**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**ý****QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended March31, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Transition Periodfrom                   to                   **

 

**Commission file number 000-27719**

 

**Greenville First Bancshares, Inc.**

(Exact name of registrant as specified in its charter)

 

| **South Carolina**                       |   | **58-2459561**                       |
|------------------------------------------|--------|--------------------------------------|
| (State of Incorporation)                 |   | (I.R.S. Employer Identification No.) |
|                                     |   |                                 |
| **112 Haywood Road  Greenville, S.C.**   |   | **29607**                            |
| (Address of principal executive offices) |   | (Zip Code)                           |

 

**864-679-9000**

(Telephone Number)

 

**Not Applicable**

(Former name, former addressand former fiscal year,if changed since last report)

 

Check whether the issuer (1)has filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the numberof shares outstanding of each of the issuer’s classes of common equity, as ofthe latest practicable date:

 

1,724,994 sharesof common stock, $.01 par value per share, issued and outstanding as of May 4,2004.

 

Transitional SmallBusiness Disclosure Format (check one): YES o  NO  ý

 

 

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**GREENVILLEFIRST BANCSHARES, INC.**

 

**PARTI.  FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

The financialstatements of Greenville First Bancshares, Inc. and Subsidiaries are set forthin the following pages.

 

2

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***GREENVILLE FIRST BANCSHARES,INC. & SUBSIDIARIES***

***CONSOLIDATED BALANCESHEETS***

 
|                                                                                        |   | **March 31,  2004** |            | **December  31,  2003** |   |
|---------------------------------------------------------------------------------------------|--------|---------------------|-----------------|-------------------------|--------|
|                                                                                        |   | **(Unaudited)**     |            | **(Audited)**           |   |
| **Assets**                                                                                  |   |                |            |                    |   |
| Cash and due from banks                                                                     |   | $                   | 3,267,291       |                    | $      | 4,104,697 |   |
| Federal funds sold                                                                          |   | 4,661,891           |            | 2,842,594               |   |
| Investment securities available for sale                                                    |   | 3,390,436           |            | 3,628,996               |   |
| Investment securities held to maturity-  (market value $15,197,435 and $9,761,305)          |   | 15,045,743          |            | 9,834,324               |   |
| Other investments, at cost                                                                  |   | 3,071,150           |            | 2,296,150               |   |
| Loans, net                                                                                  |   | 226,366,349         |            | 206,076,833             |   |
| Accrued interest                                                                            |   | 807,144             |            | 756,905                 |   |
| Property and equipment, net                                                                 |   | 985,125             |            | 824,259                 |   |
| Other assets                                                                                |   | 1,216,402           |            | 476,463                 |   |
|                                                                                        |   |                |            |                    |   |
| Total assets                                                                                |   | **$**               | **258,811,531** | ** **              | **$**  | **230,841,221** |   |
|                                                                                        |   |                |            |                    |   |
| **Liabilities**                                                                             |   |                |            |                    |   |
| Deposits                                                                                    |   | $                   | 173,235,954     |                    | $      | 168,963,595 |   |
| Official checks outstanding                                                                 |   | 2,247,352           |            | 1,575,357               |   |
| Federal funds purchased and repurchase  agreements                                          |   | 14,631,999          |            | 9,296,999               |   |
| Federal Home Loan Bank advances                                                             |   | 48,000,000          |            | 32,500,000              |   |
| Note payable                                                                                |   | 2,000,000           |            | —                  |   |
| Trust preferred note                                                                        |   | 6,186,000           |            | 6,186,000               |   |
| Accrued interest payable                                                                    |   | 632,660             |            | 572,272                 |   |
| Accounts payable and accrued expenses                                                       |   | 317,288             |            | 560,030                 |   |
|                                                                                        |   |                |            |                    |   |
| Total liabilities                                                                           |   | $                   | 247,251,253     |                    | $      | 219,654,253 |   |
|                                                                                        |   |                |            |                    |   |
| **Commitments and contingencies**                                                           |   |                |            |                    |   |
|                                                                                        |   |                |            |                    |   |
| **Shareholders’ equity**                                                               |   |                |            |                    |   |
| Preferred stock, par value $.01 per share,  10,000,000 shares  authorized, no shares issued |   | —              |            | —                  |   |
| Common stock, par value $.00667  Authorized, 10,000,000 shares. Issued 1,724,994            |   | 11,500              |            | 11,500                  |   |
| Additional paid-in capital                                                                  |   | 10,635,200          |            | 10,635,200              |   |
| Accumulated other comprehensive income                                                      |   | 82,357              |            | 96,997                  |   |
| Retained earnings                                                                           |   | 831,221             |            | 443,271                 |   |
|                                                                                        |   |                |            |                    |   |
| Total shareholders’ equity                                                             |   | 11,560,278          |            | 11,186,968              |   |
|                                                                                        |   |                |            |                    |   |
| Total liabilities and shareholders’ equity                                             |   | **$**               | **258,811,531** | ** **              | **$**  | **230,841,221** |   |

 

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

 

3

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***GREENVILLE FIRSTBANCSHARES, INC. & SUBSIDIARIES***

***CONSOLIDATEDSTATEMENTS OF INCOME***

 
|                                                  |   | **For the  Three Months Ended  March 31,** |      |
|-------------------------------------------------------|--------|--------------------------------------------|-----------|
|                                                  |   | **2004**                                   |      | **2003** |   |
|                                                  |   |                                       |      |   |   |
| **Interest   income**                            |   |                                       |      |   |   |
| Loans                                                 |   | $                                          | 2,737,916 |   | $ | 2,087,996 |   |
| Investment securities                                 |   | 224,814                                    |      | 136,544 |   |
| Federal funds sold                                    |   | 4,590                                      |      | 6,489 |   |
|                                                  |   |                                       |      |   |   |
| Total interest income                                 |   | 2,967,320                                  |      | 2,231,029 |   |
| **Interest   expense**                           |   |                                       |      |   |   |
| Deposits                                              |   | 727,722                                    |      | 729,480 |   |
| Borrowings                                            |   | 306,613                                    |      | 162,470 |   |
| Total interest expense                                |   | 1,034,335                                  |      | 891,950 |   |
|                                                  |   |                                       |      |   |   |
| Net interest income before provision for  loan losses |   | 1,932,985                                  |      | 1,339,079 |   |
| Provision for loan losses                             |   | 350,000                                    |      | 300,000 |   |
|                                                  |   |                                       |      |   |   |
| Net interest income after provision for  loan losses  |   | 1,582,985                                  |      | 1,039,079 |   |
|                                                  |   |                                       |      |   |   |
| **Noninterest income**                                |   |                                       |      |   |   |
| Loan fee income                                       |   | 26,035                                     |      | 44,354 |   |
| Service fees on deposit accounts                      |   | 66,750                                     |      | 59,729 |   |
| Other income                                          |   | 69,538                                     |      | 43,070 |   |
|                                                  |   |                                       |      |   |   |
| Total noninterest income                              |   | 162,323                                    |      | 147,153 |   |
|                                                  |   |                                       |      |   |   |
| **Noninterest expenses**                              |   |                                       |      |   |   |
| Salaries and benefits                                 |   | 598,645                                    |      | 479,278 |   |
| Professional fees                                     |   | 48,933                                     |      | 33,601 |   |
| Marketing                                             |   | 51,279                                     |      | 35,349 |   |
| Insurance                                             |   | 30,516                                     |      | 26,685 |   |
| Occupancy                                             |   | 140,770                                    |      | 161,397 |   |
| Data processing and related costs                     |   | 181,471                                    |      | 133,057 |   |
| Telephone                                             |   | 6,470                                      |      | 5,470 |   |
| Other                                                 |   | 61,498                                     |      | 42,161 |   |
|                                                  |   |                                       |      |   |   |
| Total noninterest expenses                            |   | 1,119,582                                  |      | 916,998 |   |
|                                                  |   |                                       |      |   |   |
| Income before income tax expense                      |   | 625,726                                    |      | 269,234 |   |
|                                                  |   |                                       |      |   |   |
| **Income tax expense**                                |   | 237,776                                    |      | 102,307 |   |
|                                                  |   |                                       |      |   |   |
| **Net income**                                        |   | $                                          | 387,950   |   | $ | 166,927 |   |
|                                                  |   |                                       |      |   |   |
| **Earnings per common share:**                        |   |                                       |      |   |   |
| Basic                                                 |   | $                                          | .22       |   | $ | .10 |   |
| Diluted                                               |   | $                                          | .19       |   | $ | .09 |   |
|                                                  |   |                                       |      |   |   |
| **Weighted average common shares outstanding**        |   |                                       |      |   |   |
| Basic                                                 |   | 1,724,994                                  |      | 1,724,994 |   |
| Diluted                                               |   | 2,007,634                                  |      | 1,834,053 |   |

 

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

 

4

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***GREENVILLE FIRSTBANCSHARES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYAND COMPREHENSIVE INCOMEFOR THE THREE MONTHS ENDED MARCH  31,2004 AND 2003***

 
|                                                      |   | **Common stock** |       | **Additional  paid-in  capital** |       | **Accumulated  other  comprehensive  income** |   | **Retained  Income  (deficit)** |       | **Total  shareholders’  equity** |        |
|-----------------------------------------------------------|--------|------------------|------------|----------------------------------|------------|-----------------------------------------------|--------|---------------------------------|------------|---------------------------------------|-------------|
|                                                      |   | **Shares**       |       | **Amount**                       |       |                                          |   |                            |       |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| **December 31, 2002**                                     |   | 1,150,000        |       | $                                | 11,500     |                                          | $      | 10,635,200                      |       | $                                     | 147,733     |   | $ | (562,644 | ) | $ | 10,231,789 |   |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| Net income                                                |   | —           |       | —                           |       | —                                        |   | —                          |       | 166,927                               |        | 166,927 |   |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| Comprehensive loss, net of tax -                          |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| Unrealized holding gain on securities  available for sale |   | —           |       | —                           |       | —                                        |   | (7,773                          | )          | —                                |        | (7,773 | ) |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| Comprehensive income                                      |   | —           |       | —                           |       | —                                        |   | —                          |       | —                                |        | 159,154 |   |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| **March 31, 2003**                                        |   | **1,150,000**    | ** ** | **$**                            | **11,500** | ** **                                    | **$**  | **10,635,200**                  | ** ** | **$**                                 | **139,960** | ** ** | **$** | **(395,717** | **)** | **$** | **10,390,943** | ** ** |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| **December 31, 2003**                                     |   | 1,724,994        |       | $                                | 11,500     |                                          | $      | 10,635,200                      |       | $                                     | 96,997      |   | $ | 443,271 |   | $ | 11,186,968 |   |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| Net   income                                         |   | —           |       | —                           |       | —                                        |   | —                          |       | 387,950                               |        | 387,950 |   |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| Comprehensive income, net of tax -                        |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| Unrealized holding loss on securities  available for sale |   | —           |       | —                           |       | —                                        |   | (14,640                         | )          | —                                |        | (14,640 | ) |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| Comprehensive income                                      |   | —           |       | —                           |       | —                                        |   | —                          |       | —                                |        | 373,310 |   |
|                                                      |   |             |       |                             |       |                                          |   |                            |       |                                  |        |   |   |
| **March 31, 2004**                                        |   | **1,724,994**    | ** ** | **$**                            | **11,500** | ** **                                    | **$**  | **10,635,200**                  | ** ** | **$**                                 | **82,357**  | ** ** | **$** | **831,221** | ** ** | **$** | **11,560,278** | ** ** |

 

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

 

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***GREENVILLE FIRSTBANCSHARES, INC.AND SUBSIDIARIES***

***CONSOLIDATEDSTATEMENTS OF CASH FLOWS***

 
|                                                                           |   | **For the  Three Months Ended  March 31,** |          |
|--------------------------------------------------------------------------------|--------|--------------------------------------------|---------------|
|                                                                           |   | **2004**                                   |          | **2003** |   |
|                                                                           |   |                                       |          |   |   |
| **Operating  activities**                                                      |   |                                       |          |   |   |
| Net income                                                                     |   | $                                          | 387,950       |   | $ | 166,927 |   |
| Adjustments to reconcile net income to cash provided by operating  activities: |   |                                       |          |   |   |
| Provision for loan losses                                                      |   | 350,000                                    |          | 300,000 |   |
| Depreciation and other amortization                                            |   | 33,902                                     |          | 34,982 |   |
| Accretion and amortization of securities discounts and premiums, net           |   | 20,506                                     |          | 26,192 |   |
| Increase in other assets, net                                                  |   | (790,178                                   | )             | (253,301 | ) |
| Increase in other liabilities, net                                             |   | 497,183                                    |          | 111,180 |   |
|                                                                           |   |                                       | ** **    |   | ** ** |
| Net cash provided by operating activities                                      |   | 499,363                                    |          | 385,980 |   |
|                                                                           |   |                                       | ** **    |   | ** ** |
| **Investing  activities**                                                      |   |                                       |          |   |   |
| Increase (decrease) in cash realized from:                                     |   |                                       |          |   |   |
| Origination of loans, net                                                      |   | (20,639,516                                | )             | (9,974,871 | ) |
| Purchase of property and equipment                                             |   | (194,768                                   | )             | (22,707 | ) |
| Purchase of investment securities:                                             |   |                                       |          |   |   |
| Held to maturity                                                               |   | (5,586,017                                 | )             | — |   |
| Other investments                                                              |   | (1,225,000                                 | )             | (800,000 | ) |
| Payments and maturity of investment securities:                                |   |                                       |          |   |   |
| Available for sale                                                             |   | 207,567                                    |          | 9,114,118 |   |
| Held to maturity                                                               |   | 362,903                                    |          | — |   |
| Other investments                                                              |   | 450,000                                    |          | — |   |
|                                                                           |   |                                       |          |   |   |
| Net cash used for investing activities                                         |   | (26,624,831                                | )             | (1,683,460 | ) |
|                                                                           |   |                                       |          |   |   |
| **Financing  activities**                                                      |   |                                       |          |   |   |
| Increase in deposits, net                                                      |   | 4,272,359                                  |          | 3,533,884 |   |
| Increase(decrease) in short-term borrowings                                    |   | 5,335,000                                  |          | (7,154,000 | ) |
| Increase in other borrowings                                                   |   | 2,000,000                                  |          | 500,000 |   |
| Increase in Federal Home Loan Bank advances                                    |   | 15,500,000                                 |          | 12,500,000 |   |
|                                                                           |   |                                       |          |   |   |
| Net cash provided by financing activities                                      |   | 27,107,359                                 |          | 9,379,884 |   |
|                                                                           |   |                                       |          |   |   |
| Net increase in cash and cash equivalents                                      |   | 981,891                                    |          | 8,082,404 |   |
|                                                                           |   |                                       |          |   |   |
| **Cash and  cash equivalents at beginning of  the  year**                 |   | 6,947,291                                  |          | 4,471,026 |   |
|                                                                           |   |                                       |          |   |   |
| **Cash and  cash equivalents at end of the year**                              |   | **$**                                      | **7,929,182** | ** ** | **$** | **12,553,430** | ** ** |
|                                                                           |   |                                       |          |   |   |
| **Supplemental  information**                                                  |   |                                       |          |   |   |
| **Cash paid  for**                                                             |   |                                       |          |   |   |
| Interest                                                                       |   | $                                          | 973,947       |   | $ | 889,898 |   |
|                                                                           |   |                                       |          |   |   |
| Income taxes                                                                   |   | $                                          | 580,040       |   | $ | 382,302 |   |
|                                                                           |   |                                       |          |   |   |
| **Schedule  of non-cash transactions**                                         |   |                                       |          |   |   |
| Unrealized gain (loss) on securities, net of income taxes                      |   | $                                          | (14,640       | ) | $ | (7,773 | ) |

 

Seenotes to consolidated financial statements that are an integral part of theseconsolidated

 

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***GREENVILLE FIRSTBANCSHARES, INC.  AND SUBSIDIARIES***

***NOTES TOCONSOLIDATED FINANCIAL STATEMENTS***

 

**Note 1 – Nature of Business and Basis ofPresentation**

 

**Business activity**

 

GreenvilleFirst Bancshares, Inc.** (the “company”) is a South Carolina corporation that owns all ofthe capital stock of Greenville First Bank, N.A.**** (the “bank”) and all of the stock of Greenville First StatutoryTrust I (the “Trust”).  The bank is anational bank organized under the laws of the United States located in GreenvilleCounty, South Carolina.  The bank isprimarily engaged in the business of accepting demand deposits and savingsdeposits insured by the Federal Deposit Insurance Corporation, and providingcommercial, consumer and mortgage loans to the general public.  The Trust is a special purpose subsidiaryfor the sole purpose of issuing trust preferred securities.

 

**Basis of Presentation**

 

Theaccompanying financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-QSB. Accordingly, they do not include all the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the three-month periodended March 31, 2004 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2004.  For further information, refer to the consolidated financialstatements and footnotes thereto included in the company’s Form 10-KSB(Registration Number 000-27719) as filed with the Securities and ExchangeCommission.  The consolidated financialstatements include the accounts of Greenville First Bancshares, Inc., and itswholly owned subsidiaries Greenville First Bank, N.A., and Greenville FirstStatutory Trust I.

 

**Cash and Cash Equivalents**

 

For purposesof the Consolidated Statement of Cash Flows, cash and federal funds sold areincluded in “cash and cash equivalents.” These assets have contractual maturities of less than three months.

 

**Note 2 – Stock Split**

 

On November17, 2003, shareholders of record as of November 3, 2003, received oneadditional share of stock for every two shares of stock owned prior to the 3for 2 stock split.  All factional shareswere paid in cash.  The earnings pershare amounts for all periods shown have been adjusted to reflect the 3 for 2split.

 

**Note 3 – Note Payable**

 

At March 31,2004, the company had a $4.5 million revolving line of credit with anotherbank.  At March 31, 2004, theoutstanding balance was $2.0 million. This line of credit has a maturity of March 26, 2005. The line of creditbears interest at a rate of three-month libor plus 2.00%, which at March 31,2004 was 3.09%.  The company has pledgedthe stock of the bank as collateral for this line of credit. The line of creditagreement contains various covenants related to earnings and assetquality.  As of March 31, 2004, thecompany was in compliance with all covenants.

 

7

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**Note 4 – Earnings per Share**

 

The following schedule reconciles the numerators and denominators ofthe basic and diluted earnings per share computations for the three monthsended March 31, 2004 and 2003.  Dilutivecommon shares arise from the potentially dilutive effect of Greenville FirstBancshares, Inc.’s stock options and warrants that are outstanding.  The assumed conversion of stock options andwarrants can create a difference between basic and dilutive net income percommon share.  The numbers of shares andthe earnings per share have been adjusted for the 3 for 2 stock split.

 

|                              |   | **Three  Months Ended March 31,** |    |
|-----------------------------------|--------|-----------------------------------|---------|
|                              |   | **2004**                          |    | **2003** |   |
|                              |   |                              |    |   |   |
| Basic Earnings Per Share          |   |                              |    |   |   |
| Average common shares             |   | 1,724,994                         |    | 1,724,994 |   |
| Net income                        |   | $                                 | 387,950 |   | $ | 166,927 |   |
| Earnings per share                |   | $                                 | .22     |   | $ | .10 |   |
|                              |   |                              |    |   |   |
| Diluted Earnings Per Share        |   |                              |    |   |   |
| Average common shares outstanding |   | 1,724,994                         |    | 1,724,994 |   |
| Average dilutive common shares    |   | 282,640                           |    | 109,059 |   |
| Adjusted average common shares    |   | 2,007,634                         |    | 1,834,053 |   |
| Net income                        |   | $                                 | 387,950 |   | $ | 166,927 |   |
| Earnings per share                |   | $                                 | .19     |   | $ | .09 |   |

 

**Note 5 – Reclassifications**

 

Certainamounts, previously reported, have been reclassified to state all periods on acomparable basis that had no effect on shareholder’s equity or net income.

 

**Note 6 – Accounting for Variable InterestEntities**

 

Effective January 1, 2004, the Company adopted FASBInterpretation No. 46, (“FIN 46”), “Consolidation of Variable InterestEntities,” which was revised in December 2003, which addresses consolidation bybusiness enterprises of variable interest entities. Under FIN 46, an enterprisethat holds significant variable interest in a variable interest entity but isnot the primary beneficiary is required to disclose the nature, purpose, size,and activities of the variable interest entity, its exposure to loss as aresult of the variable interest holder’s involvement with the entity, and thenature of its involvement with the entity and date when the involvement began.The primary beneficiary of a variable interest entity is required to disclosethe carrying amount and classification of consolidated assets that arecollateral for the variable interest entity’s obligations, and any lack ofrecourse by creditors (or beneficial interest holders) of a consolidatedvariable interest entity to the general credit of the primary beneficiary. Inaccordance with the revised rules, the Company deconsolidated its trustsubsidiary at March 31, 2004, which had been formed for the sole purpose ofraising capital by issuing preferred securities to institutional investors. Thedeconsolidation of this wholly-owned subsidiary, increased both the Company’sother assets by $186,000, and the debt associated with trust preferred note.The full and unconditional guarantee by the Company for the preferredsecurities remains in effect.

 

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**Note 7 – Stock Based Compensation**

 

The companyhas a stock-based employee compensation plan. The company accounts for the plan under the recognition and measurementprinciples of Accounting Principles Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees,* and related Interpretations.  No stock-based employee compensation cost isreflected in net income, as all stock options granted under these plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The following tableillustrates the effect on net income and earnings per share if the company hadapplied the fair value recognition provisions of Financial Accounting StandardsBoard (“FASB”), Statement of Financial Accounting Standards (“SFAS”) SFAS No.123, *Accountingfor Stock-Based Compensation,* to stock-based employee compensation.

 

 

|                                                                                                                                                            |   | **For the  Three Months ended March 31,** |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-------------|
|                                                                                                                                                            |   | **2004**                                  |        | **2003** |   |
|                                                                                                                                                            |   |                                      |        |   |   |
| Net income, as reported                                                                                                                                         |   | $                                         | 387,950     |   | $ | 166,927 |   |
| Deduct:   Total stock-based employee compensation expense determined  under fair value based method for all  awards,  net of related tax effects |   | (20,719                                   | )           | (19,613 | ) |
|                                                                                                                                                            |   |                                      |        |   |   |
| Pro forma net income                                                                                                                                            |   | **$**                                     | **367,231** | ** ** | **$** | **147,314** | ** ** |
|                                                                                                                                                            |   |                                      |        |   |   |
| Earnings   per common share-adjusted for 3 for 2 stock split:                                                                                              |   |                                      |        |   |   |
| Basic - as reported                                                                                                                                             |   | **$**                                     | **.22**     | ** ** | **$** | **.10** | ** ** |
| Basic - pro forma                                                                                                                                               |   | **$**                                     | **.21**     | ** ** | **$** | **. 09** | ** ** |
|                                                                                                                                                            |   |                                      | ** **  |   | ** ** |
| Diluted - as reported                                                                                                                                           |   | **$**                                     | **.19**     | ** ** | **$** | **.09** | ** ** |
| Diluted - pro-forma                                                                                                                                             |   | **$**                                     | **.18**     | ** ** | **$** | **.08** | ** ** |

 

The fair value of the option grant is estimated on the date of grantusing the Black-Scholes option-pricing model. The following assumptions were used for grants: expected volatility of10% for 2004 and 2003, risk-free interest rate of 3.00% for 2004 and 2003respectively, expected lives of the options 10 years, and the assumed dividendrate was zero.

 

9

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**Item 2. Management’s Discussion and Analysis or Plan of Operation.**

 

**DISCUSSION OF FORWARD-LOOKINGSTATEMENTS**

 

The following is our discussion and analysis ofcertain significant factors that have affected our financial position andoperating results and those of our subsidiaries, Greenville First Bank, N.A.,during the periods included in the accompanying financial statements.  This commentary should be read inconjunction with the financial statements and the related notes and the otherstatistical information included in this report.

 

This report contains “forward-looking statements”relating to, without limitation, future economic performance, plans andobjectives of management for future operations, and projections of revenues andother financial items that are based on the beliefs of management, as well asassumptions made by and information currently available to management.  The words “may,” “will,” “anticipate,”“should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,”and “intend,” as well as other similar words and expressions of the future, areintended to identify forward-looking statements.  Our actual results may differ materially from the resultsdiscussed in the forward-looking statements, and our operating performance eachquarter is subject to various risks and uncertainties that are discussed indetail in our filings with the Securities and Exchange Commission, including,without limitation:

 

•                  significantincreases in competitive pressure in the banking and financial servicesindustries;

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

•                  changes inpolitical conditions or the legislative or regulatory environment;

•                  general economicconditions, either nationally or regionally and especially in primary servicearea, becoming less favorable than expected resulting in, among other things, adeterioration in credit quality;

•                  changesoccurring in business conditions and inflation;

•                  changes intechnology;

•                  changes inmonetary and tax policies;

•                  the level ofallowance for loan loss;

•                  the rate ofdelinquencies and amounts of charge-offs;

•                  the rates ofloan growth;

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

•                  loss of consumerconfidence and economic disruptions resulting from terrorist activities;

•                  changes in thesecurities markets; and

•                  other risks anduncertainties detailed from time to time in our filings with the Securities andExchange Commission.

 

#### **CRITICAL ACCOUNTING POLICIES**

 

We haveadopted various accounting policies that govern the application of accountingprinciples generally accepted in the United States in the preparation of ourfinancial statements.  Our significantaccounting policies are described in the footnotes to the consolidatedfinancial statements at December 31, 2003 as filed on our annual report on Form10-KSB.

 

Certainaccounting policies involve significant judgments and assumptions by us thathave a material impact on the carrying value of certain assets andliabilities.  We consider theseaccounting policies to be critical accounting policies.  The judgment and assumptions we use arebased on historical experience and other factors, which we believe to bereasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actualresults could differ from these judgments and estimates that could have amaterial impact on our carrying values of assets and liabilities and ourresults of operations.

 

We believe theallowance for loan losses is a critical accounting policy that requires themost significant judgment and estimates used in preparation of our consolidatedfinancial statements. Refer to the portion of this discussion that addressesour allowance for loan losses for a description of our processes andmethodology for determining our allowance for loan losses.

 

10

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**GENERAL**

 

The followingis a discussion of our financial condition as of March 31, 2004 and the resultsof operations for the three months ended March 31, 2004.  These comments should be read in conjunctionwith our consolidated financial statements and accompanying consolidatedfootnotes appearing in this report.  Thesignificant accounting policies are described throughout the Management andDiscussion section of this document.

 

**NATIONALAND ECONOMIC EVENTS**

 

Nationally, during mostof 2001 and during 2002, the United States experienced a slowing economyfollowing a tenth year of expansion. During this period, the economy was also affected by lower returns andexpectations of the stock markets. Economic data led the Federal Reserve to begin an aggressive program ofrate cutting, which moved the Federal Funds rate down 11 times during 2001 fora total reduction of 475 basis points, bringing the Federal Funds rate to itslowest level in 40 years.  During thefourth quarter of 2002, and the first quarter of 2003, the Federal Reservereduced the Federal Funds rate down an additional 75 basis points.

 

Despite sharply lowershort-term rates, stimulus to the economy over the last twelve months has beenmuted and consumer demand and business investment activity has remained weak.The financial markets are operating now under very low historical interestrates. As a result of these unusual conditions, Congress passed an economicstimulus plan. However, during the first quarter of 2004, many economistsbelieve the economy is beginning to show signs of strenthening and that theFederal Reserve may begin increasing interest rates during the last sevenmonths of 2004.  No assurance can begiven that the Federal Reserve will take such action.  We continue to believe that the markets we serve generallyperform better than national markets, even in times of recession.

 

**INCOMESTATEMENT REVIEW**

 

**NetInterest Income**

 

Net interest income, thelargest component of our income, was $1,932,985 in the first three months of2004 compared to $1,339,079 during the same period in 2003, or an increase of44.4%. The level of net interest income is determined by the level of earningassets and the successful managing of the net interest margin. Changes ininterest rates paid on assets and liabilities, the rate of growth of the assetand liability base, the ratio of interest-earning assets to interest-bearingliabilities, and management of the balance sheet’s interest rate sensitivityall factor into changes in net interest income.

 

 Interest income for the 2004 period of$2,967,320 consisted of $2,737,916 on loans, $224,814 in investments, and$4,590 on federal funds sold.  Interestincome for same 2003 period of $2,231,029 included $2,087,996 on loans,$136,544 on investments, and $6,489 on federal funds sold.

 

 Interest expense in the first quarter of 2004of $1,034,335 consisted of $727,722 related to deposits and $306,613 related toborrowings. Interest expense in the first quarter of 2003 of $891,950 consistedof $729,480 related to deposits and $162,470 related to borrowings.

 

11

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**Net Interest Income, continued**

 

The following table setsforth, for the three months ended March 31, 2004 and 2003, information relatedto our average balance sheet and average yields on assets and average costs ofliabilities.  We derived these yields bydividing annualized income or expense by the average balance of thecorresponding assets or liabilities.  Wederived average balances from the daily balances throughout the periodsindicated.

 

**Average Balances, Income and Expenses, and Rates(in $000’s)**

 
|                                            |   | **For the  three months ended March 31,** |    |
|-------------------------------------------------|--------|-------------------------------------------|---------|
|                                            |   | **2004**                                  |    | **2003** |   |
|                                            |   | **Average  Balance**                      |    | **Income/  Expense** |   | **Yield/  Rate** |   | **Average  Balance** |   | **Income  Expense** |   | **Yield/  Rate** |   |
|                                            |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Earning Assets:                                 |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                              |   | $                                         | 2,150   |   | $ | 5 |   | .94 | % | $ | 2,351 |   | $ | 7 |   | 1.21 | % |
| Investment securities                           |   | 20,316                                    |    | 224 |   | 4.43 | % | 13,773 |   | 136 |   | 4.00 | % |
| Loans                                           |   | 216,824                                   |    | 2,738 |   | 5.08 | % | 154,242 |   | 2,088 |   | 5.49 | % |
| Total earning-assets                            |   | 239,290                                   |    | 2,967 |   | 4.99 | % | 170,366 |   | 2,231 |   | 5.31 | % |
| Non-earning assets                              |   | 6,640                                     |    |   |   |   |   | 6,206 |   |   |   |   |   |
| Total assets                                    |   | $                                         | 245,930 |   |   |   |   |   | $ | 176,572 |   |   |   |   |   |
|                                            |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                    |   | $                                         | 33,770  |   | $ | 47 |   | .56 | % | $ | 27,584 |   | $ | 32 |   | .47 | % |
| Savings & money market                      |   | 27,429                                    |    | 59 |   | .87 | % | 20,500 |   | 33 |   | ..65 | % |
| Time deposits                                   |   | 106,715                                   |    | 622 |   | 2.34 | % | 84,764 |   | 664 |   | 3.18 | % |
| Total interest-bearing deposits                 |   | 167,914                                   |    | 728 |   | 1.74 | % | 132,848 |   | 729 |   | 2.23 | % |
| FHLB advance                                    |   | 43,846                                    |    | 197 |   | 1.81 | % | 21,167 |   | 118 |   | 2.26 | % |
| Other borrowings                                |   | 19,866                                    |    | 109 |   | 2.21 | % | 9,704 |   | 45 |   | 1.88 | % |
| Total interest-bearing liabilities              |   | 231,626                                   |    | 1,034 |   | 1.80 | % | 163,719 |   | 892 |   | 2.21 | % |
| Non-interest bearing liabilities                |   | 2,679                                     |    |   |   |   |   | 2,354 |   |   |   |   |   |
| Shareholders’ equity                       |   | 11,625                                    |    |   |   |   |   | 10,499 |   |   |   |   |   |
| Total liabilities and shareholders’ equity |   | $                                         | 245,930 |   |   |   |   |   | $ | 176,572 |   |   |   |   |   |
|                                            |   |                                      |    |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                             |   |                                      |    |   |   | 3.19 | % |   |   |   |   | 3.10 | % |
| Net interest income / margin                    |   |                                      |    | $ | 1,933 |   | 3.25 | % |   |   | $ | 1,339 |   | 3.19 | % |

 

Our net interest spreadwas 3.19% for the three months ended March 31, 2004 as compared to 3.10% forthe three months ended March 31, 2003. The net interest spread is the difference between the yield we earn onour interest-earning assets and the rate we pay on our interest-bearing liabilities.

 

Our  net interest margin for the period endedMarch 31, 2004 was 3.25% as compared to 3.19% for the three months ended March31, 2003.  During the first quarter of2004, earning assets averaged $239.3 million as compared to $170.4 million in thefirst quarter of 2003.  The net interestmargin is calculated as net interest income divided by year-to-date averageearning assets.

 

In pricing deposits, weconsidered our liquidity needs, the direction and levels of interest rates andlocal market conditions.  As such,higher rates have been paid initially to attract deposits.

 

12

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**Rate/VolumeAnalysis**

 

Net interest income canbe analyzed in terms of the impact of changing rates and changing volume. Thefollowing table sets forth the effect which the varying levels of earningassets and interest-bearing liabilities and the applicable rates have had onchanges in net interest income for the periods presented.

 
|                    |   | **March 31,  2004 vs 2003**     |   | **March 31,  2003 vs 2002** |   |
|-------------------------|--------|---------------------------------|--------|-----------------------------|--------|
|                    |   | **Increase  (Decrease) Due to** |   |                        |   | **Increase  (Decrease) Due to** |   |   |   |
|                    |   | **Volume**                      |   | **Rate**                    |   | **Rate/  Volume** |   | **Total** |   | **Volume** |   | **Rate** |   | **Rate/  Volume** |   | **Total** |   |
|                    |   |                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest income**     |   |                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans                   |   | $                               | 857    |                        | (158   | ) | (49 | ) | 650 |   | 753 |   | (171 | ) | (81 | ) | 501 |   |
| Investment securites    |   | 65                              |   | 15                          |   | 8 |   | 88 |   | 6 |   | (49 | ) | (2 | ) | (45 | ) |
| Federal funds sold      |   | (1                              | )      | (2                          | )      | 1 |   | (2 | ) | (12 | ) | (7 | ) | 4 |   | (15 | ) |
| Total interest income   |   | 921                             |   | (145                        | )      | (40 | ) | 736 |   | 747 |   | (227 | ) | (79 | ) | 441 |   |
|                    |   |                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest expense**    |   |                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                |   | 195                             |   | (160                        | )      | (36 | ) | (1 | ) | 207 |   | (195 | ) | (53 | ) | (41 | ) |
| FHLB advances           |   | 128                             |   | (24                         | )      | (25 | ) | 79 |   | 128 |   | (16 | ) | (43 | ) | 69 |   |
| Other borrowings        |   | 48                              |   | 8                           |   | 8 |   | 64 |   | 32 |   | (6 | ) | (8 | ) | 18 |   |
| Total interest expense  |   | 371                             |   | (176                        | )      | (53 | ) | 142 |   | 367 |   | (217 | ) | (104 | ) | 46 |   |
|                    |   |                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net interest income** |   | $                               | 550    |                        | 31     |   | 13 |   | 594 |   | 380 |   | (10 | ) | 25 |   | 395 |   |

 

**Provisionfor Loan Losses**

 

Included in the results of operations for the periods ended March 31,2004 and 2003 is a non-cash expense of $350,000 and $300,000, respectively, relatedto the provision for loan losses. The loan loss reserve was $3.0 million and$2.7 million as of March 31, 2004 and December 31, 2003, respectively. Theallowance for loan losses as a percentage of gross loans was 1.33% at March 31,2004 and was 1.30% at December 31, 2003. The loan portfolio is periodicallyreviewed to evaluate the outstanding loans and to measure both the performanceof the portfolio and the adequacy of the allowance for loan losses.Management’s judgment as to the adequacy of the allowance is based upon anumber of assumptions about future events that it believes to be reasonable,but which may or may not be accurate. Because of the inherent uncertainty ofassumptions made during the evaluation process, there can be no assurance that loanlosses in future periods will not exceed the allowance for loan losses or thatadditional allocations will not be required. For the three months ended March31, 2004, we reported net charge-offs of $12,045.    For the three months ended March 31, 2003, we reported netcharge-offs of $4,969.

 

**Noninterest Income and Expense**

 

Noninterest income in first quarter 2004 was$162,323, an increase of 10.32% over noninterest income of $147,153 in the sameperiod in 2003.  This increase wasprimarily due to increases in service charges on deposits, increases in feescharged on ATM transactions, partly offset by lower loan fees received on theorigination of mortgage loans that were sold.

 

We incurred general and administrative expenses of$1.1 million for the three months ended March 31, 2004 compared to $916,998 forthe 2003 period.  The $202,584additional general and administrative expenses resulted primarily from theadditional staff hired during 2003 to handle the current and anticipated futuregrowth in both loans and deposits.

 

13

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**Noninterest Income and Expense, continued**

 

Salaries and benefits in 2004 were $598,645, or anincrease of $119,367.  Salaries andbenefits represented 53.5% of the total noninterest expense.  Salaries and benefits in first quarter 2003were $479,278. All other expenses increased only $83,217.  This increase relates primarily to $48,414additional cost for outside services, $15,332 of added professional fees, and$15,930 of additional marketing costs. The primary reason for the higher level of outside services is theadditional data processing expense associated with the higher level of activitythat resulted from the significant increases in both loans and deposits. Thesignificant portion of the increase in professional fees relates to additionalcosts related primarily to additional audit expense.  The increase related to marketing expense relates to expandingthe bank’s market awareness in the Greenville Market.

 

Income taxexpense was $237,776 in the first quarter of 2004 compared to $102,307 in thesame period of 2003.  The increaserelates to the higher level of income before income tax expense.

 

**BALANCE SHEET REVIEW**

 

**General**

 

At March 31, 2004, we hadtotal assets of $258.8 million, consisting principally of $226.4 million inloans, $26.2 million in investments and $3.3 million in cash and due frombanks.  Liabilities at March 31, 2004totaled $247.3 million, consisting principally of $173.2 million in deposits,$48.0 million in FHLB advances, $16.6 million of short-term borrowings and $6.2million in trust preferred securities. At March 31, 2004, shareholders’ equity was $11.6 million.

 

**Investments**

 

At March 31, 2004, the$23.4 million in the investment securities portfolio represented approximately9.0% of our total assets.  We wereinvested in U.S. Government agency securities and mortgage-backed securitieswith a fair value of $15.2 million and an amortized cost of $15.0 million foran unrealized gain of $151,000.

 

Contractual maturitiesand yields on our investments (all available for sale) at March 31, 2004 areshown in the following table (dollars in thousands). Expected maturities maydiffer from contractual maturities because issuers may have the right to callor prepay obligations with or without call or prepayment penalties. Based onthe comparison of investment securities coupon rates and the market interestrate as of March 31, 2004, the bank anticipates that approximately $8.6 millionwill be called during the 2004 year.

 

|                       |   | **Within  one year** |   | **Yield** |   | **After one  but  Within five  Years** |   | **Yield** |   | **Over  Five years** |   | **Yield** |   | **Total** |   | **Yield** |   |
|----------------------------|--------|----------------------|--------|-----------|--------|----------------------------------------|--------|-----------|--------|----------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| **Available for sale**     |   |                 |   |      |   |                                   |   |      |   |                 |   |      |   |      |   |      |   |
| U.S.Government agencies    |   | —               |   | —    |   | $                                      | 1,103  |      | 5.40   | %                    | $      | —    |   | —    |   | $         | 1,103  |   | 5.40 | % |
| Mortgage-backed securities |   | —               |   | —    |   | —                                 |   | —    | %      | 2,287                |   | 3.41      | %      | 2,287     |   | 3.41      | %      |
| Total                      |   | —               |   | —    |   | $                                      | 1,103  |      | 5.40   | %                    | $      | 2,287     |   | 3.41      | %      | $         | 3,390  |   | 4.05 | % |
|                       |   |                 |   |      |   |                                   |   |      |   |                 |   |      |   |      |   |      |   |
| **Held to Maturity**       |   |                 |   |      |   |                                   |   |      |   |                 |   |      |   |      |   |      |   |
| Mortgage-backed securities |   | —               |   | —    |   | $                                      | — |      | — |                 | $      | 15,046    |   | 4.25      | %      | 15,046    |   | 4.25 | % |

 

14

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The amortizated costs andthe fair values of our investments at March 31, 2004 and December 31, 2003 areshown in the following table (in thousands).

 

 

|                       |   | **March 31,  2004** |   | **December  31, 2003** |   |
|----------------------------|--------|---------------------|--------|------------------------|--------|
|                       |   | **Amortized  Cost** |   | **Fair  Value**        |   | **Amortized  Cost** |   | **Fair  Value** |   |
| **Available for Sale**     |   |                |   |                   |   |   |   |   |   |
| U. S. Government agencies  |   | $                   | 1,020  |                   | 1,103  |   | $ | 1,022 |   | 1,098 |   |
| Mortgage-backed securities |   | 2,245               |   | 2,287                  |   | 2,460 |   | 2,531 |   |
| Total                      |   | $                   | 3,265  |                   | 3,390  |   | $ | 3,482 |   | 3,629 |   |
|                       |   |                |   |                   |   |   |   |   |   |
| **Held to Maturity**       |   |                |   |                   |   |   |   |   |   |
| Mortgage-backed securities |   | $                   | 15,046 |                   | 15,197 |   | $ | 9,834 |   | 9,761 |   |

 

Otherinvestments securities totaled $3,071,150 and $2,296,150 at March 31, 2004 andDecember 31, 2003, respectively.  Otherinvestments at March 31, 2004, consisted of Federal Reserve Bank stock with acost of $485,150, investment in Greenville First Bank Statutory Trust I of$186,000 and Federal Home Loan Bank stock with a cost of $2,400,000.  At December 31, 2003, the company ownedFederal Reserve Bank stock with a cost of $485,150, investment in GreenvilleFirst Bank Statutory Trust I of $186,000 and Federal Home Loan Bank stock witha cost of $1,625,000.

 

At March 31, 2004, the$4.7 million of short-term investments in federal funds sold on an overnightbasis comprised 1.8% of total assets at March 31, 2004, as compared to $2.8million, or 1.2% of total assets, at December 31, 2003.

 

**Loans**

 

Since loans typicallyprovide higher interest yields than do other types of interest earning assets,it is our intent to channel a substantial percentage of our earning assets intothe loan portfolio.  Average loans forthe quarters ended March 31, 2004 and 2003 were $216.8 million and $154.2million, respectively.  Total loansoutstanding at March 31, 2004 and Decmber 31, 2003 were $229.4 million and$208.8 million, respectively, before allowance for loan losses.

 

The principal componentof our loan portfolio at March 31, 2004 and December 31, 2003 was loans securedby real estate mortgages.  Due to the shorttime the portfolio has existed, the current mix of loans may not be indicativeof the ongoing portfolio mix. Management will attempt to maintain a relatively diversified loanportfolio to help reduce the risk inherent in concentration of collateral.

 

15

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**Loans,continued**

 

The following tablesummarizes the composition of the loan portfolio at March 31:

 
|                                    |   | **March 31,  2004** |        | **December  31, 2003** | ** ** |
|-----------------------------------------|--------|---------------------|-------------|------------------------|------------|
|                                    |   | **Amount**          |        | **% of Total**         |       | **Amount** |   | **% of Total** |   |
| Real estate:                            |   |                |        |                   |       |   |   |   |   |
| Commercial                              |   |                |        |                   |       |   |   |   |   |
| Owner occupied                          |   | $                   | 40,343,662  |                   | 17.59      | % | $ | 39,300,648 |   | 18.82 | % |
| Non-owner occupied                      |   | 61,790,545          |        | 26.93                  | %          | 53,898,628 |   | 25.82 | % |
| Construction                            |   | 14,864,344          |        | 6.48                   | %          | 10,878,152 |   | 5.21 | % |
| Total commercial real-estate            |   | 116,998,551         |        | 51.00                  | %          | 104,077,428 |   | 49.85 | % |
| Consumer                                |   |                |        |                   |       |   |   |   |   |
| Residential                             |   | 37,900,272          |        | 16.52                  | %          | 35,822,608 |   | 17.16 | % |
| Home Equity                             |   | 27,664,163          |        | 12.06                  | %          | 24,278,245 |   | 11.63 | % |
| Construction                            |   | 4,728,529           |        | 2.06                   | %          | 4,365,041 |   | 2.09 | % |
| Total consumer real-estate              |   | 70,292,964          |        | 30.64                  | %          | 64,465,894 |   | 30.88 | % |
| Total real-estate                       |   | 187,291,515         |        | 81.64                  | %          | 168,543,322 |   | 80.73 | % |
| Commercial business                     |   | 37,977,456          |        | 16.55                  | %          | 36,106,814 |   | 17.29 | % |
| Consumer-other                          |   | 4,715,985           |        | 2.06                   | %          | 4,661,929 |   | 2.23 | % |
| Deferred origination fees, net          |   | (575,502            | )           | (.25                   | )%         | (530,082 | ) | (.25 | )% |
| Total gross loans, net of deferred fees |   | 229,409,454         |        | 100.00                 | %          | 208,781,983 |   | 100.00 | % |
| Less—allowance for loan losses     |   | (3,043,105          | )           |                   |       | (2,705,150 | ) |   |   |
| Total loans, net                        |   | $                   | 226,366,349 |                   |       |   | $ | 206,076,833 |   |   |   |

 

**Maturitiesand Sensitivity of Loans to Changes in Interest Rates**

 

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

 

The following tablesummarizes the loan maturity distribution, by type, and related interest ratecharacteristics at March 31, 2004 (dollars in thousands):

 

|                                |   | **One year  or less** | ** ** | **After one  but  within five  years** | ** ** | **After  five years** | ** ** | **Total** | ** ** |
|-------------------------------------|--------|-----------------------|------------|----------------------------------------|------------|-----------------------|------------|-----------|------------|
|                                |   |                  | ** ** |                                   | ** ** |                  | ** ** |      | ** ** |
| Commercial                          |   | $                     | 22,304     |                                   | $          | 15,592                |       | $         | 81         |   | $ | 37,977 |   |
| Real estate – construction     |   | 7,363                 |       | 5,922                                  |       | 6,308                 |       | 19,593    |       |
| Real estate - mortgage              |   | 22,992                |       | 132,529                                |       | 12,178                |       | 167,699   |       |
| Consumer and other                  |   | 2,558                 |       | 1,848                                  |       | 310                   |       | 4,716     |       |
| Deferred origination fees, net      |   | (104                  | )          | (417                                   | )          | (55                   | )          | (576      | )          |
| Total loans                         |   | $                     | 55,113     |                                   | $          | 155,474               |       | $         | 18,822     |   | $ | 229,409 |   |
|                                |   |                  |       |                                   |       |                  |       |      |       |
| Loans maturing after one year with: |   |                  |       |                                   |       |                  |       |      |       |
| Fixed interest rates                |   |                  |       |                                   |       |                  |       | $         | 69,695     |   |
| Floating interest rates             |   |                  |       |                                   |       |                  |       | $         | 159,714    |   |

 

16

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**Provision and Allowance for LoanLosses**

 

We have developedpolicies and procedures for evaluating the overall quality of our creditportfolio and the timely identification of potential credit problems. Management’sjudgment as to the adequacy of the allowance is based on a number ofassumptions about future events, which it believes to be reasonable, but whichmay or may not be valid. Based on our judgments, evaluation, and analysis ofthe loan portfolio, we consider the allowance for loan losses to beadequate.  However, there can be noassurance that charge-offs in future periods will not exceed the allowance forloan losses as estimated at any point in time or that provisions for loanlosses may be significant to a particular accounting period.

 

We have established anallowance for loan losses through a provision for loan losses charged toexpense on our statement of income.  Theallowance represents an amount which we believe will be adequate to absorb probablelosses on existing loans that may become uncollectible.  Our judgment in determining the adequacy ofthe allowance is based on evaluations of the collectibility of loans, includingconsideration of factors such as the balance of impaired loans; the quality,mix and size of our overall loan portfolio; economic conditions that may affectthe borrower’s ability to repay; the amount and quality of collateral securingthe loans; our historical loan loss experience and a review of specific problemloans.  We adjust the amount of theallowance periodically based on changing circumstances as a component of theprovision for loan losses.  We chargerecognized losses to the allowance and add subsequent recoveries back to theallowance.

 

The following table summarizesthe activity related to the bank’s allowance for loan losses for the threemonths ended March 31, 2004 and 2003:

 

|                                       |   | **March 31,** |      |
|--------------------------------------------|--------|---------------|-----------|
|                                       |   | **2004**      |      | **2003** | ** ** |
|                                       |   |          |      |   |   |
| Balance, beginning of period               |   | $             | 2,705,150 |   | 1,824,149 |   |
|                                       |   |          |      |   |   |
| Recoveries of loans previously charged-off |   | 394           |      | — |   |
|                                       |   |          |      |   |   |
| Provision for loan losses                  |   | 350,000       |      | 300,000 |   |
|                                       |   |          |      |   |   |
| Loans charged-off                          |   | (12,439       | )         | (4,969 | ) |
|                                       |   |          |      |   |   |
| Balance, end of period                     |   | $             | 3,043,105 |   | 2,119,180 |   |
|                                       |   |          |      |   |   |
| Allowance for loan losses to total loans   |   | 1.33          | %         | 1.33 | % |
|                                       |   |          |      |   |   |
| Net charge-offs to average loans           |   | .01           | %         | .01 | % |

 

We do not allocate theallowance for loan losses to specific categories of loans but evaluate theadequacy on an overall portfolio basis utilizing our credit grading systemwhich we apply to each loan. The bank has an independent consultant to reviewthe loan files on a test basis. The bank’s analysis of the adequacy of theallowance also considers subjective issues such as changes in the lendingpolicies and procedures, changes in local/national economy, changes in volumeor type of credits, changes in volume/severity of problem loans, quality ofloan review and board of director oversight, concentrations of credit, and peergroup comparisions. Due to our limited operating history, the provision for loanlosses has been made primarily as a result of an assessment of general loanloss risk as compared to banks of similar size and maturity.

 

17

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**NonperformingAssets**

 

Nonperforming assets,percentages of net charge-offs, and the related percentage of allowance forloan losses at and for the three months ended March 31, 2004 and at and for thetwelve months ended December 31, 2003 are shown in the following table:

 

|                                                                             |   | **March 31,  2004** |    | **December  31  2003** |    |
|----------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|---------|
|                                                                             |   |                |    |                   |    |
| Loans over 90 days past due                                                      |   | $                   | 670,880 |                   | 395,850 |   |
|                                                                             |   |                |    |                   |    |
| Loans on non-accrual                                                             |   |                |    |                   |    |
| Mortgage                                                                         |   | 612,930             |    | 149,649                |    |
| Commercial                                                                       |   | 214,688             |    | 223,747                |    |
| Consumer                                                                         |   | 71,348              |    | 70,543                 |    |
| Total non-accrual loans                                                          |   | 898,966             |    | 443,939                |    |
|                                                                             |   |                |    |                   |    |
| Trouble debt restructuring                                                       |   | —              |    | —                 |    |
|                                                                             |   |                |    |                   |    |
| Total of nonperforming loans                                                     |   | 898,966             |    | 443,939                |    |
|                                                                             |   |                |    |                   |    |
| Other nonperforming assets                                                       |   | —              |    | —                 |    |
|                                                                             |   |                |    |                   |    |
| Total nonperforming assets                                                       |   | $                   | 898,966 |                   | 443,939 |   |
|                                                                             |   |                |    |                   |    |
| Percentage of total assets                                                       |   | .35                 | %       | .19                    | %       |
|                                                                             |   |                |    |                   |    |
| Percentage of nonperforming loans to total  loans and other nonperforming assets |   | .39                 | %       | .21                    | %       |
|                                                                             |   |                |    |                   |    |
| Allowance for loan losses to total loans                                         |   | 1.33                | %       | 1.30                   | %       |
|                                                                             |   |                |    |                   |    |
| Net charge-offs to average loans                                                 |   | .01                 | %       | .03                    | %       |

 

At March 31, 2004 and December 31, 2003, the allowancefor loan losses was $3.0 million and $2.7 million, respectively, or 1.33% ofoutstanding loans at March 31, 2004 and 1.30% at December 31, 2003.    During the three months ended March 31,2004 and 2003, our net charged-off loans were $12,045 and $4,969, respectively.

 

At March 31, 2004, nonaccrual loans represented .39%of total loans.  At March 31, 2004 andDecember 31, 2003, the bank had $898,966 and $443,939, respectively onnon-accrual status.  The increase inmortgage loans on non-accrual relates primarily to one loan that is adequatelysecured by real estate.  Generally, aloan is placed on nonaccrual status when it becomes 90 days past due as toprincipal or interest, or when management believes, after considering economicand business conditions and collection efforts, that the borrower’s financialcondition is such that collection of the loan is doubtful.  A payment of interest on a loan that isclassified as nonaccrual is recognized as income when received.

 

18

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**Depositsand Other Interest-Bearing Liabilities**

 

Our primary source offunds for loans and investments is our deposits, advances from FHLB, andshort-term repurchase agreements. National and local market trends over thepast several years suggest that consumers have moved an increasing percentageof discretionary savings funds into investments such as annuities, stock andfixed income mutual funds.

 

The following is a tableof deposits by category at March 31, 2004 and December 31, 2003 (dollars inthousands):

 
|                              |   | **March 31,  2004** |    | **December  31, 2003** |   |
|-----------------------------------|--------|---------------------|---------|------------------------|--------|
|                              |   |                |    |                   |   |   |   |   |   |
| Demand deposit accounts           |   | $                   | 16,053  |                   | 9.27   | % | $ | 16,329 |   | 9.66 | % |
| NOW accounts                      |   | 21,362              |    | 12.33                  | %      | 17,455 |   | 10.33 | % |
| Money market accounts             |   | 32,728              |    | 18.89                  | %      | 24,769 |   | 14.66 | % |
| Savings accounts                  |   | 1,381               |    | .80                    | %      | 1,589 |   | .94 | % |
| Time deposits less than $100,000  |   | 31,929              |    | 18.43                  | %      | 29,714 |   | 17.59 | % |
| Time deposits of $100,000 or more |   | 69,783              |    | 40.28                  | %      | 79,108 |   | 46.82 | % |
| Total deposits                    |   | $                   | 173,236 |                   | 100.00 | % | $ | 168,964 |   | 100.00 | % |

 

Core deposits, which excludetime deposits of $100,000 or more, provide a relatively stable funding sourcefor our loan portfolio and other earning assets.  Our core deposits were $103.5 million and $89.9 million at March31, 2004 and December 31, 2003, respectively. The decrease in time deposits of $100,000 or more resulted from the bankrepaying maturing deposits that were obtained outside of the bank’s primarilymarket with the additional NOW accounts and Money market funds that wereobtained.  At March 31, 2004 the total ofdeposits outside of the bank’s primary market totaled $75.5 million.  The bank anticipates being able to eitherrenew or replace these deposits when they mature, however, no assurance can begiven that the bank will be able to replace these deposits with the same termsor rates.  Our loan-to-deposit ratio was131% and 122% at March 31, 2004 and at December 31, 2003, respectively.  The maturity distribution of our timedeposits of $100,000 or more at March 31, 2004 and December 31, 2003 is asfollows( in thousands):

 

|                             |   | **March 31,  2004** |   | **December  31, 2003** | ** ** |
|----------------------------------|--------|---------------------|--------|------------------------|------------|
|                             |   |                |   |                   |       |
| Three months or less             |   | $                   | 15,798 |                   | $          | 19,272 |   |
| Over three through six months    |   | 21,509              |   | 16,416                 |       |
| Over three through twelve months |   | 18,941              |   | 24,983                 |       |
| Over twelve months               |   | 13,535              |   | 18,437                 |       |
| Total                            |   | $                   | 69,783 |                   | $          | 79,108 |   |

 

19

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**Borrowings**

 

At March 31,2004 the bank had $14,631,999 sales of securities under agreements torepurchase with brokers with a weighted rate of 1.10% that mature in less than90 days.  These agreements are securedwith approximately $15,000,000 of investment securities.  The securities under agreement to repurchaseaveraged $13,463,264 during the first quarter of 2004, with $14,637,000 beingthe maximum amount outstanding at any month-end.

 

At December31, 2003 the bank had $9,296,999 sales of securities under agreements torepurchase with brokers with a weighted rate of 1.12% that mature in less than90 days.  These agreements are securedwith approximately $9,800,000 of investment securities.  These securities under agreement torepurchase averaged $5,689,259 during 2003, with $9,865,000 being the maximumamount outstanding at any month-end.

 

At March 31,2004 and at December 31, 2003 the bank had two unused federal funds purchaselines of credit totaling $7,000,000. These lines of credit are unsecured and bear interest at the daily rateof federal funds plus 25 basis points (1.25% at March 31, 2004).

 

At March 31, 2004 the companyhad a $4,500,000 revolving line of credit with another bank with a maturity ofMarch 26, 2005.  At March 31, 2004, thecompany had outstanding $2,000,000.  Thecompany used the $2,000,000 of the proceeds to increase its investment in thebank.  The line of credit bears interestat a rate of three-month libor plus 2.00%, which at March 31, 2004 was3.09%.  The company has pledged all ofthe stock of the bank as collateral for this line of credit. The line of creditagreement contains various covenants related to net income and assetquality.  As of March 31, 2004, thecompany believes it is in compliance with all covenants.

 

At March 31, 2004 and December31, 2003 the bank had $48,000,000 and $32,500,000, respectively of advancesfrom the FHLB.  These advances aresecured at March 31, 2004 and December 31, 2003, with approximately$116,341,000 and $99,800,000, respectively of first mortgage loans and thebank’s stock in the FHLB.

 

The $48,000,000 of advance atMarch 31, 2004 consisted of $25,500,000 of advances with a fixed rate and$22,500,000 with a variable rate.  AtDecember 31, 2003, the $32,500,000 of advance consisted of the same $25,500,000of fixed rate advances and $7,000,000 of advances with a variable rate.

 

The maturity on the variablerate advances at both March 31, 2004 and December 31, 2003 is October 1,2004.  The variable rate advances can berepaid at any time without any prepayment penalties.  The variable rate at March 31, 2004 was 1.22% and was 1.15% atDecember 31, 2003.

 

Listed below is a summary of theterm and maturities of fixed rate advances:

 

•          The maturity on$5,000,000 of the advances with a weighted rate of 1.63% is July 16, 2004. TheFHLB has the option to re-price this advance as of April 16, 2004.

•          The maturity on$5,000,000 of the advances with a weighted rate of 1.56% is October 15, 2007.The FHLB has the option to re-price this advance as of April 15, 2004.

•          The maturity on$3,000,000 of the advances with a weighted rate of 4.86% is August 24, 2011.The FHLB has the option to re-price this advance as of August 24, 2006.

•          The maturity on$5,000,000 of the advances with a weighted rate of 3.36% is January 30, 2013.The FHLB has the option to re-price this advance as of January 30, 2008.

•          The maturity on$7,500,000 of the advances with a weighted rate of 1.21% is March 10, 2006. TheFHLB has the option to re-price this advance as of March 10, 2004.

•          The maturity on$7,000,000 of advances with a variable daily floating rate at December 31, 2003of 1.15% is October 1, 2004.  The$7,000,000 of floating rate advances can be repaid at any time without anyprepayment penalties.

 

20

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**CAPITALRESOURCES**

 

Total shareholders’ equity amounted to $11,560,278 atMarch 31, 2004 and $11,186,968 at December 31, 2003.  The increase during the first quarter of 2004 resulted primarilyfrom the $387,950 of net income earned during the quarter, partly offset by$14,640 reduction in unrealized gain on investment securities, net of tax.

 

The following table shows the annualized return onaverage assets (net income divided by average total assets), return on averageequity (net income divided by average equity), and equity to assets ratio(average equity divided by average total assets) for the three months endedMarch 31,  2004 and for the 12 monthsended December 31, 2003.  Since ourinception, we have not paid cash dividends.

 

|                     |   | **March 31  2004** |   | **December  31,  2003** |   |
|--------------------------|--------|--------------------|--------|-------------------------|--------|
| Return on average assets |   | 0.6                | %      | .5                      | %      |
|                     |   |               |   |                    |   |
| Return on average equity |   | 13.4               | %      | 9.3                     | %      |
|                     |   |               |   |                    |   |
| Equity to assets ratio   |   | 4.5                | %      | 5.6                     | %      |

 

The Federal Reserve Board and bank regulatory agenciesrequire bank holding companies and financial institutions to maintain capitalat adequate levels based on a percentage of assets and off-balance sheetexposures, adjusted for risk weights ranging from 0% to 100%.

 

The company andthe bank are both subject to various regulatory capital requirementsadministered by the federal banking agencies. Under these capital guidelines, we must maintain a minimum totalrisk-based capital of 8%, with at least 4% being Tier 1 capital.  In addition, we must maintain a minimum Tier1 leverage ratio of at least 4%.  To beconsidered “well-capitalized”, we must maintain total risk-based capital of atleast 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

 

Under the capitaladequacy guidelines, capital is classified into two tiers.  These guidelines require an institution tomaintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets.  Tier 1 capital consists of commonstockholders’ equity, excluding the unrealized gain or loss on securitiesavailable for sale, minus certain intangible assets.  In determining the amount of risk-weighted assets, all assets,including certain off-balance sheet assets, are multiplied by a risk-weightfactor of 0% to 100% based on the risks believed inherent in the type ofasset.  Tier 2 capital consists of Tier1 capital plus the general reserve for loan losses subject to certainlimitations.  The bank is also requiredto maintain capital at a minimum level based on total average assets, which isknown as the Tier 1 leverage ratio.

 

21

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**CAPITALRESOURCES, continued**

 

The following table setsforth the company’s and the bank’s various capital ratios at March 31, 2004 andat December 31, 2003.  At March 31, 2004and December 31, 2003, both the company and the bank were in compliance witheach of the applicable regulatory capital requirements.   At December 31, 2003 both the company andthe bank were considered to be “well capitalized.”  At March 31, 2004 the bank was considered “well capitalized andthe company was consider to “meet” the capital requirements.

 

|                      |   | **March 31,  2004** |   | **December  31, 2003** |   |
|---------------------------|--------|---------------------|--------|------------------------|--------|
|                      |   | **Company**         |   | **Bank**               |   | **Company** |   | **Bank** | ** ** |
| Total risk-based capital  |   | 9.6                 | %      | 10.5                   | %      | 10.2 | % | 10.1 | % |
|                      |   |                |   |                   |   |   |   |   |   |
| Tier 1 risk-based capital |   | 7.3                 | %      | 9.2                    | %      | 7.8 | % | 8.8 | % |
|                      |   |                |   |                   |   |   |   |   |   |
| Leverage capital          |   | 5.7                 | %      | 7.8                    | %      | 6.7 | % | 7.7 | % |

 

We believe that capital is sufficient to fund the activities of thebank over the next two years. The company is currently evaluating variousalternatives for increasing capital. It is management’s objective to maintainthe capital levels such that the bank will continue to be considered wellcapitalized.  However, no assurance canbe given that this objective will be achieved. We do anticipate that capital levels will be maintained at levels thatwill allow the company and the bank to qualify as being adequately capitalizedas defined by OCC regulations. Depending on the timing of when additional capital is obtained, the bankmay be required to limit the level of growth that has been experienced in thepast three years. As of March 31, 2004, there were no significant firmcommitments outstanding for capital expenditures.

 

**EFFECTOF INFLATION AND CHANGING PRICES**

 

The effect ofrelative purchasing power over time due to inflation has not been taken intoeffect in our financial statements. Rather, the statements have been prepared on an historical cost basis inaccordance with generally accepted accounting principles.

 

Unlike most industrialcompanies, the assets and liabilities of financial institutions such as ourcompany and bank are primarily monetary in nature.  Therefore, the effect of changes in interest rates will have amore significant impact on our performance than will the effect of changingprices and inflation in general.  Inaddition, interest rates may generally increase as the rate of inflationincreases, although not necessarily in the same magnitude.  As discussed previously, we seek to mangethe relationships between interest sensitive assets and liabilities in order toprotect against wide rate fluctuations, including those resulting frominflation.

 

22

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**OFF-BALANCE SHEET RISK**

 

Commitments to extend credit are agreementsto lend to a customer as long as there is no violation of any materialcondition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require the payment of a fee. At March 31, 2004, unfunded commitments to extend credit were$52,698,000, of which $14,228,000 is at fixed rates and $38,470,000 is atvariable rates.  The significant portionof the unfunded commitments relates to consumer equity lines of credit. Thebank anticipates, based on historical experience, that the significant portionof these lines of credit will not be funded. The bank evaluates each customer’scredit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the bank uponextension of credit, is based on management’s credit evaluation of theborrower.  Collateral varies but mayinclude accounts receivable, inventory, property, plant and equipment, andcommercial and residential real estate.

 

At March 31, 2004, there was a $1,832,000commitment under a letter of credit. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending loan facilities to customers.  Collateral varies but may include accountsreceivable, inventory, equipment, marketable securities and property.  Since most of the letters of credit areexpected to expire without being drawn upon, they do not necessarily representfuture cash requirements.

 

Except asdisclosed in this report, we are not involved in off-balance sheet contractualrelationships, unconsolidated related entities that have off-balance sheetarrangements or transactions that could result in liquidity needs or othercommitments or significantly impact earnings.

 

**MARKET RISK**

 

Market risk isthe risk of loss from adverse changes in market prices and rates, whichprincipally 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 riskand commodity price risk, do not normally arise in the normal course of ourbusiness.   Management actively monitorsand manages its interest rate risk exposure.

 

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

 

Due to the fact thatapproximately 73% of our loans were variable rate loans at March 31, 2004, weare currently asset sensitive for the three month period following March 31,2004. After June 30, 2004, the bank is liability sensitive for the next ninemonths. The ratio of cumulative gap to total earning assets after twelve monthswas a negative 6.4%.  This reflects that$16.1 million more liabilites will reprice in a twelve month period thenassets.  However, our gap analysis isnot a precise indicator of our interest sensitivity position. The analysispresents only a static view of the timing of maturities and repricingopportunities, without taking into consideration that changes in interest ratesdo not affect all assets and liabilities equally. For example, rates paid on asubstantial portion of core deposits may change contractually within arelatively short time frame, but those rates are viewed by management assignificantly less interest-sensitive than market-based rates such as thosepaid on non-core deposits. Net interest income may be impacted by othersignificant factors in a given interest rate environment, including changes inthe volume and mix of earning assets and interest-bearing liabilities.

 

23

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**LIQUIDITY& INTEREST RATE SENSITIVITY**

 

Liquidity managementinvolves monitoring our sources and uses of funds in order to meet ourday-to-day cash flow requirements while maximizing profits.  Liquidity represents the ability of acompany to convert assets into cash or cash equivalents without significantloss and to raise additional funds by increasing liabilities.  Liquidity management is made more complicatedbecause different balance sheet components are subject to varying degrees ofmanagement control.  For example, thetiming of maturities of the investment portfolio is fairly predictable andsubject to a high degree of control at the time the investment decisions aremade.  However, net deposit inflows andoutflows are far less predictable and are not subject to nearly the same degreeof control.

 

At March 31, 2004 and2003, our liquid assets, consisting of cash and due from banks and federalfunds sold, amounted to $7,929,182 and $6,947,291, representing 3.1% and 3.0%of total assets, respectively. Investment securities at March 31, 2004 and 2003 amounted to $21,507,329and $15,759,470, representing 8.3% and 6.8% of total assets, respectively.  These securities provide a secondary sourceof liquidity since they can be converted into cash in a timely manner.  Our ability to maintain and expand ourdeposit base and borrowing capabilities also serves as a source of liquidity.

 

We plan tomeet our future cash needs through the liquidation of temporary investments,generation of deposits, maturities and sale of loans and maturity of investmentsecurities. During most of 2004, as a result of historically low rates thatwere being earned on short-term liquidity investments, we chose to maintain alower than normal level of short-term liquidity securities. In addition, thebank maintains federal funds purchased lines of credit with correspondent banksin the amount of $7,000,000.  The bankis also a member of the Federal Home Loan Bank of Atlanta from whichapplications for borrowings can be made for leverage purposes, if so desired.The FHLB requires that securities, qualifying single family mortgage loans, andstock of the FHLB owned by the bank be pledged to secure any advances from theFHLB. The unused borrowing capacity currently available from the FHLB at March31, 2004 was $12.0 million and assumes that the bank’s $2,400,000 investment inFHLB stock as well as qualifying mortgages would be pledged to secure anyfuture borrowings.

 

Management believes thatour existing stable base of core deposits, borrowings from the FHLB, andshort-term repurchase agreements will enable us to successfully meets our longterm liquidity needs.

 

Asset/liabilitymanagement is the process by which we monitor and control the mix andmaturities of our assets and liabilities. The essential purposes ofasset/liability management are to ensure adequate liquidity and to maintain anappropriate balance between interest sensitive assets and liabilities tominimize potentially adverse impacts on earnings from changes in marketinterest rates.  The bank’sasset/liability management committee (“ALCO”) monitors and considers methods ofmanaging exposure to interest rate risk. The bank has both an internal ALCO that consists of senior managementand meets at various times during the month and a board ALCO that meetsmonthly.  The ALCO is charged with theresponsibility to maintain the level of interest rate sensitivity of the bank’sinterest sensitive assets and liabilities within Board-approved limits.

 

24

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**LIQUIDITY& INTEREST RATE SENSITIVITY, continued**

 

The following tablepresents our rate sensitivity at each of the time intervals indicated as ofMarch 31, 2004.  The table may not be indicativeof our rate sensitivity position at other points in time.  In addition, the table’s maturitydistribution may differ from the contractual maturities of the earning assetsand interest bearing liabilities presented due to consideration of prepaymentspeeds under various interest rate change scenarios in the application of theinterest rate sensitivity methods described above.

 
|                                             |   | **Within  three  months**   |       | **After  three but  within twelve  months** |   | **After one  but  within five  years** |   | **After  five  years** |   | **Total** |   |
|--------------------------------------------------|--------|-----------------------------|------------|---------------------------------------------|--------|----------------------------------------|--------|------------------------|--------|-----------|--------|
|                                             |   | **(Dollars  in thousands)** | ** ** |
| Interest-earning assets:                         |   |                        |       |                                        |   |                                   |   |                   |   |      |   |
| Federal funds sold                               |   | $                           | 4,662      |                                        | $      | —                                 |   | $                      | — |      | $      | — |   | $ | 4,662 |   |
| Investment securities                            |   | 1,416                       |       | 4,247                                       |   | 12,959                                 |   | —                 |   | 18,622    |   |
| Loans                                            |   | 165,894                     |       | 8,299                                       |   | 44,835                                 |   | 9,481                  |   | 228,509   |   |
|                                             |   |                        |       |                                        |   |                                   |   |                   |   |      |   |
| Total earning assets                             |   | $                           | 171,972    |                                        | $      | 12,546                                 |   | $                      | 57,794 |      | $      | 9,481 |   | $ | 251,793 |   |
|                                             |   |                        |       |                                        |   |                                   |   |                   |   |      |   |
| Interest-bearing liabilities:                    |   |                        |       |                                        |   |                                   |   |                   |   |      |   |
| Money market and NOW                             |   | $                           | 54,090     |                                        | $      | —                                 |   | $                      | — |      | $      | — |   | $ | 54,090 |   |
| Regular savings                                  |   | 1,381                       |       | —                                      |   | —                                 |   | —                 |   | 1,381     |   |
| Time deposits                                    |   | 25,548                      |       | 57,038                                      |   | 19,126                                 |   | —                 |   | 101,712   |   |
| Repurchase Agreements                            |   | 14,446                      |       | —                                      |   | —                                 |   | —                 |   | 14,446    |   |
| Note payable                                     |   | 2,000                       |       | —                                      |   | —                                 |   | —                 |   | 2,000     |   |
| FHLB advances                                    |   | 40,000                      |       | —                                      |   | 8,000                                  |   | —                 |   | 48,000    |   |
| Trust preferred securities                       |   | 6,186                       |       | —                                      |   | —                                 |   | —                 |   | 6,186     |   |
|                                             |   |                        |       |                                        |   |                                   |   |                   |   |      |   |
| Total interest-bearing liabilities               |   | $                           | 143,651    |                                        | $      | 57,038                                 |   | $                      | 27,126 |      | $      | — |   | $ | 227,815 |   |
|                                             |   |                        |       |                                        |   |                                   |   |                   |   |      |   |
| Period gap                                       |   | $                           | 28,321     |                                        | $      | (44,492                                | )      | $                      | 30,668 |      | $      | 9,481 |   |   |   |   |
| Cumulative gap                                   |   | $                           | 28,321     |                                        | $      | (16,171                                | )      | $                      | 14,497 |      | $      | 23,978 |   |   |   |   |
|                                             |   |                        |       |                                        |   |                                   |   |                   |   |      |   |
| Ratio of cumulative gap to total earning  assets |   | 11.2                        | %          | (6.4                                        | )%     | 5.8                                    | %      | 9.5                    | %      |      |   |

 

**ACCOUNTING,REPORTING AND REGULATORY MATTERS**

 

Accountingstandards have been issued or proposed by the Financial Accounting StandardsBoard and are not required to be adopted until a future date and are notexpected to have a material impact on the consolidated financial statementsupon adoption.

 

25

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**Item 3. Controls and Procedures**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as defined in Exchange Act Rule13a-15(e).  Based upon that evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that ourcurrent disclosure controls and procedures are effective as of March 31, 2004.

 

The design of any systemof controls and procedures is based in part upon certain assumptions about thelikelihood of future events.  There canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how remote.

 

**PARTII.  OTHER INFORMATION**

 
| **Item 1.** | **Legal Proceedings**                                                                                                             |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                              |
|        | There are no material  pending legal proceedings to which the company is a party or of which any of  its property is the subject. |
|        |                                                                                                                              |
| **Item 2.** | **Changes in Securities**                                                                                                         |
|        |                                                                                                                              |
|        | None                                                                                                                              |
|        |                                                                                                                              |
| **Item 3.** | **Defaults Upon Senior Securities**                                                                                               |
|        |                                                                                                                              |
|        | Not applicable                                                                                                                    |
|        |                                                                                                                              |
| **Item 4.** | **Submission of Matters to a Vote of Security Holders**                                                                           |
|        |                                                                                                                              |
|        | None                                                                                                                              |
|        |                                                                                                                              |
| **Item 5.** | **Other Information**                                                                                                             |
|        |                                                                                                                              |
|        | None                                                                                                                              |
|        |                                                                                                                              |
| **Item 6.** | **Exhibits and Reports on Form 8-K**                                                                                              |
|        |                                                                                                                              |
| (a)         | Exhibits:  See Exhibit Index attached hereto.                                                                                |

 
| **Exhibit** |   | **Description**                                               |
|-------------|--------|---------------------------------------------------------------|
|        |   |                                                          |
| 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.                                 |

 
| (b)    | Reports on Form 8-K                                                                                                                                                    |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                   |
|   | The following  reports were filed on Form 8-K during the first quarter ended March 31, 2004.                                                                           |
|   |                                                                                                                                                                   |
|   | The Company  filed a Form 8-K on January 16, 2004 to disclose the issuance of a press  release announcing its financial results for the year ended December 31,  2003. |

 

26

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**SIGNATURES**

 

Pursuant to therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
|               | GREENVILLE FIRST  BANCSHARES, INC. |
|--------------------|------------------------------------|
|               |                               |
| Date: May 14, 2004 |                               |
|               |                               |
|               | /s/  R.  Arthur Seaver, Jr.   |   |
|               | R. Arthur Seaver, Jr.              |
|               | Chief Executive Officer            |
|               |                               |
|               |                               |
| Date: May 14, 2004 | /s/ James M. Austin, III           |   |
|               | James M. Austin, III               |
|               | Chief Financial Officer            |

 

27

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INDEX TO EXHIBITS

 
| **Exhibit  Number** |   | **Description**                                               |
|---------------------|--------|---------------------------------------------------------------|
|                |   |                                                          |
| 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.                                 |

 

28

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