in this Lease, Tenant shall not, without Landlord’s prior written approval, make any alteration or change to the Leased Premises which would decrease the size of, or decrease the square foot floor area of, any building comprising a part of the Leased Premises.

10. Indemnity and Public Liability Insurance

(a) Tenant shall at all times indemnify Landlord for, defend Landlord against, and save Landlord harmless from, any liability, loss, cost, injury, damage, or other expense or risk whatsoever that may occur or be claimed by or with respect to any person(s) or property on or about the Leased Premises and resulting directly or indirectly from the use, misuse, occupancy, possession, or unoccupancy of the Leased Premises by Tenant or any concessionaires, subtenants, or other persons claiming through or under Tenant, or their respective agents, employees, licensees, invitees, guests, or other such persons, or from the condition of the Leased Premises. Tenant shall, at its cost and expense, defend against any and all such actions, claims, and demands and shall indemnify Landlord for all costs, expenses, and liabilities it may incur in connection therewith. Landlord shall not in any event whatsoever be liable for any injury or damage to the Leased Premises or to the Tenant or to any concessionaires, subtenants, or other persons claiming through or under Tenant, or their respective agents, employees, licensees, invitees, guests, or other such persons, or to any property of any such persons. Tenant shall not make any claim or demand upon, or institute any action against, the Landlord as a result of such injury or damage.

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(b) Tenant, at its cost and expense, shall obtain and maintain in force throughout the term of this Lease, comprehensive general liability insurance against any loss, liability, or damage on, about, or relating to the Leased Premises, with limits of not less than Five Million ($5,000,000.00 ) Dollars for death or injuries to one person and not less than Five Million ($5,000,000.00) Dollars for death or injuries to two or more persons in one occurrence, and not less than Five Million ($5,000,000.00) Dollars for damage to property (all of the foregoing being hereinafter sometimes collectively referred to as the Liability Insurance). All such Liability Insurance obtained and maintained by Tenant shall name both Landlord and Tenant as the parties therein and shall be obtained and maintained from and with a reputable and financially sound insurance company(ies) reasonably acceptable to Landlord, authorized to issue such insurance in the State in which the Leased Premises is located.

(c) The policies of insurance required hereunder this Lease shall contain an agreement by the insurer that it will not cancel or modify such policy except after thirty (30) days’ prior written notice to Landlord and any Mortgagees by certified mail, return receipt requested. Not less than thirty (30) days prior to the expiration of any such insurance policy, Tenant shall deliver to Landlord a certificate evidencing the replacement or renewal thereof.

(d) Tenant shall furnish Landlord with duplicate original(s) or original certificate(s) of such insurance policies, including renewal and replacement policies, together with written evidence that the premiums therefor have been paid. It is understood and agreed that said policies may be blanket policies covering other locations operated by Tenant, its affiliates, or subsidiaries, provided that such blanket policies otherwise comply with the provisions of this Section 10.

(e) Tenant shall comply, notwithstanding any other provision, with the requirements of any Mortgages relating to the insurance and to the proceeds of insurance maintained and required to be maintained by Tenant pursuant to the provisions of Section 10 and 11 of this Lease.

11. Insurance for Damage or Destruction and Workers’ Compensation

(a) The Tenant shall, throughout the term of this Lease, at its own cost and expense, obtain and maintain in full force and effect and in the name of Tenant, Landlord and, if so requested by Landlord, any Mortgagees (except that Landlord and any Mortgagee need not be named on any Workers’ Compensation policy):

(i) all risks insurance, including, but not limited to, collapse, loss, or damage occasioned by fire, the perils included in the so-called extended coverage endorsement, vandalism, and malicious mischief, and water damage, and containing Replacement Cost, Agreed Amount and, if obtainable, Demolition and Increased Cost due to Ordinance endorsements covering the Improvements and all replacements and additions thereto, and all fixtures, equipment, and other personal property therein; the foregoing coverage shall be provided in amounts sufficient to provide one hundred (100%) percent of the full replacement cost of the Improvements and shall be determined from time to time, but not more frequently than once in any thirty-six (36) calendar months unless otherwise reasonably requested by a Mortgagee, at Tenant’s expense, at the request of the Landlord, by any appraiser selected by Tenant and approved by Landlord and the insurance carrier;

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(ii) if a sprinkler system shall be located in the Leased Premises, sprinkler leakage insurance in amounts reasonably satisfactory to Landlord and any Mortgagees;

(iii) such other insurance and in such amounts as may from time to time be required by a Mortgagee;

(iv) Boiler and Machinery Broad Form policy covering explosion insurance in respect of steam and pressure boilers and similar apparatus, if any, located on the Leased Premises in an amount equal to one hundred (100%) percent of the full replacement cost of the Improvements;

(v) war risk insurance as and when such insurance is obtainable from the United States Government or any agency or instrumentality thereof, and a state of war or national or public emergency exists or threatens, and in an amount not less than the full insurable value of the Leased Premises;

(vi) the Liability Insurance as provided in Section 10 of this Lease;

(vii) Workers’ Compensation insurance subject to statutory limits or better in respect of any work or other operations on or about the Leased Premises;

(viii) such other insurance with respect to the Leased Premises and in such amounts as Landlord from time to time may reasonably request against such other insurable hazards which at the time in question are commonly insured against in the case of property similar to the Leased Premises;

(ix) during the performance of any construction, broad form Builder’s All-Risk insurance; and

(x) Loss of rents insurance with respect to the rent payable for the one year period following the occurrence of any insurable event or any casualty.

(b) All such insurance described in subparagraph (a) of this Section 11 shall:

(i) be obtained from and maintained with reputable and financially sound insurance company(ies) reasonably acceptable to Landlord and any Mortgagees, authorized to issue such insurance in the State in which the Leased Premises are located;

(ii) be on and/or contain such terms and conditions as shall be satisfactory to Landlord and to any Mortgagees;

(iii) provide that the proceeds of any loss shall be payable to Landlord (but to be held in escrow by any recognized financial institution selected by Landlord), or, if Landlord so requests, to any Mortgagees in accordance with this Lease;

(iv) contain an agreement by the insurer that it will not cancel or modify such policy except after thirty (30) days’ prior written notice to Landlord and any Mortgagees by certified mail, return receipt requested; and

(v) contain an agreement, if obtainable, that any loss otherwise payable thereunder shall be payable notwithstanding any act or negligence of Landlord or Tenant which might, absent such agreement, result in a forfeiture of all or part of the payment of such loss.

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(c) Not less than thirty (30) days prior to the expiration of any such insurance policy, Tenant shall deliver to Landlord a certificate evidencing the replacement or renewal thereof,

(d) The Tenant shall furnish Landlord and any Mortgagees with duplicate original(s) or original certificate(s) together with true copy(ies) of all such insurance policies described in subparagraph (a) of this Section 11, including renewal and replacement policy(ies), together with written evidence that the premiums therefor have been paid. It is understood and agreed that said policies may be blanket policies covering other locations operated by Tenant, its affiliates, or subsidiaries, provided that such blanket policies otherwise comply with the provisions of this Section 1.1, and provided further that such policies shall provide for a reserved amount thereunder with respect to the Leased Premises so as to assure that the amount of insurance required by the provisions of this Section 11 will be available notwithstanding any losses with respect to other property covered by such blanket policies.

(e) If any portion of the Leased Premises is damaged or destroyed by fire or other casualty, Tenant shall forthwith give notice thereof to Landlord, and Tenant shall, at its cost and expense, forthwith repair, restore, rebuild, or replace the damaged or destroyed Improvements, fixtures, or equipment, and complete the same as soon as reasonably possible, to the condition they were in prior to such damage or destruction, except for such changes in design or materials as may then be required by Law. The Landlord, in such event, shall, to the extent and at the times the insurer and any Mortgagees make the proceeds of the insurance available, reimburse the Tenant for the costs of making such repairs, restoration, rebuilding, and replacements, provided further that said reimbursements need be made only under such conditions that the Landlord and any Mortgagees are assured that at all times the Leased Premises shall be free of liens or claims of liens by reason of such work, and provided further that the portion of the proceeds paid out at any time shall not exceed the value of the actual work and materials incorporated in the repaired, restored, rebuilt, or replaced Leased Premises, and that the conditions described in Section 9 are complied with. To the extent, if any, that the proceeds of insurance made available as aforesaid are insufficient to pay the entire cost of making such repairs, restoration, rebuilding, and replacements, and notwithstanding the expiration or termination of the term of this Lease, the Tenant shall pay the amount by which such costs exceed the insurance proceeds made available as aforesaid. Any surplus of insurance proceeds over the cost of restoration, net of all expenses incurred by Landlord in connection with the administration thereof, shall be promptly paid over to the Tenant,

(f) In the event of any damage to or destruction of the Leased Premises, Tenant shall promptly notify Landlord and any Mortgagees and shall file prompt proof of loss to the relevant insurance company(ies).

(g) The obligation to pay the rent provided for herein and to otherwise perform Tenant’s obligations hereunder shall continue unabated by reason of such damage or destruction; that is, there shall be no abatement or diminution of rent or release from any of Tenant’s obligations hereunder by reason of such damage or destruction regardless of the period of time, if any, during which the Leased Premises or any part thereof remain untenantable, any Laws to the contrary notwithstanding, except to the extent Landlord shall actually receive the proceeds of rent insurance as its sole property.

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(h) The provisions and requirements of all of Section 9 shall apply with respect to any repairing, restoring, rebuilding, or replacing made pursuant to this Section 11; and same shall be made in accordance with the Plans and Specifications to the extent required hereunder.

(i) As to any loss or damage which may occur upon the property of a party hereto and be collected under any insurance policy(ies), such party hereby releases the other from any and all liability for such loss or damage to the extent of such amounts collected.

(j) Tenant shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be furnished by Tenant under Sections 10 and 11 of this Lease, unless Landlord, and with respect to the insurance described in Section 11, any Mortgagees designated by Landlord, are included therein as named insureds, with loss payable as in said Sections provided. Tenant shall immediately notify Landlord whenever any such separate insurance is taken out and shall deliver to Landlord duplicate original(s) thereof, or original certificate(s) evidencing the same with true copies thereof, as provided in this Lease.

12. Condemnation and Rejectable Offer

(a) In the event that at any time during the term of this Lease, title to the whole or materially all of the Leased Premises shall be taken by the exercise of the right of condemnation or eminent domain or by agreement between the Landlord and those authorized to exercise such right, this Lease shall terminate and expire on the date of such taking (herein called the Taking Date), and the rent provided to be paid by the Tenant shall be apportioned and paid to the Taking Date.

(b) If (i) any portion of any building on the Leased Premises shall be taken, or (ii) any portion of the parking accommodations shall be taken, or (iii) substantially all reasonable means of ingress and egress to and from the Leased Premises are permanently eliminated by reason of such a taking, then and in any of such events, Landlord and Tenant shall each have the right to terminate this Lease on the next date for payment of Minimum Rental occurring at least one hundred twenty (120) days after notice to the other given within ninety (90) days after the Taking Date; provided, however, that Tenant may not terminate this Lease by reason of any such reduction of the parking accommodations if, prior to the actual reduction, Landlord shall have provided substitute parking areas adjacent to or in the immediate vicinity of the Leased Premises, which, together with the remaining parking accommodations, are sufficient to produce accommodations equal to one hundred (100%) percent of the accommodations existing prior to such taking, or such greater percentage as may be necessary to bring such accommodations into compliance with all then applicable zoning requirements.

(c) If and when it shall be established that this Lease shall terminate pursuant to the provisions of subsection (a) or (b) of this Section 12, then Tenant shall (i) be deemed to have hereby made an irrevocable offer (the Offer) to purchase the Leased Premises and Landlord’s right to the award payable in connection with such taking as of the Taking Date, at a price (the “Purchase Price”) determined in accordance with Schedule C attached hereto and the Fair Market Value as defined therein, and (ii) if less than the entire Leased Premises shall have been taken, and Tenant elects to cancel as a result thereof, Tenant shall deliver to Landlord a certificate of Tenant, signed by the President or any Vice President thereof, stating that, in the judgment of the Board of Directors of Tenant, the portion of the Leased Premises or the means of ingress and egress so taken is sufficient to fulfill the conditions set forth in subdivisions (i), (ii), or (iii) of subsection (b) of this Section 12.

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Notwithstanding the foregoing, in the event that this Lease shall terminate pursuant to the provisions of this Section 12 during any Extended Term to which the Initial Term is extended pursuant to any provisions of this Lease, then the foregoing provisions of this subsection 12(c) shall be inapplicable and of no force or effect.

(d) If Landlord desires to accept the Offer, it shall notify Tenant of such acceptance (the Acceptance Notice), and the procedures specified in subsection (e) hereof shall be applicable except that the Closing Date shall be a date specified by Landlord in the Acceptance Notice, which date shall be not less than thirty (30) days nor more than sixty (60) days from the date thereof, but in no event shall the Closing Date be prior to the Taking Date. If Landlord shall reject the Offer by notice given to Tenant not later than the tenth (l0th) day prior to the Taking Date, then, except with respect to obligations and liabilities of Tenant under this Lease, actual or contingent, which have arisen on or prior to the Taking Date, this Lease shall terminate on the Taking Date upon payment by Tenant of all installments of Minimum Rental and all other sums then due and payable under this Lease to and including the Taking Date. Anything herein contained to the contrary notwithstanding, if the Taking Date occurs, and any Mortgages are then in effect, any rejection by Landlord of the Offer shall be of no force or effect whatsoever unless accompanied by the written consent thereto of all Mortgagees.

(e) If Landlord shall not have rejected the Offer as provided in subsection (d) above, or if Landlord makes such rejection without the consent (if required) of any Mortgagees, then Tenant shall forthwith give written notice thereof (the Final Notice) to Landlord, and if such rejection is not made and/or such consent is not given, as the case may be, within five (5) days after Landlord’s receipt of the Final Notice from Tenant, then Landlord shall be conclusively presumed to have accepted the Offer, and on a date (the Closing Date) which shall be specified by Tenant in the Final Notice, but not more than thirty (30) days from the date of the Final Notice, Landlord shall transfer, convey, or assign to Tenant or its designee upon the terms and provisions set forth in subsections 23(a) and 23(b) hereof, all of Landlord’s right, title, and interest, if any, in (i) the Leased Premises, and (ii) the Net Award (as hereinafter defined), (whether or not such Net Award or any part thereof shall have been received by Landlord). Concurrently with such transfer, conveyance, or assignment, Tenant shall pay the Purchase Price therefor to Landlord together with all installments of Minimum Rental and all other sums then due and payable under this Lease to and including such Closing Date minus, however, any part of the Net Award which may theretofore have been received by Landlord. In the event of the termination of this Lease pursuant to this Section 12, and only if Tenant shall have purchased the Leased Premises pursuant to this Section 12, Tenant or its designee shall be entitled to the “Net Award” payable in connection with such taking (the entire award less all of Landlord’s expenses related thereto being herein called the Net Award). Notwithstanding anything contained in this Lease to the contrary, (i) in the event of the termination of this Lease pursuant to this Section 12, and if Tenant shall not have purchased the Leased Premises pursuant to the provisions of this Section 12, or (ii) if this Lease is terminated pursuant to the provisions of this Section 12 after the expiration of the Initial Term of this Lease, then, in either of such events, Landlord shall be entitled to the entire award payable in connection with such taking.

(f) In the event of any taking of the Leased Premises, and if this Lease shall not terminate as provided in subsections 12(a) and 12(b) above, then this Lease shall continue unaffected (except as hereinafter specifically otherwise provided), and the Landlord shall be entitled to all awards, damages, consequential damages, and compensation for such taking, and

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the Tenant shall not be entitled to share in any such award or have any claim against Landlord for any part thereof, provided: (i) Landlord shall, to the extent the Net Award paid for the Improvements on the Leased Premises is made available to Landlord, reimburse Tenant for its cost of demolition, repair, rebuilding, and restoration to return the Improvements to a tenantable condition, as and when expended, and paid in like manner and subject to the provisions and conditions contained in Section 9 above, which provisions and conditions shall be deemed to apply to such demolition, repair, rebuilding, and restoration, The Minimum Rental payable by Tenant shall be reduced in the same proportion as the amount of usable floor space of the building improvements taken. Such taking and reduction of Minimum Rental shall not relieve Tenant from Tenant’s obligation to pay the full additional rent payable under the Lease.

(g) In the event Landlord is advised of an impending condemnation, the Landlord shall give notice of such fact to the Tenant and the Tenant, at its election, shall be entitled to participate in any negotiations or litigation with the condemning authority.

(h) Notwithstanding the foregoing, Tenant, at its cost and expense, shall be entitled to claim separately, in any condemnation proceeding, any damages payable for movable trade fixtures paid for and installed by Tenant (or any persons claiming under Tenant) without any contribution or reimbursement therefor by Landlord, and for Tenant’s loss of business, and for Tenant’s relocation costs; provided Landlord’s award is not reduced or otherwise adversely affected thereby.

13. Removal of Tenant’s Property

Provided the Tenant is not then in default hereunder, the Tenant shall have the right, at any time during the term of this Lease, to remove Tenant’s Property, consisting of machinery, trade equipment, business and trade fixtures, including all furnishings, office equipment, telecommunication and data processing equipment, and all other trade equipment placed, installed, supplied, or made by it in or on the Leased Premises, at Tenant’s cost and expense (without any contribution or reimbursement therefor by Landlord) which was not specifically conveyed, transferred or sold to Landlord pursuant to that certain Limited Warranty Deed or Bill of Sale dated on or about             , 2007, and which may be removed without material injury to the Leased Premises; provided, however, that any damage to the Leased Premises or any part thereof occasioned by such removal shall be repaired by the Tenant at Tenant’s cost and expense. As used herein and hereafter, the term Tenant’s Property shall not include or be deemed to include any item now or hereafter installed in or on the Leased Premises that is an integral part of the building, including, without limiting the generality of the foregoing, heating, ventilating, and air conditioning plants and systems, electrical and plumbing fixtures and systems, and other like equipment and fixtures, if any. In the event Tenant’s property is not removed within ninety (90) days after notice by Landlord or then owner of the Land to remove the same, the title to any such Tenant Property remaining after ninety (90) days automatically vests in the owner of the Land at such time.

14. Subordination, Non-Disturbance, Notice to Lessors and Mortgagees

(a) This Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate in all respects to all ground and underlying leases of all or any portions of the Leased Premises, now or hereafter existing, and to all Mortgages

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which may now or hereafter affect all or any portions of the Leased Premises and/or any of such leases, to each and every advance made or hereafter to be made under such Mortgages, and to all renewals, modifications, replacements, and extension of such leases and Mortgages and spreaders and consolidations of such Mortgages; provided, that, as to any such leases and/or Mortgages that become liens of record after the date of this Lease, the lessors and/or Mortgagees thereunder shall, each enter into a non-disturbance agreement, in favor of Tenant, to provide that in the event its said Mortgage shall be foreclosed or its said lease shall be terminated, as the case may be, and provided that mere has not occurred an Event of Default hereunder, this Lease shall not terminate on account thereof so long as the Tenant continues to pay the rents reserved in this Lease and otherwise performs and observes all of the terms, covenants, conditions, and provisions of this Lease to be performed and observed by or on behalf of Tenant thereunder, The lien of any Mortgages shall not cover any trade fixtures or other personal property paid for and installed in the Leased Premises by Tenant (or any persons claiming under Tenant) without any contribution or reimbursement therefor by Landlord, The provisions of this subsection (a) shall be self-operative. In confirmation of such subordination. Tenant shall promptly execute and deliver any instruments that Landlord, the lessor of any such lease, or the holder of any Mortgage, or any of their respective successors in interest, may reasonably request to evidence such subordinations, and Tenant hereby irrevocably appoints Landlord the attorney-in-fact of Tenant to execute and deliver such instrument on behalf of Tenant, should Tenant refuse or fail to do so promptly after request, such power being coupled with an interest, and Landlord shall promptly send to Tenant a copy of any subordination agreement executed and delivered by Landlord on behalf of Tenant. The lease(s) to which, at the time in question, this Lease is subject and subordinate is (are) hereinafter sometimes called Superior Lease(s), and the Lessor(s) of a Superior Lease or its (their) successor(s) in interest, at the time in question, is (arc) sometimes hereinafter called Superior Lessor(s), If any Superior Lease (or a memorandum thereof), or any Mortgage, shall not be recorded, the subordination provided for in this Section shall not be effective unless and until Tenant shall have received notice from Landlord or from the Superior Lessors or the Mortgagees thereunder (as the case may be) of the existence of such Superior Lease or Mortgage (as the case may be). If any Mortgagees shall, from time to time, so require, this Lease shall be prior in lien to the lien of its or their respective Mortgages.

(b) In the event of any act or omission of Landlord which would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Least, or to claim a partial or total eviction, Tenant shall not exercise such right (i) until it has given written notice of such act or omission to each Mortgagee and each Superior Lessor whose name and address shall have been previously furnished to Tenant in writing, and (ii) unless such act or omission shall be one which is not capable of being remedied by Landlord or any Mortgagee or Superior Lessor within a reasonable period of time, until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when all such Mortgagees and Superior Lessors shall have become entitled under such Mortgages or Superior Leases, as the case may be, to remedy the same (which reasonable period shall in no event he less than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy), provided any such Mortgagee or Superior Lessor shall with due diligence give Tenant written notice of its intention to, and shall commence and continue to, remedy such act or omission, but nothing herein contained shall obligate any Mortgagee or Superior Lessor to do so unless it so elects.

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(c) If a Superior Lessor or a Mortgagee shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed, then at the request of such party so succeeding to Landlord’s rights (herein sometimes called Successor Landlord) and upon such Successor Landlord’s written agreement to accept Tenant’s attornment, which such Successor Landlord shall agree to accept if so requested by Tenant, Tenant shall attorn to and recognize such Successor Landlord as Tenant’s landlord under this Lease, and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment. Tenant hereby irrevocably appoints Landlord the attorney-in-fact of Tenant to execute and deliver such instrument on behalf of Tenant, should Tenant refuse or fail to do so promptly after request, such power being coupled with an interest. Upon such attornment, this Lease shall continue in full force and effect as, and as if it were, a direct lease between the Successor Landlord and Tenant upon all of the terms, covenants, and conditions set forth in this Lease, and all such terms, covenants, and conditions shall be applicable after such attornment except that the Successor Landlord shall:

(i) not be liable for any previous act or omission of Landlord under this Lease,

(ii) not be subject to any offset, not expressly provided for in this Lease, which shall have theretofore accrued or which may thereafter accrue to Tenant against Landlord, and

(iii) not be bound by any previous modification of this Lease, not expressly provided for in this Lease, other than a modification of this Lease executed by Landlord and Tenant prior to the execution of any Superior Lease or Mortgage, or by any previous prepayment of more than one month’s Minimum Rental, unless such modification or prepayment shall have been expressly approved in writing by the Superior Lessor(s) or the Mortgagee(s) through or by reason of which the Successor Landlord shall have succeeded to the rights of Landlord under this Lease.

15. Non-Waiver

Neither a failure by the Landlord to exercise any of its options hereunder, nor failure to enforce its rights or seek its remedies upon any default, nor the acceptance by the Landlord of any rent accruing before or after any default, shall effect or constitute a waiver of the Landlord’s right to exercise such option, to enforce such right, or to seek such remedy with respect to that default or to any prior or subsequent default. The remedies provided in this Lease shall be cumulative and shall not in any way abridge, modify, or preclude any other rights or remedies to which the Landlord may be entitled either at law or in equity.

16. Quiet Enjoyment

If the Tenant pays the rent it is obligated hereunder to pay, and observes all other terms, covenants, and conditions hereof, it may peaceably and quietly have, hold, and enjoy the Leased Premises during the term of this Lease, subject, however, to all the terms of this Lease. No failure by Landlord to comply with the foregoing covenant shall give Tenant any right to cancel or terminate this Lease or to abate, reduce, or make any deduction from or offset against any rent or any other sum payable under this Lease, or to fail to perform any other obligations of Tenant hereunder.

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17. Assignment and Subletting

(a) Tenant shall not sublet the Leased Premises, nor any part thereof, nor assign, or otherwise dispose of this Lease or any interest therein, or any part thereof, without Landlord’s prior written consent in each of the foregoing cases, which consent, however, to an assignment of this Lease, or subletting of the Leased Premises, shall not be unreasonably withheld, provided the following conditions are complied with:

(i) Any assignment shall transfer to the assignee all of the Tenant’s rights in, and interests under, this Lease.

(ii) At the time of any assignment and/or subletting, this Lease must be in full force and effect without any breach or default thereunder on the part of the Tenant,

(iii) Any assignee shall assume, by written, recordable instrument, in form and content satisfactory to Landlord, the due performance of all of Tenant’s obligations under this Lease, including any accrued obligations at the time of the assignment. A copy of the assignment and assumption agreement, both in form and content satisfactory to Landlord, fully executed and acknowledged by the assignee, together with a certified copy of a properly executed corporate resolution (if the assignee be a corporation) authorizing such assumption agreement, shall be sent to Landlord within ten (10) days from the effective date of such assignment.

(iv) A copy of any sublease fully executed and acknowledged by the Tenant and the sublessee, shall be mailed to Landlord within ten (10) days from effective date of such subletting,

(v) Such assignment and/or subletting shall be subject to all the provisions, terms, covenants, and conditions of this Lease and the Tenant-assignor (and any guarantor(s) of this Lease) and such assignee(s) shall continue to be and remain liable hereunder, it being expressly understood and agreed that no assignment or subletting of the Leased Premises shall in any way relieve Tenant or any subsequent assignee(s) from the performance of any of the agreements, terms, covenants, and conditions of this Lease.

(vi) Each sublease permitted under this Section shall contain provisions to the effect that (A) such sublease is only for the actual use and occupancy by the sublessee, and (B) such sublease is subject and subordinate to all of the terms, covenants, and conditions of this Lease and to all of the rights of Landlord thereunder, and (C) in the event this Lease shall terminate before the expiration of such sublease, the subtenant thereunder will, at Landlord’s option, attorn to Landlord and waive any rights the subtenant may have to terminate the sublease or to surrender possession thereunder, as a result of the termination of this Lease.

(b) Notwithstanding anything contained in this Lease to the contrary, and notwithstanding any consent by Landlord to any sublease of the Leased Premises or to any assignment of this Lease, no subtenant shall assign its sublease nor further sublease the Leased Premises, or any portion thereof, and no assignee shall further assign its interest in this Lease nor sublease the Leased Premises, or any portion thereof, without Landlord’s prior written consent in each of such cases,

(c) Notwithstanding anything contained in this Lease to the contrary, should Tenant desire to assign this Lease or sublet more than forty (40%) percent of the net rental square footage of the building improvements or any other portion of the Leased Premises, it shall give written notice of its intention to do so to Landlord sixty (60) days or more before the

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effective date of such proposed subletting or assignment, and Landlord may, at any time within thirty (30) days after the receipt of such notice from Tenant, enter into a direct lease with the proposed subtenant or assignee or with any other persons as Landlord may desire.

(d) Tenant’s failure to comply with all of the provisions and conditions of this Section 17 and all of the subsections hereof shall (whether or not Landlord’s consent is required under this Section), at Landlord’s option, render any purported assignment or subletting null and void and of no force and effect.

(e) In the event that Tenant hereunder or any Guarantors (hereinafter defined) shall, at any time, be a corporation, no change shall occur in one or a series of related transactions in the management or the majority ownership of and/or the power to vote the majority of the outstanding capital stock of Tenant (or such Guarantors) without the prior written consent of Landlord, which consent Landlord agrees not to withhold unreasonably, The Landlord may consider the following conditions in deciding whether to consent: (a) that the total assets and net worth of such entity after such change by consolidation, merger or otherwise shall be equal to or more than that of Tenant immediately prior to such change; (b) that Tenant is not at such time in default hereunder; and (c) that such successors shall execute an instrument in writing in form and substance satisfactory to Landlord fully assuming all of the obligations and liabilities imposed upon Tenant hereunder and deliver the same to Landlord.

(f) Without the prior written consent of Landlord, Tenant may not mortgage, pledge, or otherwise encumber its leasehold estate hereunder, and any attempt to mortgage, pledge, or otherwise encumber such estate shall be null and void and of no force and effect.

(g) The Tenant may consolidate with or merge into any other corporation, convey or transfer all or substantially all of its assets to any other corporation, or permit any other corporation to consolidate with or merge into it upon condition that:

(i) the corporation which results from such consolidation or merger, or the transferee to which such sale shall have been made (the Surviving Corporation) is a corporation organized under the laws of any State of the United States, and the Surviving Corporation shall have a net worth, computed in accordance with generally accepted accounting principles, consistently applied, at least equal to the net worth of Tenant on the day immediately preceding such consolidation, merger, or transfer; and

(ii) the Surviving Corporation shall expressly and unconditionally assume by written agreement in recordable form to perform all such obligations of the Tenant hereunder or any related documents to which Tenant is bound and shall be obligated to perform all such obligations of the Tenant to the same extent as if the Surviving Corporation had originally executed and delivered this Lease and related documents; and

(iii) rights of Landlord under this Lease and the rights of Landlord’s Mortgagee under any related loan documents signed by Landlord or Tenant shall not be affected or reduced by such consolidation, merger, conveyance, or transfer. Tenant covenants that it will not merge or consolidate or sell or otherwise dispose of all or substantially all of its assets unless there shall be compliance with all of the foregoing provisions of subsection 17(g) of this Lease and unless the instrument referred to in subparagraph 17(g)(ii) above shall have been delivered to Landlord.

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18. Entry by Landlord

Landlord, any Superior Lessor(s) and any Mortgagee(s), and their respective duly authorized representatives shall have the right to enter the Leased Premises at all reasonable times and upon reasonable prior notice for the purposes of:

(a) inspecting the conditions of same, and making such repairs, alterations, additions, or improvements thereto as may be necessary or desirable if Tenant fails to do so as required hereunder (but the Landlord shall have no duty whatsoever to make any such inspections, repairs, alterations, additions, or improvements); and

(b) exhibiting the same to persons who may wish to purchase or lease the same, and, during the last month of the term of this Lease, placing a notice of reasonable size on the Leased Premises offering the same or any part thereof for sale or for rent.

Notwithstanding any provision to the contrary, no entry by Landlord shall be permitted unless accompanied by an employee of Tenant.

19. Tenant’s Default

The following shall be defined and deemed as an Event of Default: (a) if Tenant shall default in the payment of the Minimum Rental or any additional rent, and if Tenant shall fail to cure said default within ten (10) business days after the date on which Landlord gives notice to Tenant of said default (a Rent Default Notice); provided, however, that Landlord shall have no obligation to give Tenant more than two (2) such notices in any Lease Year; or (b) if Tenant shall default in the payment of the Minimum Rental or any additional rent in any Lease Year in which two (2) Rent Default Notices have been given and Tenant shall fail to cure said default within five (5) business days after the date on which such payment is due; or (c) if Tenant shall default in the performance or observance of any term, obligation, covenant, or condition to be performed or observed by Tenant under this Section 19 or under any of Sections 6(b), 10 (other than subsection 10(d)), 11 (other than subsection 11(d)), or 17 of this Lease; or (d)if Tenant shall default in the performance or observance of any term, obligation, covenant, or condition to be performed or observed by Tenant under subsection 7(a)(ii), and if Tenant shall fail to cure said default prior to the expiration of any grace or cure period, if any, provided in the Restriction, the failure to comply with which constitutes Tenant’s default under said subsection 7(a)(ii); or (e) if Tenant shall default in the performance or observance of any other term, obligation, covenant, or condition to be performed or observed by Tenant under this Lease, and if Tenant shall fail to cure said default within twenty-five (25) days after receipt of notice of said default from Landlord, or if said default shall reasonably require longer than twenty-five (25) days to cure, if Tenant shall fail to commence to cure said default within twenty-five (25) days after receipt of notice thereof and continuously prosecute the curing of the same to completion with due diligence, or (f) if Tenant shall make an assignment of its property for the benefit of creditors or shall institute any proceedings relating to it or its property under any bankruptcy or insolvency laws of any jurisdiction or shall petition to any court for, or consent to, the appointment of a receiver, trustee, or assignee of it or any part of its property, or (g) if an order for relief under any provisions of the Bankruptcy Reform Act of 1978 shall be entered against tenant, or (h) if Tenant shall be declared bankrupt or insolvent according to law, or (i) if any bankruptcy or insolvency proceedings shall be commenced against Tenant and shall not be dismissed within sixty (60) days thereafter, or

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(j) if a receiver, trustee, or assignee shall be appointed without the consent of Tenant in any bankruptcy or insolvency proceedings of Tenant or the property of Tenant and shall not be discharged within ninety (90) days thereafter, or (k) if Tenant shall be liquidated or dissolved, or shall begin proceedings toward its liquidation or dissolution, or shall, in any manner, permit the divestiture of substantially all of its assets, or (1) if, as a result of any failure by Tenant to perform or observe any of the terms, obligations, covenants, or conditions to be performed or observed by it under this Lease, a breach or default shall have occurred and be continuing under any Superior Lease or Mortgage notice of which has been given to Tenant, and if Tenant shall fail to cure said default prior to the expiration of one-half (12) of that portion of the grace or cure period, if any, applicable to said breach or default provided in such Superior Lease or Mortgage, the duration of which is ascertainable upon the occurrence of such failure by Tenant. The word Tenant as used in subsections (f), (g), (h), (i), (j), (k), and (l) of this Section 19 shall mean the then holder of the Tenant’s interest in this Lease hereunder and/or any Guarantor(s) and/or other persons who or which are liable for Tenant’s obligations under this Lease. The words “Landlord” and “Tenant” as used in subsections (b), (c), (d), and (e) of this Section 19 shall mean any person, firm, or entity controlled by, under common control with, or controlling the Landlord or the Tenant (as defined in the preceding sentence) under this Lease, respectively; and for the purpose of interpreting this sentence, the word “control” shall be deemed to mean capable of directing the business activities and direction of such person, firm, or entity. Any defaults in Tenant’s liabilities or obligations under this Lease occasioned by any acts or failures to act by any persons having or claiming any right, title, and interest in or to the Leased Premises by, through, or under Tenant, shall be deemed the default of Tenant hereunder. If this Lease is terminated pursuant to this Section 19, Tenant waives (i) the benefit of any Laws exempting property from liability for rent or for debt, and (ii) the service of any notice which may be required by any Laws.

In case of the occurrence of any Event of Default hereinbefore provided, the Landlord shall have the immediate right of reentry, and may remove all persons and property from the Leased Premises by summary proceedings, lawful force, or otherwise. In addition, in the event of the occurrence of any Event of Default (whether or not Landlord shall elect to reenter or to take possession pursuant to legal proceedings or pursuant to any notice provided for by Laws), Landlord shall have the right, at its option, to terminate this Lease on not less than two (2) days’ notice to Tenant and upon the giving of said notice, this Lease and the term hereof shall cease and expire on the date set forth in said notice as if said date were the expiration date originally set forth herein and/or it may from time to time, whether or not this Lease be terminated, make such alterations and repairs as may be reasonably necessary in order to relet the Leased Premises or any part(s) thereof for such term or terms (which may extend beyond the term of this Lease) and at such rental(s) and upon such other terms and conditions as Landlord in its sole discretion may deem advisable; upon each such reletting, all rentals received by the Landlord from such reletting shall be applied, first, to the payment of any indebtedness (other than rents due hereunder) of Tenant to Landlord, second, to the payment of any costs and expenses of such reletting, including, without limitation, brokerage fees (at no greater than customary rates in the area in which the Leased Premises is located) and reasonable attorneys’ fees, and of the cost of such alterations and repairs, third, to the payment of rents due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rents and other payments required to be made by Tenant hereunder as the same may become due and payable hereunder, with the right reserved to Landlord to bring such action(s) or proceeding(s) for the recovery of any deficits remaining unpaid without being obliged to await the end of the term for a final determination of Tenant’s account; and the commencement or maintenance of any one or more actions shall not bar Landlord from bringing other or subsequent actions for further accruals pursuant to the

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provisions of this Section. If such rentals received from such reletting during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly subject to Landlord’s right of action(s) or proceeding(s) as aforesaid. No such reentry or taking possession of the Leased Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant, or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach as damages for loss of the bargain and not as a penalty, including the cost of recovering the Leased Premises, reasonable attorneys’ fees, and including the worth, at the time of such termination, of the excess, if any, of the amount of rental and charges equivalent to the rental and charges reserved in this Lease for the remainder of the then term of this Lease, over the aggregate rental value of the Leased Premises for the remainder of such term, all of which shall be immediately due and payable from Tenant to Landlord. If any Laws shall validly limit the amount of the damages provided for in the immediately preceding sentence to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such Laws. In the event the Tenant does not comply with its obligations under this Lease, Landlord shall also have the right to appropriate injunctive relief. The rights and remedies, whether herein or anywhere else in this Lease provided, shall be cumulative, and the exercise of any one right or remedy shall not preclude the exercise of, or act as a waiver of, any other right or remedy of Landlord hereunder, or which may be existing at law, or in equity, or by statute, or otherwise. In addition to the foregoing, Tenant, and its successors and assigns, shall at all times indemnify Landlord for, defend Landlord against, and save Landlord harmless from, any liability, loss, cost, injury, damage, or other expense or risk whatsoever, directly or indirectly, arising out of, resulting from, or otherwise in connection with (i) the failure for any reason on the part of Tenant to perform, observe, or comply with any of the covenants, conditions, and obligations under this Lease to be performed, observed, or complied with by Tenant, and/or (ii) the failure for any reason of any representation, warranty, or covenant given by Tenant in connection with the execution of this Lease by Landlord to be materially true, complete, and accurate, including, without limitation, any representation, warranty, or covenant given or made by Tenant under that certain Contract of Purchase and Lease executed by and between Landlord or its predecessor-in-interest, as purchaser, and Tenant or its predecessor-in-interest, as seller, respecting the acquisition of the Leased Premises by Landlord and contemporaneously with the consummation of which this Lease was executed, all of which representations, warranties, and covenants are hereby incorporated by reference herein this Lease.

20. Tax Appeals and Contests

(a) Tenant shall have the right, at its cost and expense, to contest the amount or validity, in whole or in part, of any Imposition of any kind by appropriate proceedings diligently conducted in good faith, but no such contest shall be carried on or maintained by Tenant after the time limit for the payment of any Imposition unless the Tenant, at its option: (i) shall pay the amount involved under protest; or (ii) shall procure and maintain a stay of all proceedings to enforce any collection of any Imposition, together with all penalties, interest, costs, and expenses, by a deposit of a sufficient sum of money, or by such undertaking as may be required or permitted by law to accomplish such stay; or (iii) shall deposit with Landlord or any Superior Lessor or Mortgagee, as security for the performance by the Tenant of its obligations hereunder with respect to

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such Impositions, such security in amounts equal to such contested amount or such reasonable security as may be demanded by the Landlord or any Superior Lessor or Mortgagee to insure payment of such contested Imposition and all penalties, interest, costs, and expenses which may accrue during the period of the contest. Upon the termination of any such proceedings, it shall be the obligation of Tenant to pay the amount of such Imposition or part thereof, as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees (including counsel fees), interest, penalties, or other liabilities in connection therewith, whereupon the Landlord shall arrange to have returned to the Tenant, with any interest earned thereon and made available for such return, all amounts, if any, held by or on behalf of Landlord which were deposited by the Tenant in accordance with the provisions hereof.

(b) Tenant shall have the right, at its cost and expense, to seek a reduction in the valuation of the Leased Premises as assessed for tax purposes and to prosecute any action or proceeding in connection therewith. Provided Tenant is not in default hereunder, Tenant shall be authorized to collect any tax refund of any tax paid by Tenant obtained by reason thereof and to retain the same.

(c) Landlord agrees that whenever Landlord’s cooperation is required in any of the proceedings brought by Tenant as aforesaid, Landlord will reasonably cooperate therein, provided same shall not entail any cost, liability, or expense to Landlord, and Tenant will pay, indemnify, and save Landlord harmless of and from any and all liabilities, losses, judgments, decrees, costs, and expenses (including all reasonable attorneys’ fees and expenses) in connection with any such contest and will, promptly after the final settlement, fully pay and discharge the amounts which shall be levied, assessed, charged, or imposed or be determined to be payable therein or in connection therewith, and Tenant shall perform and observe all acts and obligations, the performance of which shall be ordered or decreed as a result thereof. No such contest shall subject Landlord or any Superior Lessor or Mortgagee to the risk of any material civil liability or the risk of any criminal liability, and Tenant shall give such reasonable indemnity or security to Landlord, any Superior Lessor, and any Mortgagee as may be reasonably demanded by any of them to insure compliance with the foregoing provisions of this Section 20.

21. Signs

Tenant may, during the term of this Lease, upon obtaining any and all necessary permits from governmental authorities, paint or erect and maintain, at its cost and expense, signs of such dimensions and materials as it may reasonably deem appropriate in or about the Leased Premises. Such signs shall be removed by Tenant upon the termination of its occupancy of the Leased Premises.

22. Surrender of Premises

Except in the case of condemnation described in subsection 12(a), at the expiration or sooner termination of the term of this Lease, Tenant shall surrender the Leased Premises in the same condition as the Leased Premises were in upon delivery of possession thereto under this Lease, reasonable wear and tear excepted, and shall surrender all keys for the Leased Premises to Landlord at the place then fixed for the payment of rent, and shall inform Landlord of all combinations on locks, safes, and vaults, if any, in the Leased Premises. Tenant shall at such time remove all Tenant’s Property, as well as any alterations or improvements, if requested to do so by Landlord, and shall repair any damage to the Leased Premises caused thereby, and any or all of such property not so removed shall, at Landlord’s option, become the exclusive property of Landlord or be disposed of by

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Landlord, at Tenant’s cost and expense, without further notice to or demand upon Tenant. If the Leased Premises be not surrendered as and when aforesaid, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Leased Premises including, without limitation, any claims made by any succeeding occupant founded on such delay. Tenant’s obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this Lease.

23. Procedure Upon Purchase

(a) In the event of the purchase of the Leased Premises or any portion thereof by Tenant pursuant to any provision of this Lease, Landlord need not transfer and convey to Tenant or its designee any better title thereto than existed on the date of the commencement of this Lease, and Tenant shall accept such title, subject, however, to all liens, encumbrances, charges, exceptions, and restrictions on, against, or relating to the Leased Premises and to all applicable Laws, but free of the lien of and security interest created by any Mortgages, and free of any liens, encumbrances, charges, exceptions, and restrictions which have been created by or resulted from acts of Landlord during the term of this Lease which were not consented to, requested by, or resulting from the acts or omissions of Tenant.

(b) Upon the Closing Date for any such purchase by Tenant of the Leased Premises or any portion thereof pursuant to any provisions of this Lease, Tenant shall pay to Landlord, or to any persons designated by Landlord in a written notice delivered by Landlord to Tenant not less than three (3) days prior to the Closing Date, by certified check, bank check, or in federal funds, or electronic equivalent as Landlord may designate, at Landlord’s address set forth above, or at any other place within the continental United States designated by Landlord, the Purchase Price therefor specified herein, and the following shall then occur:

(i) Landlord shall deliver to Tenant a deed which describes the Leased Premises or the portion thereof then being sold to Tenant, and conveys and transfers the title thereto which is described in subsection 23(a) above;

(ii) Landlord shall deliver to Tenant such other instruments as shall be necessary to transfer to Tenant or its designee any other property then required to be sold by Landlord to Tenant pursuant to this Lease;

(iii) Tenant shall pay (or reimburse Landlord for) all costs, fees, and charges incident to such conveyance and transfer, including, without limitation, reasonable counsel fees, escrow fees, recording fees, title insurance premiums, mortgage prepayment penalties, and all applicable federal, state, and local taxes (other than any income or franchise taxes levied upon or assessed against Landlord) which may be incurred or imposed by reason of such conveyance and transfer and by reason of the delivery and/or recording of such deed and such other instruments.

(iv) Upon the completion of the purchase of the Leased Premises pursuant to the provisions hereof and the payment of the Purchase Price and all other amounts due Landlord, but not prior thereto (unless any delay in the completion of or the failure to complete such purchase shall be the fault of Landlord within the Landlord’s reasonable control), this Lease and all obligations hereunder (including the obligations to pay the Minimum Rental and additional charges) shall terminate with respect to the Leased Premises, except with respect to actual or contingent obligations and liabilities of Tenant under this Lease which arose on or prior to such Closing Date.

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24. Landlord Defined

(a) The term Landlord as used in this Lease means only the owner of the Leased Premises, or the Mortgagee in possession of the Leased Premises, for the time being, so that in the event of any sale or other transfer of the Leased Premises, Landlord shall be and hereby is entirely Freed and relieved of all liabilities and obligations of Landlord hereunder, and it shall be deemed without further agreement between the parties and any successor of Landlord, that such successor has assumed and agreed to perform and observe all liabilities and obligations of Landlord hereunder.

(b) Notwithstanding anything contained herein to the contrary, it is specifically understood and agreed that there shall be no personal liability on Landlord in respect of any of the terms, covenants, conditions, or provisions of this Lease, and in the event of a breach or default by Landlord of any of its liabilities and obligations under this Lease, Tenant and any persons claiming by, through, or under Tenant shall look solely to the equity of the Landlord in the Leased Premises for the satisfaction of Tenant’s and such persons’ remedies and claims for damages.

25. Tenant’s Payments

Each and every payment and expenditure, other than Minimum Rental and other than costs for any additions, alterations, repairs, replacements, and improvements to the Improvements, which are required to be paid by Tenant under this Lease, shall be deemed to be additional rent hereunder, whether or not the provisions requiring payment of such amounts specifically so state, and shall be payable, unless otherwise provided in this Lease, on demand by Landlord, and in the case of the non-payment of any such amount, Landlord shall have, in addition to all of its other rights and remedies, all of the rights and remedies available to Landlord hereunder or by Laws in the case of non-payment of Minimum Rental. Unless expressly otherwise provided in this Lease, the performance and observance by Tenant of all the terms, covenants, and conditions of this Lease to be performed and observed by Tenant hereunder shall be performed and observed by Tenant at Tenant’s sole cost and expense. Tenant agrees to pay or reimburse Landlord, on demand, for any reasonable costs and expenses that may be incurred by Landlord in connection with its review of any instruments or documents requested by Tenant pursuant to this Lease or relating to the Leased Premises, including, but not limited to, the costs and expenses of making such investigations as the Landlord shall deem appropriate and the reasonable legal fees and disbursements of Landlord’s counsel. All payments of Minimum Rental hereunder shall be made to Landlord by check or electronic equivalent, as Landlord may direct, at the address set forth in the beginning hereof, unless otherwise provided herein, or at such other address as may be designated by Landlord.

26. Right to Cure Defaults

If Tenant shall fail to fully comply with any of its liabilities or obligations under this Lease (including, without limitation, its obligations to make repairs, maintain various policies of insurance, comply with all Laws, and pay all Impositions and bills for utilities), then three (3) days after the giving of written notice of such breach to Tenant (except that prior written notice shall not be required in the event of an emergency), Landlord shall have the right, at its option, to cure such breach at Tenant’s cost and expense. Tenant agrees to reimburse Landlord (as additional rent) for all losses, costs, damages, and expenses resulting therefrom or incurred in connection therewith, together with interest thereon (at a rate equal to the Maximum Rate), promptly upon demand. Any late charges imposed under Section 35 is in addition to the above items.

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27. Covenant Against Liens

(a) If, because of any act or omission (or alleged act or omission) of Tenant, any mechanics’ or other lien, charge, or order for the payment of money or other encumbrances shall be filed or imposed against Landlord, any Superior Lessor, any Mortgagee, and/or any portion of the Leased Premises (whether or not such lien, charge, order, or encumbrance is valid or enforceable as such), Tenant shall, at its cost and expense, cause same to be discharged of record or bonded within ten (10) days after notice to Tenant of the filing or imposition thereof; and Tenant shall indemnify and defend Landlord against, and save Landlord harmless from, all losses, costs, damages, expenses, liabilities, suits, penalties, claims, demands, and obligations, including, without limitation, reasonable counsel fees, resulting therefrom. If Tenant fails to comply with the foregoing provisions, Landlord shall have the option of discharging or bonding any such lien, charge, order, or encumbrance, and Tenant agrees to reimburse Landlord (as additional rent) for all losses, costs, damages, and expenses (including without limitation reasonable attorney fees) resulting therefrom or incurred in connection therewith, plus an administration fee of twenty (20%) percent of the total of the same together with interest thereon (at a rate equal to the Maximum Rate), promptly upon demand.

(b) All materialmen, contractors, artisans, mechanics, laborers, and any other persons now or hereafter furnishing any labor, services, materials, supplies, or equipment to Tenant with respect to any portion of the Leased Premises, are hereby charged with notice that they must look exclusively to Tenant to obtain payment for same. Notice is hereby given that the Landlord shall not be liable for any labor, services, materials, supplies, or equipment furnished or to be furnished to the Tenant upon credit, and that no mechanics’ or other lien for any such labor, services, materials, supplies, or equipment shall attach to or affect the estate or interest of the Landlord in and to the Leased Premises.

28. Waiver of Redemption

It being clearly understood by Tenant that Landlord is unwilling to enter into any lease of the Leased Premises for a term of more than five (5) years unless the statutory rights of redemption after a dispossess proceeding and to a second further trial after an action in ejectment shall be waived by Tenant (unless such second or further trial results from an appellate court decision reversing the decision of the first trial), and Tenant being willing to waive all such rights of redemption conferred by statute in order that it may secure a lease of more than five (5) years, Tenant covenants and agrees that in the event of an action for ejectment or any other action or proceeding to dispossess, terminating this Lease, the right of redemption provided or permitted by any Laws, and the right to any second or further trial provided or permitted by any Laws, shall be, and hereby are, expressly waived (unless such second or further trial results from an appellate court decision reversing the decision of the first trial). Tenant hereby expressly waives the service of any notice in writing of intention to reenter as provided for, or may be provided for, in and by the laws of the State in which the Leased Premises are located, as the same may from time to time exist.

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29. Landlord’s and Tenant’s Certificates

Landlord and Tenant shall, each without charge at any time and from time to time, within ten (10) days after request by the other party, certify by written instrument, duly executed, acknowledged, and delivered to any ground lessor, Mortgagee, assignee of any Mortgagee or purchaser, or any proposed Mortgagee, or proposed assignee or sub-tenant of Tenant or any other person, firm, or corporation specified by Landlord or Tenant:

(a) That this Lease are unmodified and in full force and effect (or, if there has been modification, that the same is in full force and effect as modified, and stating the modifications);

(b) Whether or not there are then existing any breaches or defaults by the other party under any of the terms of this Lease, and specifying such breach or default or any setoffs or defenses against the enforcement of any of the agreements, terms, covenants, or conditions of this Lease, as the case may be, to be performed or complied with (and, if so, specifying the same and the steps being taken to remedy the same); and

(c) The dates, if any, to which the rental(s) and other charges under this Lease have been paid in advance.

30. Waiver of Trial by Jury (Have parties initial)

Landlord and Tenant do hereby waive trial by jury in any action, proceeding, or counterclaim brought by either against the other, upon any matters whatsoever arising out of or in any way connected with this Lease, Tenant’s use or occupancy of the Leased Premises, and/or any claim of injury or damage. It is further mutually agreed that in the event Landlord commences any summary proceeding for non-payment of Minimum Rental or additional rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding.

31. Net Lease: Non-Terminability

This is an absolutely net lease, and, except as otherwise specifically provided in Section 12 hereof, this Lease shall not terminate, nor shall Tenant have any right to terminate this Lease; nor shall Tenant be entitled to any abatement, deduction, deferment, suspension, or reduction of, or setoff, defense, or counterclaim against, any rentals, charges, or other sums payable by Tenant under this Lease; nor shall the respective obligations of Landlord and Tenant be otherwise affected by reason of damage to, or destruction of, the Leased Premises from whatever cause, any taking by condemnation, eminent domain, or by agreement between Landlord and those authorized to exercise such rights, the lawful or unlawful prohibition of Tenant’s use of the Leased Premises, the interference with such use by any persons, corporations, or other entities, or by reason of any eviction by paramount title, or by reason of Tenant’s acquisition of ownership of the Leased Premises otherwise than pursuant to an express provision of this Lease, or by reason of any default or breach of any warranty by Landlord under this Lease or any other agreement between Landlord and Tenant, or to which Landlord and Tenant are parties, or for any other cause whether similar or dissimilar to the foregoing, any Laws to the contrary notwithstanding; it being the intention that the obligations of Landlord and Tenant hereunder shall be separate and independent covenants and agreements, and that the Minimum Rental, additional rent, and all other charges and sums payable by Tenant hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease; and Tenant covenants and agrees that it will

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remain obligated under this Lease in accordance with its terms, and that it will not take any action to terminate, cancel, rescind, or void this Lease, notwithstanding the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding-up, or other proceedings affecting Landlord or any assignee of, or successor to, Landlord, and notwithstanding any action with respect to this Lease that may be taken by a trustee or receiver of Landlord or any assignee of, or successor to, Landlord, or by any court in any such proceeding.

32. Miscellaneous Provisions

(a) Notices. Any notice, exercise of option or election, communication, request, or other document or demand required or permitted under this Lease shall be in writing and shall be given to Landlord or Tenant by national, reputable, overnight courier which provides proof of delivery, registered or certified mail, return receipt requested, postage prepaid, to the parties at the addresses listed below:

(i) to the Landlord as follows:

First National Holdings, LLC

c/o Donald B. Wildman

220 North Church Street, Suite 4

Spartanburg, SC 29306

Telephone: (864)582-8121

Facsimile: (864) 585-5328

(ii) to the Tenant as follows:

First National Bank of Spartanburg

Attn: President

215 North Pine Street

Spartanburg, SC 29302

Telephone: (864) 594-5690

Facsimile: (864) 594-5688

Either party may, from time to time, change the address to which such written notices, exercise of options or elections, communications, requests, or other documents or demands are to be mailed, by giving the other party(ies) written notice of such changed address, pursuant to the terms hereinabove set forth. At Landlord’s option, which may be exercised at any time hereafter, Tenant shall send copies of any and all said notices and other communications designated by Landlord, to any Mortgagees and Superior Lessors designated by Landlord, in the same manner as notices are required to be sent to Landlord, and at such address(es) as Landlord may from time to time designated by notice to Tenant.

(b) Relationship of the Parties. It is the intention of the parties hereto to create the relationship of Landlord and Tenant, and no other relationship whatsoever, and unless expressly otherwise provided herein, nothing herein shall be construed to make the parties hereto liable for any of the debts, liabilities, or obligations of the other party.

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(c) Applicability. Whenever a provision in this Lease is stated to apply to the term of this Lease, or words of similar import, the same shall be deemed to mean and include any Extended Term as well, unless specific reference is made to such provision as having applicability only to all or any portions of the Initial Term and/or any Extended Term.

(d) Governing Laws. This Lease shall be governed exclusively by the provisions hereof and by the laws of the State in which the Leased Premises are located as the same may from time to time exist.

(e) Invalidity of Particular Provisions. If any term or provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law.

(f) Waiver. Failure on the part of either party to complain of any action or non-action on the part of the other party, no matter how long the same may continue, shall never be deemed to be a waiver by either party of any of its rights hereunder. Acceptance by Landlord of Minimum Rental, additional rent, or any other charges paid by Tenant hereunder shall not be, or be deemed to be, a waiver by Landlord of any default by Tenant, whether or not Landlord knows of such default. No waiver at any time of any of the provisions hereof by either party shall be construed as a waiver of any of the other provisions hereunder, and a waiver at any time of any of the provisions hereof shall not be construed as a waiver at any subsequent time of the same provisions.

(g) Counterparts. This Lease may be executed in several counterparts, each of which shall be deemed an original, and such counterparts shall constitute but one and the same instrument.

(h) Sole Agreement. This Lease sets forth all the promises, inducements, agreements, conditions, and understandings between Landlord and Tenant relative to the demise of the Leased Premises, and there are no promises, agreements, conditions, or understandings, either oral or written, express or implied, between them, other than as herein incorporated or set forth with respect to such demise. Except as herein otherwise provided, no subsequent alteration, amendment, change, or addition to this Lease shall be binding upon Landlord or Tenant, unless reduced to writing and signed by the party(ies) to be charged therewith.

(i) Short Form of Lease. A short form of Lease for recording purposes only, in form reasonably satisfactory to Landlord and Tenant, shall, simultaneously with the execution hereof, and at any time hereafter upon the request of either Landlord or Tenant, be executed by Landlord and Tenant in recordable form.

(j) Captions. The captions of the several Sections and subsections of this Lease and table of contents are not a part of the context hereof and shall be ignored in construing this Lease. They are intended only as aids in locating various provisions hereof.

(k) Successors and Assigns. Except as may be expressly otherwise provided herein, the terms, covenants, and conditions hereof shall inure to the benefit of, and shall be binding upon, Landlord and its successors and assigns and the terms, covenants, and conditions hereof shall inure to the benefit of, and shall be binding upon, Tenant and its successors and permitted assigns.

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(1) No Merger. There shall be no merger of this Lease, or the leasehold estate created by this Lease, with any other estate or interest in the Leased Premises, or any part thereof, by reason of the fact that the same person, firm, corporation, or other entity may acquire or own or hold, directly or indirectly, (i) this Lease or the leasehold estate created by this Lease, or any interest in this Lease or in any such leasehold estate, and (ii) any such other estate or interest in the Leased Premises or any part thereof; and no such merger shall occur unless and until all persons, corporations, firms, and other entities having an interest (including a security interest) in (i) this Lease or the leasehold estate created by this Lease; and (ii) any such other estate or interest in the Leased Premises, or any part thereof, shall join in a written instrument effecting such merger and shall duly record the same.

(m) Rights of Superior Lessor. Any rights provided herein for the benefit of any Mortgagees shall apply with equal force and effect for the benefit of any Superior Lessors as if expressly so stated in each instance.

(n) Reports. In the event the following is not available to the general public, Tenant agrees to furnish to Landlord, upon request and with reasonable promptness: (1) copies of financial statements of Tenant and each Guarantor (including, but not limited to, annual balance sheets, income statements, and surplus statements, certified by independent certified public accountants); and (2) other financial statements, reports, and documents which the Tenant and each Guarantor: (i) files with or otherwise sends to the Securities and Exchange Commission, whether pursuant to the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934 including, without limitation, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K and Proxy Statements and other soliciting materials; (ii) files with any other governmental commission, department, or agency or any securities exchange; and (iii) sends to or makes available to its shareholders. In addition to the foregoing, Tenant shall obtain and deliver to Landlord, with reasonable promptness: (a) such other information respecting the operation of the Leased Premises or the financial condition and affairs of Tenant or any Guarantors, as Landlord may from time to time reasonably request; and (b) together with the annual reports of each Guarantor as required above, an Officer’s Certificate of such Guarantor stating that to the best of the signer’s knowledge and belief, after making due inquiry, neither Tenant nor such Guarantor is in default in the performance or observance of any of the agreements, terms, covenants, or conditions of this Lease or the Guarantee upon the part of Tenant or the Guarantor, as the case may be, to be performed or observed (or, if so, specifying the same and the steps being taken to remedy the same).

(o) Ownership of Leased Premises. Tenant acknowledges that the Leased Premises are the property of Landlord and that Tenant has only the right to the possession and use thereof upon the terms, covenants, and conditions set forth in this Lease.

(p) Encroachments, Restrictions, etc. If any of the Improvements shall, at any time, encroach upon any property, street, or right-of-way adjoining or adjacent to the Leased Premises, or shall violate the agreements or conditions contained in any restrictive covenant or other agreement affecting the Leased Premises, or any part thereof, or shall hinder or obstruct any easement or right-of-way to which the Leased Premises are subject, or shall impair the rights of others under such easement or right-of-way, then promptly upon the request of the Landlord at the behest of any persons affected by any

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such encroachment, violation, hindrance, obstruction, or impairment, Tenant shall, at its cost and expense, either (i) obtain valid and effective waivers or settlements of all claims, liabilities, and damages resulting from each such encroachment, violation, hindrance, obstruction, or impairment, whether the same shall affect Landlord or Tenant, or (ii) make such changes in the Improvements, and take such other actions as shall be necessary, to remove such encroachments, hindrances, or obstructions and to end such violations or impairments, including, if necessary, but only with Landlord’s prior written consent, the alteration or removal of any of the Improvements. Any such alteration or removal consented to by Landlord shall be made by Tenant in accordance with the requirements of Section 9, above. Tenant’s obligations under this subsection 32(p) shall survive the expiration or sooner termination of this Lease,

(q) Acceptance of Surrender, No surrender to Landlord of this Lease or of the Leased Premises, or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Landlord and consented to in writing by any and all Mortgagees and Superior Lessors, and no act or omission by Landlord or any representative or agent of Landlord, other than such a written acceptance by Landlord, consented to as aforesaid, shall constitute an acceptance of any such surrender.

(r) Consent by Landlord. Wherever in this Lease Landlord agrees not to withhold its consent or approval unreasonably, or words of like import, Tenant agrees that it shall not be unreasonable for Landlord to withhold such consent or approval (i) if, by granting such consent or approval, Landlord shall be in violation of any Mortgage, or (ii) any Mortgagee shall not give its consent or approval thereto where its consent or approval is required by the terms of its Mortgage. Anything herein contained to the contrary notwithstanding, any consent or approval given by Landlord hereunder this Lease with respect to any act or matter to which a Mortgagee is entitled by the terms of its Mortgage to consent or approve shall be of no force or effect, and shall be deemed to have been withheld, unless accompanied by the written consent or approval of such Mortgagee. In the event that a claim or adjudication is made that Landlord has acted unreasonably, or unreasonably delayed acting in any case where by law or under this Lease it has an obligation to act reasonably or promptly, Landlord shall not be liable for any monetary damages, and Tenant’s remedies shall be limited to injunctive relief or declaratory judgment.

33. Tenant’s Right of First Option/Refusal to Purchase

In the event that, at any time during the term of this Lease, Landlord desires to sell the Leased Premises to any entity not related to or affiliated with Landlord, Tenant shall have the right of first offer with respect to the purchase thereof, which right shall be exercisable in accordance with and subject to the following conditions:

(a) If Landlord desires to offer the Leased Premises for sale, it shall send Tenant a notice (the Offer Notice) so stating;

(b) If Tenant is interested in purchasing the Leased Premises, it shall send Landlord a written offer (the First Offer) within thirty (30) days of the Offer Notice which shall be deemed, subject to the terms of Section 33(d) hereof, to be an irrevocable offer to purchase the Leased Premises as provided in this Section 33. The First Offer shall specify a price (the First Offer Purchase Price) and other terms (the Other Terms) upon which the Tenant shall be obligated, at Landlord’s option as herein provided, to purchase the Leased’ Premises. Failure of Tenant to send the First Offer to Landlord within

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said thirty (30) day period shall be deemed a waiver by Tenant of its right of first offer, and thereafter, the provisions of this Section 33 shall no longer be of any force and effect;

(c) In the event that Tenant has sent Landlord a First Offer, then for a period of one (1) year from the Offer Notice, Landlord shall not sell the Leased Premises to a third party for less than the amount of the First Offer Purchase Price or on terms substantially more onerous to Landlord than the Other Terms. Upon a sale by the Landlord of the Leased Premises to a third party, the provisions of this Section 33 shall no longer be of any force or effect. Notwithstanding anything to the contrary, Landlord shall have no obligation to accept the First Offer or to sell the Leased Premises to any third party;

(d) If Tenant has sent Landlord a First Offer in compliance with subsection (b) of this Section 33 and Landlord has not accepted a third party offer within one (1) year after receipt of the First Offer, the Offer Notice shall terminate, and Tenant’s right of first offer shall again be in full force and effect;

(e) If Landlord is willing to accept the First Offer prior to the termination thereof as provided in Section 33(d) hereof, then Landlord shall send Tenant a written notice (the Acceptance);

(f) On a date (the First Offer Closing Date) which shall be specified by Landlord in the Acceptance, but shall be not less than thirty (30), nor more than one hundred twenty (120), days from the date of the Acceptance, Tenant shall purchase the Leased Premises on the Other Terms as set forth in the First Offer and as otherwise provided in Section 23 of this Lease, whereupon Tenant shall pay the First Offer Purchase Price (which, for purposes of Section 23 of this Lease, may sometimes be referred to as the Purchase Price) as set forth in the First Offer to Landlord, together with all installments of Minimum Rental and all other sums due and payable under this Lease to and including such First Offer Closing Date,

(g) Notwithstanding anything to the contrary contained in this Section 33, the provisions of this Section 33 shall not apply to, and Landlord shall have no obligation and Tenant shall have no right under this Section 33 in connection with, any of the following:

(i) any sale, transfer, or other disposition of the Leased Premises or any portion thereof or any interest therein incidental to the exercise of any remedy provided for in any Mortgage or Superior Lease,

(ii) any sale, transfer, or other disposition of the Leased Premises or any portion thereof or any interest therein if, at the time Landlord would have otherwise been obligated to send Tenant an Offer Notice in connection with such disposition or at any time thereafter, there shall have occurred an Event of Default hereunder.

34. Bankruptcy or Insolvency

The Landlord and Tenant acknowledge and agree that the provisions of this Section 34 shall control notwithstanding anything to the contrary contained herein.

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(a) In the event that Tenant shall become a debtor under Chapter 7 of the Bankruptcy Reform Act of 1978, 11 U.S.C. A. §§701 to 784 (Bankruptcy Code) and Tenant’s trustee or Tenant shall elect to assume this Lease for the purpose of assigning the same or otherwise, such election and assignment may be made only if the provisions of this Section 34 are satisfied. If Tenant or Tenant’s trustee shall fail to assume this Lease within 60 days after the entry of an order for relief, this Lease shall be deemed to have been rejected. Immediately thereupon, Landlord shall be entitled to possession of the Leased Premises without further obligation to Tenant or Tenant’s trustee and this Lease, upon the election of Landlord, shall terminate, but Landlord’s right to be compensated for damages (including, without limitation, liquidated damages pursuant to Section 19 or the exercise of any other remedies in any such proceeding) shall survive, whether or not this Lease shall be terminated.

(b) In the event that a voluntary petition for reorganization is filed by Tenant, or an involuntary petition is filed against Tenant under Chapter 11 of the Bankruptcy Code, or in the event of the entry of an order for relief under Chapter 7 in a case which is then transferred to Chapter 11, Tenant’s trustee or Tenant, as debtor-in-possession, must elect to assume this Lease within 60 days from the date of the filing of the petition under Chapter 11 or the transfer thereto, or Tenant’s trustee or the debtor-in-possession shall be deemed to have rejected this Lease. Immediately thereupon, Landlord shall be entitled to possession of the Leased Premises without further obligation to Tenant or Tenant’s trustee and this Lease, upon the election of Landlord, shall terminate, but Landlord’s right to be compensated for damages (including, without limitation, liquidated damages pursuant to Section 19 or the exercise of any other remedies in any such proceeding) shall survive, whether or not this Lease shall be terminated.

(c) No election by Tenant’s trustee or the debtor-in-possession to assume this Lease, whether under Chapter 7 or Chapter 11, shall be effective unless each of the following conditions has been satisfied:

(i) Tenant’s trustee or the debtor-in-possession has cured all defaults under this Lease, or has provided Landlord with evidence satisfactory to Landlord that it will cure all defaults susceptible of being cured by the payment of money within 10 days from the date of such assumption, and that it will cure all other defaults under this Lease which are susceptible of being cured by the performance of any act within 30 days after the date of such assumption.

(ii) Tenant’s trustee or the debtor-in-possession has compensated, or has provided Landlord with evidence satisfactory to Landlord that, within 10 days from the date of such assumption, it will compensate, Landlord for any actual pecuniary loss incurred by Landlord arising from the default of Tenant, Tenant’s trustee, or the debtor-in-possession as indicated in any statement of actual pecuniary loss sent by Landlord to Tenant’s trustee or the debtor-in-possession.

(iii) Tenant’s trustee or the debtor-in-possession (A) has provided Landlord with Assurance, as hereinbelow defined, of the future performance of each of the obligations under this Lease of Tenant, Tenant’s trustee, or the debtor-in-possession, and (B) shall, in addition to any other security deposits held by Landlord, deposit with Landlord, as security for the timely payment of Minimum Rental and for the performance of all other obligations of Tenant under this Lease, an amount equal to 3 monthly installments of Minimum Rental and any percentage rental payable under this Lease (both at the rate then payable), and (C) pay in advance to Landlord on the date each installment of Minimum Rental is due and payable, one-twelfth of Tenant’s annual obligations for Impositions and

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insurance premiums to be made by Tenant pursuant to this Lease. The obligations imposed upon Tenant’s trustee or the debtor-in-possession by this Section 34 shall continue with respect to Tenant or any assignee of this Lease, after the conclusion of proceedings under the Bankruptcy Code.

(iv) Such assumption will not breach or cause a default under any provision of any other lease, Mortgage, financing agreement, or other agreement by which Landlord or the Superior Lessor is bound, relating to the Leased Premises or any larger development of which the Leased Premises is a part.

(d) For purposes of subsection (c)(iii) of this Section 34, Landlord and Tenant acknowledge that Assurance shall mean no less than: (i) Tenant’s trustee or the debtor-in-possession has, and will continue to have, sufficient unencumbered assets, after the payment of all secured obligations and administrative expenses, to assure Landlord that sufficient funds will be available to fulfill the obligations of Tenant under this Lease, and (ii) to secure to Landlord the obligations of Tenant, Tenant’s trustee, or the debtor-in-possession, and to assure the ability of Tenant, Tenant’s trustee, or the debtor-in-possession to cure the defaults under this Lease, monetary and/or non-monetary, there shall have been: (A) sufficient cash deposited with Landlord, or (B) the Bankruptcy Court shall have entered an order segregating sufficient cash payable to Landlord, and/or (C) Tenant’s trustee or the debtor-in-possession shall have granted to Landlord a valid and perfected first lien and security interest and/or mortgage in properly of Tenant, Tenant’s trustee, or the debtor-in-possession, acceptable as to value and kind to Landlord.

(e) In the event that this Lease is assumed in accordance with subsection (b) of this Section 34 and thereafter Tenant is liquidated or files, or has filed against it, a subsequent petition under any provision of the Bankruptcy Code or any similar statute for relief of debtors, Landlord may, at its option, terminate this Lease and all rights of Tenant hereunder, by giving Tenant notice of its election to so terminate within 30 days after the occurrence of either of such events.

(f) If Tenant’s trustee or the debtor-in-possession has assumed this Lease pursuant to the terms and provisions of this Section 34 for the purpose of assigning (or elects to assign) this Lease, this Lease may be so assigned only if the proposed assignee has provided adequate assurance of future performance of all of the terms, covenants, and conditions of this Lease to be performed by Tenant. Landlord shall be entitled to receive all consideration for such assignment, whether cash or otherwise. As used in this subsection (f) of this Section 34 “adequate assurance of future performance” shall mean at least that clauses (B) and (C) of subsection (c)(iii) of this Section 34, and each of the following conditions, has been satisfied:

(i) The proposed assignee has furnished Landlord with a current financial statement audited by a certified public accountant, determined in accordance with generally accepted accounting principles consistently applied, indicating a credit rating, net worth, and working capital in amounts which Landlord reasonably determines to be sufficient to assure the future performance of such assignee of Tenant’s obligations under this Lease, but in no event indicating a net worth less than the net worth of the Tenant and any Guarantors of this Lease, on the date of execution hereof.

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(ii) Such assignment will not breach or cause a default under any provision of any other lease, Mortgage, financing agreement, or other agreement by which Landlord or the Superior Lessor is bound, relating to the Leased Premises or any larger development of which the Leased Premises is a part.

(iii) The proposed assignment will not release or impair any Guarantee under this Lease.

(g) When, pursuant to the Bankruptcy Code, Tenant’s trustee or the debtor-in-possession shall be obligated to pay reasonable use and occupancy charges for the use of the Leased Premises, such charges shall not be less than the Minimum Rental and all additional rent payable by Tenant under this Lease, and shall be paid at the times and when due as though such charges were Minimum Rental and additional rent.

(h) Anything in this Lease to the contrary notwithstanding, neither the whole nor any portion of Tenant’s interest in this Lease or its estate in the Leased Premises shall pass to any trustee, receiver, assignee for the benefit of creditors, or any other similar person or entity, or otherwise by operation of law under the Bankruptcy Code or any similar federal statute now or hereinafter enacted, or under the laws of any state having jurisdiction of the person or property of Tenant, unless Landlord shall have consented to such transfer in writing. No acceptance by Landlord of rent or any other payments from any such trustee, receiver, assignee, person, or other entity shall be deemed to constitute such consent by Landlord, nor shall it be deemed a waiver of Landlord’s right to terminate this Lease for any transfer of Tenant’s interest under this Lease without such consent.

(i) Anything in this Lease to the contrary notwithstanding, Tenant covenants and agrees that this Lease is an extension of financial benefits and accommodations to Tenant which are uniquely personal in nature, and such financial benefits and accommodations are a material inducement for Landlord’s execution and delivery of this Lease, and are an integral part of the consideration for this Lease.

(j) Notwithstanding anything in this Lease to the contrary, and as a material inducement for Landlord’s execution and delivery of this Lease, and the extension of financial benefits and accommodations uniquely personal to Tenant, Tenant covenants and agrees for itself, its successors, and assigns, that it will maintain at all times a net worth, determined in accordance with generally accepted accounting principles consistently applied, of not less than the net worth so determined of Tenant and any Guarantors of this Lease on the date of execution hereof. Failure to comply with the provisions of this subsection (j) of Section 34 shall be deemed a default relating to a monetary obligation, as that term is used in Section 19 of this Lease, entitling Landlord to the remedies therein provided.

(k) In the event of an assumption or assignment, or both, of Tenant’s interests pursuant to this Section 34, the right to extend the term of this Lease for an Extended Term beyond the then term of this Lease shall be extinguished.

35. Late Charges

(a) Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be

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imposed on Landlord by the terms of any mortgage or trust deed encumbering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord or Landlord’s designee within ten (10) days after the date on which such sum is due, Tenant shall pay to Landlord a late charge equal to ten (10%) percent of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant’s default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder.

(b) Any amount due Landlord not paid within ten (10) days after the date on which such amount is due shall bear interest at the Maximum Rate from the due date of such amount. Payment of such interest shall not excuse or cure any default by Tenant under this Lease.

36. Definitions

For the purposes of this Lease, the following definitions shall be applicable in addition to those definitions of terms contained in other sections and schedules of the Lease:

Lease Year—Any twelve (12) month period during the Initial Term of this Lease and any Extended Term commencing on the first day of the first full calendar month of the term of this Lease.

Maximum Rate—an annual rate of interest equal to the Prime Rate plus two (2%) percent, but in no event in excess of the maximum lawful rate permitted to be charged by a Landlord against a defaulting Tenant for monies advanced by reason of a Tenant’s default.

Mortgage—any Mortgage, deed of trust, or other security interest now existing or hereafter created on all or any portion of Landlord’s interest in this Lease and/or the Leased Premises.

Mortgagee—the holder of any Mortgage.

Person/Persons—any individual(s), partnership(s), firm(s), corporation(s), business trust(s), estate(s), legal representative(s), or other entities of any nature or description whatsoever.

Prime Rate—the rate being charged at the time in question by First National Bank of the South, or any successor bank, for short-term ninety (90) day unsecured loans made to its preferred customers.

Superior Lease—any lease of all or any portions of the Leased Premises made by and between any persons, firms, or entities, as lessor, and any Landlord hereunder, as lessee.

Superior Lessor—the Lessor under any Superior Lease.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

[SIGNATURES ON FOLLOWING PAGES]

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IN WITNESS WHEREOF, the parties hereto have duly executed this instrument under seal as of the day and year first above written.

WITNESS:	LANDLORD:
	FIRST NATIONAL HOLDINGS, LLC, a South Carolina limited liability company
	By:
	Name:	Donald B. Wildman
	Its:	Manager
	TENANT:
	FIRST NATIONAL BANK OF THE SOUTH, a national banking organization
	By:
	Name:	Jerry L. Calvert
	Its:	President & C.E.O

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EXHIBIT “A”

LEGAL DESCRIPTIONS

North Pine Street Property:

ALL those lots, pieces or parcels of land with improvements located thereon, located, lying and being in the City of Spartanburg, Spartanburg County, South Carolina on the western side of North Pine Street US Highway 176 (R/W varies), containing 2.98 acres, more or less, and being more particularly shown on plat of survey made for First National Holdings, LLC dated November 15, 2006, last revised January 11, 2007, by Site Design, Inc. (Joe F. Gosnell, P.L.S. S. C. Reg. No. 16501) recorded February     , 2007 in Plat Book                     , at Page                      in the Spartanburg County Register of Deeds Office, to which plat reference is hereby made for a more complete and particular description and with the following metes and bounds, to-wit:

COMMENCING at an old nail in curb located 412.3 feet more or less, from that intersection of the rights of way of North Pine Street US Highway 176 and Saint John Street along a tie line of N 26-40-00 W said point being the POINT OF BEGINNING (P.O.B.);

From said P.O.B. and leaving the right of way of North Pine Street, thence S. 89-45-19 W. 107.01 feet to IPO  ¹/2" rebar; thence S. 38-31-44 W. 166.32 feet to IPO  ¹/2" rebar; thence S. 12-59-37 W. 25.33 feet to IPO  ¹/2" rebar; thence S. 35-29-00 W. 75.79 feet to IPO  ¹/2" rebar; thence S. 52-05-04 E. 32.61 feet to IPO  ¹/2" rebar; thence S. 13-06-08 W. 51.59 feet to IPO  ¹/2" rebar located on the right of way of Saint John Street; thence along the right of way of Saint John Street N 66-50-29 W 38.22 feet to a point; thence N. 67-50-04 W. 59.33 feet to an Old Nail & Cap; thence leaving the right of way of Saint John Street N. 18-46-19 E. 26.44 feet to an Old Nail & Cap; thence N. 18-43-06 E. 35.75 feet to old RR Spike; thence N. 15-39-05 E. 67.76 feet to old RR Spike; thence N. 14-44-54 E. 35.50 feet to Old RR Spike; thence N. 12-24-45 E. 10.53 feet to Mag Nail Set; thence N. 04-54-04 E. 59.93 feet to Old Nail & Cap; thence S. 06-09-50 W. 24.47 feet to a point; thence S. 69-55-21 W. 56.48 feet to IPO  ³/8" rebar; thence N. 13-27-48 W. 56.90 feet to IPO  ¹/4" SR Bent; thence N. 69-25-42 E. 75.13 feet to Mag Nail Set; thence N. 06-09-50 E. 75.15 feet to point; thence S. 68-36-40 W. 103.38 feet to IPO  ¹/2" rebar; thence N. 13-16-11 W. 54.19 feet to IPO  ¹/2" RB Bent; thence N. 13-18-21 W. 68.46 feet to IPO  ¹/2" rebar; thence N. 70-10-40 E. 68.16 feet to IPS  ⁵/8" rebar; thence N. 14-34-32 W. 16.95 feet to IPO  ⁵/8" solid rod; thence N. 16-19-51 W. 49.62 feet to an IPO  ¹/2" solid rod; thence N. 68-31-30 E. 28.22 feet to IPO  ¹/2" rebar; thence N. 14-14-23 W. 127.74 feet to Old Mag Nail; thence along the right of way of Greenleaf Street 20’ R/W, thence N. 75-43-34 E. 50.38 feet to IPO  ¹/2" rebar, thence N. 77-29-16 E. 50.95 feet to IPO  ¹/2" rebar, thence N. 74-51-16 E. 9.39 feet to IPO  ¹/2" R. B. Bent located on the right of way of North Pine Street US Highway 176; thence along the right of way of North Pine Street US Highway 176 the following two (2) calls: S. 28-35-12 E. 113.16 feet to IPO  ¹/2" rebar; S. 26-40-00 E. 414.60 feet to Old Nail in Curb and the P.O.B.

Derivations:

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg, Div. of First National Bank of the South by deed of Robbin Waldrop and Gracie Sue Waldrop recorded on February 8, 2005 in Deed Book 82-G, at Page 702, aforesaid records.

Tax Map Number: 7-12-07-158.00

A portion of the above described property was heretofore conveyed to First National Bank of the South by deed of Bobby J. Crump recorded October 13, 2005 in Deed Book 84-D, at Page 524, aforesaid records.

Tax Map Number: 7-12-07-161.00

A portion of the above described property was heretofore conveyed to First National Bank of the South by deeds recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 72-G at Page 464; Deed Book 72-G at Page 465; and Deed Book 72-G at Page 466.

Tax Map Numbers: P/O 7-12-07-147.00; P/O 7-12-07-147.01 and also 7-12-07-157.00

A portion of the above described property was heretofore conveyed to FIRST NATIONAL BANK OF SPARTANBURG by deed of HBJ PROPERTIES, A SOUTH CAROLINA GENERAL PARTNERSHIP, dated February 22, 2000, recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 71-N, at Page 609.

Tax Map Number: 7-12-07-168.00

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg by deed recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 83-G at Page 402.

Portions of the above described property was heretofore conveyed to First National Bank of Spartanburg by Road Closure Order recorded in Deed Book 72-F at Page 624.)

Tax Map Number: 7-12-07-156.00

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg by deed recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 84-E at Page 180.

Portions of the above described property was heretofore conveyed to First National Bank of Spartanburg by Road Closure Order recorded in Deed Book 84-P at Page 302.)

Tax Map Numbers: 7-12-7-153.00 and 7-12-7-154.00

Boiling Springs Road Property:

ALSO: ALL that lot, piece or parcel of land located in the State of South Carolina, County of Spartanburg, at Boiling Springs, located at the northeastern quadrant of the intersection of Boiling Springs Road (S. C. Highway No. 9) and Swain Avenue, containing 0.946 acres, more or less, and being more particularly shown on plat of survey made for First National Bank of Spartanburg dated August 15, 2000 by John Robert Jennings, P.L.S., Surveyor, recorded December 27, 2000 in Plat Book 149, at Page 360 in the Office of the Register of Deeds for Spartanburg County, S. C. See also “ALTA / ACSM Land Title Survey” prepared for First National Holdings, LLC by Joe F. Gosnell, P.L.S., South Carolina Reg. No. 16501 of Site Design, Inc., dated November 7, 2006, last revised on February 8, 2007 (the “Survey”) showing said parcel as having the following metes and bounds, to-wit:

Commencing at an iron pin old 3/4” open lop located on the right of way of Boiling Springs Road (SC Hwy 9) (45’ R/W from C/L) as shown on said Survey and being the Point of Beginning (POB).

From said POB, thence along the Boiling Springs Road right of way the following three calls: N. 32-57-13 W. 93.14 feet to IPS 5/8” rebar, N. 33-39-21 W. 84.29 feet to IPS 5/8” rebar, N. 07-29-08 E. 11.91 feet to IPS 5/8” rebar; thence along the 40’ right of way of Swain Avenue the following two calls: N. 49-22-15 E. 172.49 feet to Mag Nail Set, N. 49-24-00 E. 44.51 feet to IPS; thence leaving said right of way and running S. 33-18-35 E. 184.79 feet to IPO 1/2” rebar; thence S. 49-09-22 W. 21.53 feet to IPO 1/2” rebar; thence S. 49-13-08 W. 203.46 feet to IPO 3/4” open top and POB, and containing 41,214 square feet, 0.95 acres, more or less.

This being the same property heretofore conveyed to FIRST NATIONAL BANK OF SPARTANBURG by deed of PATRICK A. TINSLEY dated December 21, 2000, recorded December 27, 2000 in Deed Book 73-D, at Page 422, aforesaid records.

Tax Map Number: 2-44-10-053.00

Property Address: 3090 Boiling Springs Road; Boiling Springs, SC

EXHIBIT “A” LEGAL DESCRIPTION CONTINUED:

THESE BEING THE SAME PROPERTIES HERETOFORE CONVEYED TO FIRST NATIONAL HOLDINGS, LLC, A SOUTH CAROLINA LIMITED LIABILITY COMPANY, BY DEED OF FIRST NATIONAL BANK OF THE SOUTH, ALSO KNOWN AS FIRST NATIONAL BANK OF SPARTANBURG, A DIVISION OF FIRST NATIONAL BANK OF THE SOUTH DATED FEBRUARY 6, 2007, AND RECORDED IN THE OFFICE OF THE REGISTER OF DEEDS FOR SPARTANBURG COUNTY, S. C. IN DEED BOOK                     , at PAGE                     .

Schedule A.

See attached Building Sketches of Boiling Springs (page 34) and N. Pine Street (pages 34,35,36,37,38) locations for depiction of usable space.

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SCHEDULE “B”

MINIMUM RENTAL

Lease years 1 through 25 inclusive shall be in the amount of Four Hundred Sixty Three Thousand Two Hundred Fifty and No/100 ($463,250.00) Dollars annually with monthly installments of Thirty Eight Thousand Six Hundred Four and 17/100 ($38,604.17) Dollars. Any partial month shall be prorated based on the monthly installment amount as set forth in the Lease.

First Renewal Option Rental for lease years 26 through 30 shall be determined by the following. At the commencement of the First Renewal Term, if exercised, the Fixed Annual Minimum Rent, for that Renewal Period shall be adjusted to reflect the increase, if any, in the Index (as herein defined) between date of the commencement of the First Renewal Term and the date of the commencement of the Initial Term. In no event shall the Fixed Annual Minimum Rent be increased by less than 25%. The term “Index” as referred to herein shall mean the Consumer Price Index for All Urban Consumers (CPI-U), All Items, U.S. City Average (1982-1984=100), published by the United States Department of Labor, Bureau of Statistics. In the event the CPI-U is discontinued, Landlord will select another nationally recognized published index of similar statistical information.

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Schedule C.

Determination of Fair Market Value

(a) In the event that Landlord and Tenant shall have failed to agree upon the Fair Market Value (for purposes of this schedule, the Value) when and as provided in this Lease for such agreement, then such Value shall be determined as provided in subparagraph (b) hereof. For purposes of this Schedule, the Taking Date shall be the Determination Date for the Fair Market Value (the Determination Date).

(b)

(i) Landlord and Tenant shall each appoint an appraiser by written notice given to the other party not later than thirty (30) days after the Determination Date in effect with respect to the Value to be determined. If either Landlord or Tenant shall have failed to appoint an appraiser within such period of time, and thereafter shall have failed to do so by written notice given within a period of ten (10) days after notice by the other party requesting the appointment of such appraiser, then such appraiser shall be appointed by the American Arbitration Association or its successors (the branch office of which is located in or closest to the location of the Leased Premises), upon request of either Landlord or Tenant, as the case may be;

(ii) the two (2) appraisers appointed as above provided shall appoint a third (3rd) appraiser by written notice given to both Landlord and Tenant, and, if they fail to do so by written notice given within thirty (30) days after their appointment, such third (3rd) appraiser shall be appointed as above provided for the appointment of an appraiser in the event either party fails to do so;

(iii) all of such appraisers shall be M.A.I. real estate appraisers, having not less than ten (10) years’ experience in appraising the value of real estate similar to the Leased Premises, and whose appraisals are acceptable to savings banks or life insurance companies doing business in the State in which the Leased Premises are located;

(iv) the Fair Market Value shall (a) include the value of the Land, all Improvements located thereon, and all appurtenances thereto (the Lease Premises), (b) shall be determined as if the Leased Premises were free of and unencumbered by this Lease and any subleases, licenses, and concessions thereunder, and (c) shall be determined for the highest or best use or uses of the Leased Premises by whichever applicable valuation method (generally acceptable for M.A.I. appraisals) shall reflect the greatest value (including, without limitation, market value, replacement cost, and capitalization of income methods).

(v) the determination of the Value in question by such appraisers must be reached by a unanimous decision of such appraisers. In the event that such appraisers cannot reach a unanimous determination of the Value in question within the time period allotted therefor, such determination shall be equal to the average of the two appraisals thereof which are closest in value, and insofar as the same is in compliance with the provisions and conditions of this subparagraph (b), shall

44

be binding upon Landlord and Tenant. Duplicate original counterparts of such determination shall be sent forthwith by the appraisers by certified mail, return receipt requested, to both Landlord and Tenant. If, for any reason whatsoever, a written decision of the appraisers shall not be rendered within twenty (20) days after the appointment of the third (3rd) appraiser, then, at any time thereafter before such decision shall have been rendered, either party may apply to any court having jurisdiction sitting in the locality where the Leased Premises are located by action, proceeding, or otherwise (but not by a new arbitration proceeding), as may be proper, to determine the question in dispute consistently with the provisions of this Lease. The cost and expense of the appraisers and any such action, proceeding, or otherwise shall be borne by Tenant.

45

EXHIBIT “C”

Permitted Encumbrances

23

EXHIBIT “C”

PERMITTED ENCUMBRANCES

1. Rights or claims of parties in possession not shown by the public records;

2. Easements, or claims of easements, not shown by the public records;

3. Any lien, or right to a lien, for services, labor, or materials hereto of hereafter furnished, imposed by law and not shown by the public records.

4. Rights of dower, homestead or other marital rights of the spouse, if any, of an individual insured;

5. Restrictions upon the use of the premises not appearing in the chain of title to the land.

6. Real property taxes for the year 2007, and subsequent years, a lien, but not yet due and payable.

7. No liability is assumed for payment of maintenance assessments (if any) as set forth in any restrictive covenants; said easements are second and subordinate to the Mortgage insured hereby.

8. Any and all easements as per recorded plat(s).

9. The amount of acreage contained in the land described herein.

10. AS TO THE BOILING SPRINGS, SOUTH CAROLINA PARCEL: RESTRICTIONS FILED FOR RECORD IN DEED BOOK 23-A, AT PAGE 82, WHICH ALLOW USE OF THE INSURED PROPERTY FOR BUSINESS PURPOSES.

11. AS TO THE BOILING SPRINGS, SOUTH CAROLINA PARCEL: RIGHT OF WAY AND EASEMENT GIVEN TO DUKE POWER COMPANY RECORDED IN DEED BOOK 51-Q, AT PAGE 692, AFORESAID RECORDS.

12. AS TO THE NORTH PINE STREET PARCEL: RIGHT OF WAY AND EASEMENT GIVEN TO DUKE POWER COMPANY RECORDED IN DEED BOOK 82-E, AT PAGE 355, AFORESAID RECORDS.

13. AS TO THE NORTH PINE STREET PARCEL: Matters of survey and rights of others affecting the property based on items shown on “ALTA / ACSM Land Title Survey” prepared for First National Holdings, LLC by Joe F. Gosnell, P.L.S., S. C. Registration No. 16501, of Site Design, Inc., Civil Engineers and Surveyors, dated November 15, 2006, last revised                     , 2006, as follows: (a) Storm drainage across eastern corner of property; (b) chain link fence encroachment; (c) tx on concrete and underground power; (d) electric meter; (e) asphalt parking encroachment; (f) signs; (g) dumpster pad; (h) light poles; (i) inaccessible catch basins; (j) nine (9’) foot building line and five (5’) foot building line; (k) storm drainage running across western portion of property; (l) overhead power crossing western portion of property; (m) fifteen (15’) foot building line, ten (10’) foot building line, forty (40’) foot building line and twenty five (25’) front building line; (n) eight (8”) inch concrete wall; (o) gas line; (p) storm drainage (18” C & C typical); (q) twenty five (25’) Duke Power Company right of way; (r) overhead power line; (s) sanitary sewer line.

1

14. AS TO THE BOILING SPRINGS, SC PARCEL: Matters of survey and rights of others affecting the property based on items shown on ALTA/ACSM Land Title Survey prepared for First National Holdings, LLC by Joe F. Gosnell, P.L.S., S.C. Reg. No. 16501 of Site Design, Inc. dated November 9, 2006, last revised on                     ,20    , as follows: (a) ten (10) foot sanitary sewer service easement; (b) building setback lines of fifty (50) feet along Boiling Springs Road, fifty (50) feet along Swain Avenue, fifteen (15) feet along side lot line and twenty (20) feet along rear boundary; (c) storm drainage lines; (d) sanitary sewer lines; (e) overhead power light pole on subject property; (f) signs on subject property.

2

EXHIBIT “D”

Description of the Surveys

North Pine Street Property:

Plat of survey made for First National Holdings, LLC dated November 15, 2006, last revised February 8, 2007, by Site Design, Inc. (Joe F. Gosnell, P.L.S. S. C. Reg. No. 16501).

Boiling Springs Road Property:

“ALTA / ACSM Land Title Survey” prepared for First National Holdings, LLC by Joe F. Gosnell, P.L.S., South Carolina Reg. No. 16501 of Site Design, Inc., dated November 7, 2006, last revised on February 8, 2007.

24

EXHIBIT “E”

Bill of Sale for the Personal Property

25

STATE OF SOUTH CAROLINA	)
	)	Bill of Sale
COUNTY OF SPARTANBURG	)

1. Sale and Transfer of Assets and Contract Rights. For good and valuable consideration, the receipt, adequacy and legal sufficiency of which are hereby acknowledged, and as contemplated by that certain Agreement to Purchase, Sale and Lease Agreement dated as of February 16, 2007 (the “Purchase Agreement”), to which First National Bank of the South, a national banking organization, (the “Seller”), and First National Holdings, LLC, a South Carolina limited liability company (the “Purchaser”), are parties, Seller hereby sells, transfers, assigns, conveys, grants and delivers to Purchaser, effective as of         :                  .m. (         time) on February 16, 2007 (the “Effective Time”), all of Seller’s right, title and interest in and to all of the personal property describe in the attached Schedule of Personal Properly (the “Personal Property”) used in connection with the Land described on Exhibit “A” attached hereto and incorporated herein by reference,

2. Further Actions. Seller covenants and agrees to warrant and defend the sale, transfer, assignment, conveyance, grant and delivery of the Personal Property hereby made against all persons whomsoever, to take all steps reasonably necessary to establish the record of Purchaser’s title to the Personal Property and, at the request of Purchaser, to execute and deliver further instruments of transfer and assignment and take such other action as Purchaser may reasonably request to more effectively transfer and assign to and vest in Purchaser each of the Personal Property, all at the sole cost and expense of Seller.

3. Terms of the Purchase Agreement. The terms of the Purchase Agreement, including but not limited to Seller’s representations, warranties, covenants, agreements and indemnities relating to the Personal Property, are incorporated herein by this reference. Seller acknowledges and agrees that the representations, warranties, covenants, agreements and indemnities contained in the Purchase Agreement shall not be superseded hereby but shall remain in full force and effect to the full extent provided therein, In the event of any conflict or inconsistency between the terms of the Purchase Agreement and the terms hereof, the terms of the Purchase Agreement shall govern,

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

[Signature page follows]

IN WITNESS WHEREOF, Seller has executed this Bill of Sale effective this 16th day of February, 2007.

First National Bank of the South, a national banking organization
By:		(Seal)
Name:	Jerry L. Calvert
Title	President & C.E.O.

By acceptance:
Purchaser:
FIRST NATIONAL HOLDINGS, LLC, a South Carolina limited liability company
By:
Name:	Donald B. Wildman
Title:	Manager

EXHIBIT “A”

Legal Description of Land

EXHIBIT “A”

LEGAL DESCRIPTIONS

North Pine Street Property:

ALL those lots, pieces or parcels of land with improvements located thereon, located, lying and being in the City of Spartanburg, Spartanburg County, South Carolina on the western side of North Pine Street US Highway 176 (R/W varies), containing 2.98 acres, more or less, and being more particularly shown on plat of survey made for First National Holdings, LLC dated November 15, 2006, last revised January 11, 2007, by Site Design, Inc. (Joe F. Gosnell, P.L.S. S. C. Reg. No. 16501) recorded February     , 2007 in Plat Book             , at Page              in the Spartanburg County Register of Deeds Office, to which plat reference is hereby made for a more complete and particular description and with the following metes and bounds, to-wit:

COMMENCING at an old nail in curb located 412.3 feet more or less, from that intersection of the rights of way of North Pine Street US Highway 176 and Saint John Street along a tie line of N 26-40-00 W said point being the POINT OF BEGINNING (P.O.B.);

From said P.O.B. and leaving the right of way of North Pine Street, thence S. 89-45-19 W. 107.01 feet to IPO  ¹/2” rebar; thence S. 38-31-44 W. 166.32 feet to IPO  ¹/2” rebar; thence S. 12-59-37 W. 25.33 feet to IPO  ¹/2” rebar; thence S. 35-29-00 W. 75.79 feet to IPO  ¹/2” rebar; thence S. 52-05-04 E. 32.61 feet to IPO  ¹/2” rebar; thence S. 13-06-08 W. 51.59 feet to IPO  ¹/2” rebar located on the right of way of Saint John Street; thence along the right of way of Saint John Street N 66-50-29 W 38.22 feet to a point; thence N. 67-50-04 W. 59,33 feet to an Old Nail & Cap; thence leaving the right of way of Saint John Street N. 18-46-19 E. 26.44 feet to an Old Nail & Cap; thence N. 18-43-06 E. 35,75 feet to old RR Spike; thence N. 15-39-05 E. 67.76 feet to old RR Spike; thence N. 14-44-54 E. 35.50 feet to Old RR Spike; thence N. 12-24-45 E. 10.53 feet to Mag Nail Set; thence N. 04-54-04 E. 59.93 feet to Old Nail & Cap; thence S. 06-09-50 W. 24.47 feet to a point; thence S. 69-55-21 W. 56.48 feet to IPO 3/8” rebar; thence N. 13-27-48 W. 56.90 feet to IPO  ¹/4” SR Bent; thence N. 69-25-42 E. 75.13 feet to Mag Nail Set; thence N. 06-09-50 E. 75.15 feet to point; thence S. 68-36-40 W. 103.38 feet to IPO  ¹/2” rebar; thence N. 13-16-11 W. 54.19 feet to IPO  ¹/2” RB Bent; thence N. 13-18-21 W. 68.46 feet to IPO  ¹/2” rebar; thence N. 70-10-40 E. 68.16 feet to IPS 5/8” rebar; thence N. 14-34-32 W. 16.95 feet to IPO 5/8” solid rod; thence N. 16-19-51 W. 49.62 feet to an IPO  ¹/2” solid rod; thence N. 68-31-30 E. 28.22 feet to IPO  ¹/2” rebar; thence N. 14-14-23 W. 127.74 Feet to Old Mag Nail; thence along the right of way of Greenleaf Street 20’ R/W, thence N. 75-43-34 E. 50.38 feet to IPO  ¹/2” rebar, thence N. 77-29-16 E. 50.95 feet to IPO  ¹/2” rebar, thence N. 74-51-16 E. 9.39 feet to IPO  ¹/2” R. B. Bent located on the right of way of North Pine Street US Highway 176; thence along the right of way of North Pine Street US Highway 176 the following two (2) calls: S. 28-35-12 E. 113.16 feet to IPO  ¹/2” rebar; S. 26-40-00 E. 414.60 feet to Old Nail in Curb and the P.O.B.

Derivations:

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg, Div. of First National Bank of the South by deed of Robbin Waldrop and Gracie Sue Waldrop recorded on February 8, 2005 in Deed Book 82-G, at Page 702, aforesaid records.

Tax Map Number: 7-12-07-158.00

A portion of the above described property was heretofore conveyed to First National Bank of the South by deed of Bobby J. Crump recorded October 13, 2005 in Deed Book 84-D, at Page 524, aforesaid records.

Tax Map Number: 7-12-07-161.00

A portion of the above described property was heretofore conveyed to First National Bank of the South by deeds recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 72-G at Page 464; Deed Book 72-G at Page 465; and Deed Book 72-G at Page 466.

Tax Map Numbers: P/O 7-12-07-147.00; P/O 7-12-07-147.01 and also 7-12-07-157.00

A portion of the above described property was heretofore conveyed to FIRST NATIONAL BANK OF SPARTANBURG by deed of HBJ PROPERTIES, A SOUTH CAROLINA GENERAL PARTNERSHIP, dated February 22, 2000, recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 71-N, at Page 609.

Tax Map Number: 7-12-07-168.00

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg by deed recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 83-G at Page 402.

Portions of the above described property was heretofore conveyed to First National Bank of Spartanburg by Road Closure Order recorded in Deed Book 72-F at Page 624.)

Tax Map Number: 7-12-07-156.00

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg by deed recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 84-E at Page 180.

Portions of the above described property was heretofore conveyed to First National Bank of Spartanburg by Road Closure Order recorded in Deed Book 84-P at Page 302.)

Tax Map Numbers: 7-12-7-153.00 and 7-12-7-154.00

Boiling Springs Road Property:

ALSO: ALL that lot, piece or parcel of land located in the State of South Carolina, County of Spartanburg, at Boiling Springs, located at the northeastern quadrant of the intersection of Boiling Springs Road (S. C. Highway No. 9) and Swain Avenue, containing 0.946 acres, more or less, and being more particularly shown on plat of survey made for First National Bank of Spartanburg dated August 15, 2000 by John Robert Jennings, P.LS., Surveyor, recorded December 27, 2000 in Plat Book 149, at Page 360 in the Office of the Register of Deeds for Spartanburg County, S. C. See also “ALTA / ACSM Land Title Survey” prepared for First National Holdings, LLC by Joe F. Gosnell, P.L.S., South Carolina Reg. No. 16501 of Site Design, Inc., dated November 7, 2006, last revised on February 8, 2007 (the “Survey”) showing said parcel as having the following metes and bounds, to-wit:

Commencing at an iron pin old 3/4” open top located on the right of way of Boiling Springs Road (SC Hwy 9) (45’ R/W from C/L) as shown on said Survey and being the Point of Beginning (POB).

From said POB, thence along the Boiling Springs Road right of way the following three calls: N. 32-57-13 W. 93.14 feet to IPS 5/8” rebar, N. 33-39-21 W. 84.29 feet to IPS 5/8” rebar, N. 07-29-08 E. 11.91 feet to IPS 5/8” rebar; thence along the 40’ right of way of Swain Avenue the following two calls: N. 49-22-15 E. 172.49 feet to Mag Nail Set, N. 49-24-00 E. 44.51 feet to IPS; thence leaving said right of way and running S. 33-18-35 E. 184.79 feet to IPO 1/2” rebar; thence S. 49-09-22 W. 21.53 feet to IPO 1/2” rebar; thence S. 49-13-08 W. 203.46 feet to IPO 3/4” open top and POB, and containing 41,214 square feet, 0.95 acres, more or less.

This being the same property heretofore conveyed to FIRST NATIONAL BANK OF SPARTANBURG by deed of PATRICK A. TINSLEY dated December 21, 2000, recorded December 27, 2000 in Deed Book 73-D, at Page 422, aforesaid records.

Tax Map Number: 2-44-10-053.00

Property Address: 3090 Boiling Springs Road; Boiling Springs, SC

EXHIBIT “A” LEGAL DESCRIPTION CONTINUED:

THESE BEING THE SAME PROPERTIES HERETOFORE CONVEYED TO FIRST NATIONAL HOLDINGS, LLC, A SOUTH CAROLINA LIMITED LIABILITY COMPANY, BY DEED OF FIRST NATIONAL BANK OF THE SOUTH, ALSO KNOW AS FIRST NATIONAL BANK OF SPARTANBURG, A DIVISION OF FIRST NATIONAL BANK OF THE SOUTH DATED FEBRUARY 6, 2007, AND RECORDED IN THE OFFICE OF THE REGISTER OF DEEDS FOR SPARTANBURG COUNTY, S. C. IN DEED BOOK ,             , at PAGE             .

SCHEDULE OF PERSONAL PROPERTY

All that certain personal property which is a part of that certain construction contract standard form of agreement between First National Bank of Spartanburg and Roebuck Buildings Company originally dated June 5, 2006 as may be amended.

EX-10.10

BLANKET TRANSFER, ASSIGNMENT

AND POST-CLOSING ACTIONS AGREEMENT

THIS Agreement, made and entered into as of the      day of February, 2007, by and between First National Bank of Spartanburg, a division of First National Bank of the South, a national banking organization (hereinafter referred to as “Assignor”) and First National Holdings, a South Carolina limited liability company (hereinafter referred to as “Assignee”) in connection with the consummation of the transactions contemplated in that certain Agreement to Sell, Purchase and Lease dated on or about this date by and between the Assignor as seller and the Assignee as purchaser;

WITNESSETH:

For and in consideration of the sum of Ten and No/100 Dollars ($10.00), the conveyance by Assignor to Assignee of the improved real property described in Exhibit A, attached hereto and incorporated herein by this reference (hereinafter referred to as the “Property”), and the mutual covenants herein contained, the receipt and sufficiency of the foregoing consideration being hereby acknowledged by the parties hereto, Assignor hereby transfers, grants, conveys and assigns to Assignee the following (which is hereinafter collectively referred to as the “Personal Property”);

(a) All of the right, title, interest and benefit of Assignor in, to and under any and all licenses, permits, zoning approvals, and licenses, sewer and water permits and licenses, building permits, certificates of occupancy, curb cut and right-of-way permits, utility permits, drainage rights, permits and agreements, and similar or equivalent private and governmental documents of every kind and character whatsoever pertaining or applicable to or in any way connected with the development, construction, ownership or operation of the Property, including all buildings and other improvements thereon or thereunder; and

(b) All of the right, title, interest and benefit of Assignor in, to and under any and all guaranties, warranties, affidavits, lien waivers and agreements given heretofore and with respect to the construction or composition of all improvements located in, on, upon or under and comprising a part of the Property or with respect to any of the Personal Property, including, without limitation, those warranties contained in those contracts and agreements listed on Exhibit “B” attached hereto and those contracts and agreements listed on Exhibit “B” attached hereto and made a part hereof by this reference;

Assignor will, at its own cost and expense, observe and fully comply with all provisions of law applicable to those items described in sub-paragraph (a) above and in the operation, management, maintenance and ownership of the Property as tenant. Assignor also will, at its own cost and expense faithfully abide by, perform and discharge each and every obligation, covenant and agreement under the agreements listed in Exhibit “B”.

Before June 1, 2007, Assignor shall deliver to Assignee a final Certificate of Occupancy for the building expansion space currently under construction at 215 N. Pine Street, Spartanburg, SC. Assignor shall promptly also take the steps necessary to obtain separate tax parcel status for the Property apart from Assignor’s remaining properties.

In the event Assignor fails to perform under this Agreement in a prompt and timely manner, Assignor shall and does hereby agree to indemnify, defend and to hold Assignee harmless of, for, from and against any and all liability, claim, action, cause of action, loss or damage which Assignee does, may or might incur and of and from any and all claims and demands whatsoever which may be asserted against Assignee by reason of any alleged obligations or undertakings on Assignee’s part to perform or discharge any of the terms, covenants or agreements contained in the agreements described in Exhibit “B” or any other agreements of Assignee in connection with the Property. Should the Assignee incur any such liability, loss or damage, or in the defense of any such claims or demands, the amount thereof, including costs, expenses and attorneys’ fees, Assignor shall reimburse Assignee therefor immediately upon demand.

Assignor does hereby warrant and represent that to the best of its knowledge the Personal Property is not encumbered by any lien, security interest, judgment or other encumbrance, other than liens or encumbrances which have been satisfied and cancelled simultaneously herewith and that Assignor has full right, power and authority to bargain, sell, assign, transfer and deliver the same to Assignee; and Assignor will warrant and forever defend the right and title to said Personal Property unto Assignee against the claims of all persons claiming by, through or under Assignor, but not otherwise.

In furtherance of this Agreement, Assignor hereby acknowledges that from this date Assignee has succeeded to all of its right, title and standing to:

(a) receive the rights and benefits existing now or hereafter pertaining to all rights, title, interests and benefits transferred and assigned hereby but not the obligations or the liabilities which Assignor is retaining and performing in consideration of the payment of the purchase price under Agreement to Sell, Purchase and Lease referenced above; and

(b) institute and prosecute all proceedings and take all action that Assignee, in its sole discretion, may deem necessary or proper to collect, assert or enforce any claim, right or title of any kind in and to any and all rights, title, interests and benefits transferred and assigned hereby.

This Agreement shall be governed by, and construed under, the laws of the State of South Carolina. This Agreement shall inure to the benefit of, and be binding upon, the respective legal representatives, successors and assigns of the parties hereto.

This Agreement shall in no way operate to prevent the Assignee from pursuing any right or remedy which it now has or hereafter may have under the terms or conditions of the other agreements between the parties, or by law, or by statute or in equity and all such rights and remedies shall be cumulative.

IN WITNESS WHEREOF, Assignor has caused this instrument to be executed under seal the day and year first above written.

ASSIGNOR:

First National Bank of Spartanburg, a division of

First National Bank of the South

By:

Name:

Title:

ASSIGNEE:

First National Holdings, LLC

By:

Name:

As Its:

EXHIBIT “A”

LEGAL DESCRIPTION

North Pine Street Property:

ALL those lots, pieces or parcels of land with improvements located thereon, located, lying and being in the City of Spartanburg, Spartanburg County, South Carolina on the western side of North Pine Street US Highway 176 (R/W varies), containing 2.98 acres, more or less, and being more particularly shown on plat of survey made for First National Holdings, LLC dated November 15, 2006, last revised January 11, 2007, by Site Design, Inc. (Joe F. Gosnell, P.L.S. S. C. Reg. No. 16501) recorded February     , 2007 in Plat Book             , at Page      in the Spartanburg County Register of Deeds Office, to which plat reference is hereby made for a more complete and particular description and with the following metes and bounds, to-wit:

COMMENCING at an old nail in curb located 412.3 feet more or less, from that intersection of the rights of way of North Pine Street US Highway 176 and Saint John Street along a tie line of N 26-40-00 W said point being the POINT OF BEGINNING (P.O.B.);

From said P.O.B. and leaving the right of way of North Pine Street, thence S. 89-45-19 W. 107.01 feet to IPO  ¹/2” rebar; thence S. 38-31-44 W. 166.32 feet to IPO  ¹/2” rebar; thence S. 12-59-37 W. 25.33 feet to IPO ½” rebar; thence S. 35-29-00 W. 75.79 feet to IPO  ¹/2” rebar; thence S. 52-05-04 E. 32.61 feet to IPO ½” rebar; thence S. 13-06-08 W. 51.59 feet to IPO ½” rebar located on the right of way of Saint John Street; thence along the right of way of Saint John Street N 66-50-29 W 38.22 feet to a point; thence N. 67-50-04 W. 59.33 feet to an Old Nail & Cap; thence leaving the right of way of Saint John Street N. 18-46-19 E. 26.44 feet to an Old Nail & Cap; thence N. 18-43-06 E. 35.75 feet to old RR Spike; thence N. 15-39-05 E. 67.76 feet to old RR Spike; thence N. 14-44-54 E. 35.50 feet to Old RR Spike; thence N. 12-24-45 E. 10.53 feet to Mag Nail Set; thence N. 04-54-04 E. 59.93 feet to Old Nail & Cap; thence S. 06-09-50 W. 24.47 feet to a point; thence S. 69-55-21 W. 56.48 feet to IPO  ³/8” rebar; thence N. 13-27-48 W. 56.90 feet to IPO  ¹/4” SR Bent; thence N. 69-25-42 E. 75.13 feet to Mag Nail Set; thence N. 06-09-50 E. 75.15 feet to point; thence S. 68-36-40 W. 103.38 feet to IPO  ¹/2” rebar; thence N. 13-16-11 W. 54.19 feet to IPO  ¹/2” RB Bent; thence N. 13-18-21 W. 68.46 feet to IPO ½” rebar; thence N. 70-10-40 E. 68.16 feet to IPS  ⁵/8” rebar; thence N. 14-34-32 W. 16.95 feet to IPO  ⁵/8” solid rod; thence N. 16-19-51 W. 49.62 feet to an IPO ½” solid rod; thence N. 68-31-30 E. 28.22 feet to IPO  ¹/2” rebar; thence N. 14-14-23 W. 127.74 feet to Old Mag Nail; thence along the right of way of Greenleaf Street 20’ R/W, thence N. 75-43-34 E. 50.38 feet to IPO  ¹/2” rebar, thence N. 77-29-16 E. 50.95 feet to IPO ½” rebar, thence N. 74-51-16 E. 9.39 feet to IPO  ¹/2” R. B. Bent located on the right of way of North Pine Street US Highway 176; thence along the right of way of North Pine Street US Highway 176 the following two (2) calls: S. 28-35-12 E. 113.16 feet to IPO  ¹/2” rebar; S. 26-40-00 E. 414.60 feet to Old Nail in Curb and the P.O.B.

Derivations:

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg, Div. of First National Bank of the South by deed of Robbin Waldrop and Gracie Sue Waldrop recorded on February 8, 2005 in Deed Book 82-G, at Page 702, aforesaid records.

Tax Map Number: 7-12-07-158.00

A portion of the above described property was heretofore conveyed to First National Bank of the South by deed of Bobby J. Crump recorded October 13, 2005 in Deed Book 84-D, at Page 524, aforesaid records.

Tax Map Number: 7-12-07-161.00

A portion of the above described property was heretofore conveyed to First National Bank of the South by deeds recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 72-G at Page 464; Deed Book 72-G at Page 465; and Deed Book 72-G at Page 466.

Tax Map Numbers: P/O 7-12-07-147.00; P/O 7-12-07-147.01 and also 7-12-07-157.00

A portion of the above described property was heretofore conveyed to FIRST NATIONAL BANK OF SPARTANBURG by deed of HBJ PROPERTIES, A SOUTH CAROLINA GENERAL PARTNERSHIP, dated February 22, 2000, recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 71-N, at Page 609.

Tax Map Number: 7-12-07-168.00

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg by deed recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 83-G at Page 402.

Portions of the above described property was heretofore conveyed to First National Bank of Spartanburg by Road Closure Order recorded in Deed Book 72-F at Page 624.)

Tax Map Number: 7-12-07-156.00

A portion of the above described property was heretofore conveyed to First National Bank of Spartanburg by deed recorded in the Office of the Register of Deeds for Spartanburg County, S. C. in Deed Book 84-E at Page 180.

Portions of the above described property was heretofore conveyed to First National Bank of Spartanburg by Road Closure Order recorded in Deed Book 84-P at Page 302.)

Tax Map Numbers: 7-12-7-153.00 and 7-12-7-154.00

Boiling Springs Road Property:

ALSO: ALL that lot, piece or parcel of land located in the State of South Carolina, County of Spartanburg, at Boiling Springs, located at the northeastern quadrant of the intersection of Boiling Springs Road (S. C. Highway No. 9) and Swain Avenue, containing 0.946 acres, more or less, and being more particularly shown on plat of survey made for First National Bank of Spartanburg dated August 15, 2000 by John Robert Jennings, P.L.S., Surveyor, recorded December 27, 2000 in Plat Book 149, at Page 360 in the Office of the Register of Deeds for Spartanburg County, S. C. See also “ALTA / ACSM Land Title Survey” prepared for First National Holdings, LLC by Joe F. Gosnell, P.L.S., South Carolina Reg. No. 16501 of Site Design, Inc., dated November 7, 2006, last revised on February 8, 2007 (the “Survey”) showing said parcel as having the following metes and bounds, to-wit:

Commencing at an iron pin old  ³/4” open top located on the right of way of Boiling Springs Road (SC Hwy 9) (45’ R/W from C/L) as shown on said Survey and being the Point of Beginning (POB).

From said POB, thence along the Boiling Springs Road right of way the following three calls: N. 32-57-13 W. 93.14 feet to IPS  ⁵/8” rebar, N. 33-39-21 W. 84.29 feet to IPS  ⁵/8” rebar, N. 07-29-08 E. 11.91 feet to IPS  ⁵/8” rebar; thence along the 40’ right of way of Swain Avenue the following two calls: N. 49-22-15 E. 172.49 feet to Mag Nail Set, N. 49-24-00 E. 44.51 feet to IPS; thence leaving said right of way and running S. 33-18-35 E. 184.79 feet to IPO  ¹/2” rebar; thence S. 49-09-22 W. 21.53 feet to IPO  ¹/2” rebar; thence S. 49-13-08 W. 203.46 feet to IPO  ³/4” open top and POB, and containing 41,214 square feet, 0.95 acres, more or less.

This being the same property heretofore conveyed to FIRST NATIONAL BANK OF SPARTANBURG by deed of PATRICK A. TINSLEY dated December 21, 2000, recorded December 27, 2000 in Deed Book 73-D, at Page 422, aforesaid records.

Tax Map Number: 2-44-10-053.00

Property Address: 3090 Boiling Springs Road; Boiling Springs, SC

EXHIBIT “A” LEGAL DESCRIPTION CONTINUED:

THESE BEING THE SAME PROPERTIES HERETOFORE CONVEYED TO FIRST NATIONAL HOLDINGS, LLC, A SOUTH CAROLINA LIMITED LIABILITY COMPANY, BY DEED OF FIRST NATIONAL BANK OF THE SOUTH, ALSO KNOWN AS FIRST NATIONAL BANK OF SPARTANBURG, A DIVISION OF FIRST NATIONAL BANK OF THE SOUTH DATED FEBRUARY 6, 2007, AND RECORDED IN THE OFFICE OF THE REGISTER OF DEEDS FOR SPARTANBURG COUNTY, S.C. IN DEED BOOK             , at PAGE     .

EXHIBIT B

Construction Contract by and between the Assignor and Roebuck Building Co., originally dated June 5, 2006 as amended.

EX-13

EXHIBIT 13

2006

Annual Report

Industry Experience

Personal Service

Local Decisions

Community Involvement

Stepping Forward –

Building for the Future

Financial Highlights

FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

Selected Financial and Other Data as of or for the years ended December 31 (dollars in thousands, except per share data)

Summary of Consolidated Operations

2006

2005

2004

Interest income

$28,886

$17,341

$10,424

Interest expense

14,725

7,830

3,912

Net interest income

$14,161

$9,511

$6,512

Provision for loan losses

1,192

594

679

Net interest income after provision for loan losses

$12,969

$8,917

$5,833

Non-interest income

2,079

1,855

1,771

Non-interest expense

8,901

6,476

4,966

Net income before taxes

6,147

4,296

2,638

Provision for income taxes

2,095

1,461

823

Net income

$4,052

$2,835

$1,815

Balance Sheet Summary

Total assets

$465,382

$328,679

$236,344

Securities available for sale

63,374

45,151

36,165

Loans, net of unearned income

379,490

251,405

188,507

Allowance for loan losses

3,795

2,719

2,258

Deposits

376,701

271,695

191,811

Borrowings

58,849

32,798

29,264

Shareholders’ equity

26,990

22,029

13,912

Per Share Data and Shares Outstanding(1)

Basic net income

$1.12

$0.90

$0.59

Weighted average basic shares outstanding

3,615,022

3,142,035

3,067,182

Diluted net income

$0.94

$0.73

$0.49

Weighted average diluted shares outstanding

4,324,561

3,933,760

3,728,736

Book value

$7.29

$6.21

$4.53

(1) All share and per share amounts reflect the 3 for 2 stock splits distributed on January 18, 2006, and March 1, 2004, the 6% stock dividend

distributed on May 16, 2006 and the 7% stock dividend to be distributed on March 30, 2007.

Forward-looking statements in this report, such as statements relating to future plans and expectations, are subject to risks and uncertainties, such as a downturn in the economy, greater than expected non-interest expenses or excessive loan losses, which could cause actual results to differ materially from future plans and expectations anticipated by such forward-looking statements. For a more detailed description of factors that could cause such differences, please see our Annual Report on Form 10-K, a copy of which is included with the package provided to its shareholders in connection with the 2007 annual meeting of shareholders.

FIRST NATIONAL®

2006 Annual Report

2

March 16, 2007

Dear Shareholders,

In 2006, First National achieved record results in key performance categories and continued to build for the future.

During the past year, we reported record annual earnings of $4.0 million, or $0.94 per diluted share, an increase of 42.9% over 2005’s result of $2.8 million, or $0.73 per diluted share. These amounts reflect the seven percent stock dividend to be distributed on March 30, 2007.

Total assets ended the year at $465.4 million, an increase of almost 42% over $328.7 million a year ago. Loans increased by 51% to $379.5 million as of December 31, 2006 compared to $251.4 million as of December 31, 2005. Deposits grew by 38.6% to $376.7 million as compared to $271.7 million at the end of 2005. Our credit quality continued to be strong as we experienced consistently low net charge-offs due to the efforts of our seasoned lenders and experienced risk management department.

In 2007, we will work to continue strengthening the foundation for a prosperous future for your company. We are approaching the completion of our new 14,500 square foot operations center, adjacent to our Corporate Headquarters in Spartanburg, SC, which will further support our long-term strategy of expansion. This spring, we plan to open our second full-service branch in the dynamic Charleston market, located downtown on East Bay Street. Construction and transition from our temporary office in Greenville to our Pelham Road full-service branch and Greenville Market Headquarters should be complete by late spring. We look forward to opening our seventh full-service office later this year in the rapidly expanding Greer area. With the February opening of our new loan production office in Rock Hill, we are establishing a presence in York and Lancaster counties.

As we see many construction projects through to completion, we also realize that building community relationships is a key in gredient to our success. Our team does an excellent job of providing first-class customer service, setting us apart in this increasingly competitive industry.

We eagerly look forward to the challenges and achievements that lie ahead in 2007 and beyond. Your continued support, our involved board members and an energetic and dedicated staff make all of our achievements possible. Please let us know of anyone who may be interested in First National Bank as an investor, customer or for potential employment. We always want to share our story and ask you

to “call us first” for all of your banking needs!

Best Regards,

Jerry L. Calvert

President & CEO, Vice Chairman

Gaines W. Hammond, Jr., M.D.

Chairman

2006 Milestones

Opened loan production offices in Columbia and Daniel Island

Distributed a six percent stock dividend

Appointed 12 members to the Charleston Regional Board

Opened full-service branch in Greenville, SC – our fifth overall

Announced plans to enter York and Lancaster counties in SC

Launched newly designed Web site featuring Investor Relations section

Announced stock repurchase program of up to 50,000 shares

Pictured below

(L) Jerry L. Calvert

(R) Gaines W. Hammond, Jr., M.D.

Board of Directors

First National’s Board of Directors develops the long-term strategy to guide the company’s growth. As original organizers of the company, their vision and active involvement emerge as the driving force behind our success. This dedicated group of men and women continue to be recognized for their many personal and professional achievements. We are very fortunate to be led by such an accomplished group with the foresight and commitment needed to create a top-performing financial institution.

SEATED (L to R):

Dr. C. Tyrone Gilmore, Sr.

Vice President/Customer Relations, Compass Learning, Inc.

Chairman Emeritus

Norman F. Pulliam

Chairman, Pulliam Investment Co., Inc.

Vice Chairman Jerry L. Calvert

President & CEO, First National Bancshares, Inc.

Chairman

Gaines W. Hammond, Jr., M.D.

President/Physician, Hammond Urology

Mellnee G. Buchheit

President, Buchheit News Management

Donald B. Wildman

Partner, Johnson, Smith, Hibbard & Wildman, LLP

STANDING (L to R):

W. Russel Floyd, Jr.

President, W.R. Floyd Services, Inc.

C. Dan Adams

President, The Capital Corporation

Coleman L. Young, Jr.

President, CLY, Inc.

William A. Hudson

Partner, Hudson Development Group

Martha C. Chapman

Community Volunteer

Peter E. Weisman

Managing Member, Peter Weisman/ Kinney Hill Associates, LLC

Benjamin R. Hines

President, Spencer/Hines Properties, Inc.

Management Team

The First National management team consists of talented bank officers and managers that guide our daily operations. They also serve our communities as members of local boards and service organizations.

Foster Alexander

AVP – Commercial Banking Officer, Reidville Road

Laura Austill

AVP – Financial Reporting Manager

Ellis Bleakley

AVP – Compliance Officer

David Bowdish

VP – Operations Manager

Joe Childers

Facilities and Security Officer

Van Clark

VP – Human Resource Manager

Renee Cothran

VP – Commercial Banking Officer, Pine Street

Aaron Cullip

Commercial Banking Officer, Greenville

Mary Jane Davidson

VP – City Executive, Spartanburg

Priscilla Dover

Branch Supervisor, Boiling Springs

Shany Ezell

AVP – Mortgage Loan Officer, Pine Street

Randy Foster

AVP – Commercial Banking Officer, Boiling Springs

Charlie Gamble

Branch Manager, Mt. Pleasant

Tilda Garrett

Branch Supervisor, Reidville Road

Pamela Gilliam

VP – Loan Operations Manager

Susan Gustafson

AVP – Business Banking Officer

Pat Harrison

AVP – Branch Manager, Greenville

Matt Klessens

Branch Supervisor, Pine Street

Dawn Kunak

Banking Officer – Executive Assistant

Jason Land

AVP – Marketing Manager

Chris Maxwell

VP – Secondary Marketing Manager

Sandy Meister

VP – Finance Director

Steve Meyer

AVP – Senior Loan Review Officer

Terry Phillips

AVP – Commercial Loan Specialist, Pine Street

Robbie Rohrer

AVP – Senior Credit Analyst

Marilyn Smith

VP – Branch Operations Manager

Richard Spencer

VP – Commercial Banking Officer, Columbia

Carrie Wallace

AVP – Branch Manager, East Bay Street

Scott Warren

VP – Commercial Banking Officer, East Bay Street

Chris Williams

VP – City Executive, Rock Hill

Angela Willingham

Branch Coordinator

FIRST NATIONAL®

2006 Annual Report 4

Senior Leadership Team

This knowledgeable group, which consists of our senior executive officers, regional executive officers and other key lenders and managers, implements our long-term strategy. Under their supervision, the bank strives to operate and expand in high-growth markets while maximizing its resources and creating a productive work environment for the outstanding staff this team oversees.

SEATED (L to R):

Bob Murdoch

EVP – Retail Banking Manager

Kitty Payne

EVP – Chief Financial Officer

Jerry Calvert

President & CEO, Vice Chairman

Louie Blanton

SVP – Commercial Banking & Business Development

David Zabriskie

EVP – Senior Lender

STANDING (L to R):

Peter Seitz

Senior Vice President

John Higdon

SVP – Director of Wholesale Mortgage

Barry Starling

SVP & Regional Executive Officer –Western Region

Bob Whittemore

SVP & Regional Executive Officer –Eastern Region

Rudy Gill

Market President, Charleston

Rick Manley

SVP & Regional Executive Officer –Northern Region

Charleston Regional Board

The twelve members of our Charleston Regional Board serve as ambassadors in this unique community and promote First National values. This distinguished group’s credentials are second to none and include a former South Carolina governor, a Congressional Medal of Honor recipient, prominent attorneys and accomplished business leaders.

W.E. Applegate, III, Esq.

Moore & Van Allen

J. Ron Brinson

Maritime Consultant

Richard H. Coen

President, Coen Capital, LLC

James B. Connelly

Founder, Connelly Management, Inc.

Thomas P. Cothran, Esq.

Cothran Law Office, LLC

The Honorable Dr. James B. Edwards

Governor of SC, Retired

Marvin J. Jenkins

President, Daniel Island Academy

James G. Kennedy, Esq.

Pierce, Herns, Sloan & McLeod

Robert B. Lawson

President, Palmetto Patterns

Major General James E. Livingston

US Marine Corps, Retired

Amy S. Pearson

VP Finance, Daniel Island Company

Charles C. Shaw, Jr.

Owner, MSI Viking Gage, Inc.

FIRST NATIONAL®

2006 Annual Report

5

Building for

Spartanburg Corporate Headquarters

First National is led by our Board of Directors and Executive Officers who have been part of the First National team since inception. Their knowledge and drive guide our Senior Leadership Team including our three Regional Executive Officers. The true heart of our bank consists of dozens of energetic and dedicated tellers, customer service representatives, lenders and operations staff, who are directed by a talented group of managers. Spartanburg serves as the backbone and support center for our growing branch network.

Spartanburg Market

1 Pine Street Office – Corporate Headquarters

215 N. Pine St.

Spartanburg, SC 29302

2 Reidville Road Office

2680 Reidville Rd.

Spartanburg, SC 29301

3 Boiling Springs Office

3090 Boiling Springs Rd.

Boiling Springs, SC 29316

Executive Officers

David Zabriskie

EVP – Senior

Lender

Kitty EVP Financial

Officer

Louie Blanton

SVP – Commercial

Banking & Business

Development

Peter Seitz

Senior Vice

President

Western Region

Barry Starling has formed a team of skilled bankers to execute our plans for the Greenville market where we began our expansion into the Western Region of the state. With Barry’s leadership and the opening of our Greenville Market Headquarters, we foresee considerable opportunities in this market in 2007. Barry is also identifying other high-growth areas for development in the Western Region, which stretches to our state’s Georgia border along South Carolina’s I-85 corridor.

Greenville Market

4 Pelham Road Office – Market Headquarters

3401 Pelham Rd.

Greenville, SC 29615

OPENING SPRING 2007

5 Greer Office

COMING SOON — SUMMER 2007

Barry Starling

SVP & Regional

Executive Officer –

Western Region

Barry Wynn

President

Camp Wynn, CFA

Vice President and

Trust Officer

Colonial Trust Company investment management services in all of our markets through This relationship exemplifies customers with the best financial

FIRST NATIONAL®

2006 Annual Report 6

the Future

Kitty Payne

– Chief

Financial

Officer

Jerry Calvert

President & CEO,

Vice Chairman

Bob Murdoch

EVP – Retail

Banking Manager

Northern Region

Rick Manley

SVP & Regional

Executive Officer –

Northern Region

We continued our tradition of hiring the best

bankers with the recent addition of Rick Manley,

who will lead our development in the newly-formed

Northern Region of our franchise. His

background as Chief Banking Officer for a four-billion-

dollar asset North Carolina bank made

him a perfect choice to oversee our expansion

into this vibrant area of our state. Opening a loan

production office in Rock Hill begins our entry

into the Northern Region which includes rapidly-growing

York and Lancaster counties and the

attractive South Charlotte market. Rick continues

to build relationships as we work toward our

goal of opening full-service banking facilities and

expanding into other high-growth communities.

Rock Hill Market

6 Loan Production Office

724 Arden Way, Suite 230

Rock Hill, SC 29732

Eastern Region

The Eastern Region reaches from the state

capital of Columbia down to the historic

community of Charleston and will encompass

future coastal areas of the state. We have seen

incredible production from this region led by

experienced bankers Bob Whittemore and Rudy

Gill. Through their hard work and numerous

contacts, they have developed a firm foundation

to expand our presence from the Midlands to

the Lowcountry and beyond.

Bert Barre, CFA, CTFA

Vice President and

Trust Officer

Wally Barre

Chairman

Company provides trust and services to First National customers through our strategic alliance with them. exemplifies our commitment to provide our financial services available.

Bob Whittemore

SVP & Regional

Executive Officer –

Eastern Region

Rudy Gill

Market President,

Charleston

Columbia Market

7 Loan Production Office

725 Crosshill Road

Columbia, SC 29205

Charleston Market

8 Mount Pleasant Office

651 Johnnie Dodds Blvd.

Mt. Pleasant, SC 29464

9 East Bay Street Office

140 East Bay St.

Charleston, SC 29401

OPENING APRIL 2007

10 Loan Production Office – Daniel Island

260 Seven Farms Dr., Suite B

Daniel Island, SC 29492

FIRST NATIONAL®

2006 Annual Report 7

Consolidated

Balance Sheets

FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

December 31, 2006 and 2005 (dollars in thousands)

2006

2005

Assets

Cash and due from banks

$8,200

$2,691

Interest-bearing bank balances

5

1,937

Federal funds sold

—  

16,678

Securities available for sale

63,374

45,151

Loans, net of allowance for loan losses of $3,795 and $2,719, respectively

375,695

248,686

Premises and equipment, net

6,906

4,977

Other

11,202

8,559

Total assets

$465,382

$328,679

Liabilities and Shareholders’ Equity

Liabilities

Deposits

Noninterest-bearing

$31,321

$18,379

Interest-bearing

345,380

253,316

Total deposits

376,701

271,695

FHLB advances

37,476

26,612

Junior subordinated debentures

13,403

6,186

Federal funds purchased

7,970

—  

Accrued expenses and other liabilities

2,842

2,157

Total liabilities

438,392

306,650

Commitments and contingencies

Shareholders’ equity

Preferred stock, par value $.01 per share,

10,000,000 shares authorized, no shares issued or outstanding

—  

—  

Common stock, par value $.01 per share,

10,000,000 shares authorized;

3,700,439 and 3,130,767 shares issued and outstanding, respectively

37

31

Additional paid-in capital

26,906

18,189

Unearned ESOP shares

(558)

(599)

Retained earnings

1,071

5,080

Accumulated other comprehensive loss

(466)

(672)

Total shareholders’ equity

26,990

22,029

Total liabilities and shareholders’ equity

$465,382

$328,679

Shares outstanding for 2006 reflect the 7% stock dividend to be distributed on March 30, 2007.

For further financial information about First National Bancshares, Inc., please refer to its Annual Report on Form 10-K, a copy of which is

included with the package provided to its shareholders in connection with the 2007 annual meeting of shareholders.

FIRST NATIONAL®

2006 Annual Report 8

Consolidated

Statements of Income

FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

For the Years Ended December 31, 2006, 2005 and 2004 (dollars in thousands, except share data)

2006

2005

2004

Interest income

Loans

$26,237

$15,461

$8,926

Taxable securities

1,977

1,319

1,190

Nontaxable securities

352

262

230

Federal funds sold and other

320

299

78

Total interest income

28,886

17,341

10,424

Interest expense

Deposits

12,134

6,484

3,397

FHLB advances

1,570

925

269

Junior subordinated debentures

877

380

236

Federal funds purchased

144

41

10

Total interest expense

14,725

7,830

3,912

Net interest income

14,161

9,511

6,512

Provision for loan losses

1,192

594

679

Net interest income after provision for loan losses

12,969

8,917

5,833 Noninterest income

Service charges and fees on deposit accounts

1,080

961

866

Gain on sale of guaranteed portion of SBA loans

322

441

348

Loan service charges and fees

220

163

127

Mortgage loan fees from correspondent bank

179

135

103

Gain on sale of securities available for sale

33

—  

160

Other

245

155

167

Total noninterest income

2,079

1,855

1,771

Noninterest expense

Salaries and employee benefits

5,128

3,744

2,783

Occupancy and equipment expense

660

562

Public relations

609

378

308

Data processing and ATM expense

587

487

378

Telephone and supplies

295

211

137

Professional fees

284

251

231

Other

952

745

567

Total noninterest expense

8,901

6,476

4,966

Net income before income taxes

6,147

4,296

2,638

823

Provision for income taxes

2,095 1,461

1,046

Net income

$4,052

$2,835

$1,815

Net income per share

Basic

$1.12

$0.90

$0.59

Diluted

$0.94

$0.73

$0.49

Weighted average shares outstanding

Basic

3,615,022

3,142,035

3,067,182

Diluted

4,324,561

3,933,760

3,728,736

All share and per share amounts reflect the 3 for 2 stock split distributed on January 18, 2006, the 6% stock dividend distributed on May 16, 2006

and the 7% stock dividend to be distributed on March 30, 2007.

For further financial information about First National Bancshares, Inc., please refer to its Annual Report on Form 10-K, a copy of which is

included with the package provided to its shareholders in connection with the 2007 annual meeting of shareholders.

FIRST NATIONAL®

2006 Annual Report 9

Jerry Calvert

President & CEO

7 Years

Dawn Kunak

Banking Officer &

Executive Assistant

7 Years

Priscilla Dover

Branch Supervisor,

Boiling Springs

6 Years

Kitty Payne

EVP - Chief Financial

Officer

7 Years

Angela Willingham

Branch Coordinator

7 Years

Matt Klessens

Branch Supervisor,

Pine Street

6 Years

David Zabriskie

EVP - Senior Lender

7 Years

Renee Cothran

VP – Commercial

Banking Officer, Pine

Street

7 Years

April Pruitt

Lead Teller, Reidville

Road

6 Years

Beth Wiley

Customer Service

Representative,

Pine Street

5 Years

Bob Murdoch

EVP - Retail Banking

Manager

7 Years

Marilyn Smith

VP – Branch

Operations Manager

7 Years

Kerry Shaw

Loan Operations

Assistant

6 Years

Karen Vassey

Loan Servicing

Supervisor

5 Years

Tilda Garrett

Branch Supervisor,

Reidville Road

6 Years

Lisa Horton

Commercial Loan

Administrative

Assistant, Greenville

6 Years

Tara Kallam

Operations Clerk

5 Years

Diane Smith

Customer Service

Representative,

Boiling Springs

5 Years

Shany Ezell

AVP – Mortgage Loan

Officer, Pine Street

6 Years

Kerry Blanton

Loan Operations

Assistant

5 Years

Sue Waters

Loan Processor

5 Years

Amy Harris

Commercial Loan

Administrative Assistant

5 Years

Celebrating

5 +Years

First National has prided itself on attracting the brightest and most experienced bankers since our inception in July 1999. These twenty-two employees have achieved five or more years of service and form the heart of our bank family. Collectively, they have a combined 400+ years of experience in the banking industry. As our staff continues to grow to accommodate future expansion, these team

members serve as examples for the future faces of our organization.

FIRST NATIONAL®

2006 Annual Report 10

Stock Listing

First National Bancshares, Inc. common stock is listed on

the NASDAQ Global Market under the symbol FNSC. As

of March 1, 2007, there were 610 shareholders of record.

This number does not reflect the number of persons or

entities who hold the stock in nominee or “street” name

through various brokerage firms.

Stock Transfer Agent

First Citizens Bank

Corporate Trust Division

P.O. Box 29522

Raleigh, NC 27626-0522

(877) 685-0576

Annual Meeting

The 2007 Annual Meeting of Shareholders will be held

at 5:30 p.m. on Tuesday, April 17, 2007 at First National’s

Corporate Headquarters building at 215 North Pine

Street, Spartanburg, SC 29302.

Financial Information

We will furnish, upon request, free of charge, copies of our

Annual Report to the SEC on Form 10-K by contacting:

Kitty B. Payne

First National Bancshares, Inc.

P.O. Box 3508

Spartanburg, SC 29304

(864) 948-9001

General Counsel

Nelson Mullins Riley & Scarborough, LLP

P.O. Box 10084

Greenville, SC 29603

Independent Registered

Public Accounting Firm

Elliott Davis, LLC

200 East Broad Street

Greenville, SC 29601

Information reported for trades occurring prior to November 2, 2005, represents high and low bid prices on the OTC Bulletin Board. These bid prices,

which reflect inter-dealer prices, are quotations without retail mark-up, mark-down or commission, and may not represent actual transactions.

The prices shown reflect historical activity and have been adjusted for the 3 for 2 stock splits distributed on January 18, 2006, and March 1, 2004,

the 6% stock dividend distributed on May 16, 2006 and the 7% stock dividend to be distributed on March 30, 2007.

Please see our Annual Report on Form 10-K for a stock performance graph, showing the total shareholder return of our stock over the past five calendar years.

www.firstnational-online.com

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Convenient Online

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FIRST NATIONAL®

Mission Statement

“Our mission is to be the premier bank in our

markets that exceeds the expectations of our

customers, employees, stockholders and the

community and to provide quality, competitive

products and services with a team of friendly

and well-trained professionals.”

Corporate Headquarters

215 N. Pine Street

P.O. Box 3508

Spartanburg, SC 29304

(864) 948-9001

www.firstnational-online.com

FIRST NATIONAL®

EX-21

Exhibit 21

Subsidiaries of the Company

First National Bank of the South

FNSC Capital Trust I

FNSC Statutory Trust II

FNSC Statutory Trust III

EX-31.1

Exhibit 31.1

Rule 13a-14(a) Certification of the Chief Executive Officer

I, Jerry L. Calvert, president and chief executive officer, certify that:

1. I have reviewed this annual report on Form 10-K of First National Bancshares, Inc.

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2007	By:	/s/    JERRY L. CALVERT
		Jerry L. Calvert President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Rule 13a-14(a) Certification of the Chief Financial Officer

I, Kitty B. Payne, chief financial officer, certify that:

1. I have reviewed this annual report on Form 10-K of First National Bancshares, Inc.

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 16, 2007	By:	/s/    KITTY B. PAYNE
		Kitty B. Payne Executive Vice President/Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned, the Chief Executive Officer and the Chief Financial Officer of First National Bancshares, Inc. (the “Company”), each certify that, to his knowledge on the date of this certification:

1. The annual report of the Company for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on this date (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 16, 2007	By:	/s/    JERRY L. CALVERT
		Jerry L. Calvert President and Chief Executive Officer
Date: March 16, 2007	By:	/s/    KITTY B. PAYNE
		Kitty B. Payne Executive Vice President/Chief Financial Officer