# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

# Washington, D.C. 20549

# FORM 10-Q

# [X]  QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2005

# [   ]  TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from ___________ to _____________

Commission file number
000-27719

Greenville First Bancshares, Inc.(Exact name of registrant as specified in its charter)

|South Carolina           |  | 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 address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes    No X

Indicate the number of shares  outstanding  of each of the  issuer's  classes of common stock,  as of the latest
practicable  date:  2,647,994 shares of common stock, $.01 par value per share, issued and outstanding as of  May 5, 2005.

---

# GREENVILLE FIRST
BANCSHARES, INC. PART I. FINANCIAL
INFORMATION

# Item 1. Financial
Statements

The financial  statements of  Greenville  First  Bancshares,  Inc. and  Subsidiary  are set forth in the
following pages.

GREENVILLE FIRST BANCSHARES, INC. AND SUBSIDIARYCONSOLIDATED BALANCE
SHEETS

|                                                                     | March 31, | December 31,
|-------------------------------------------------------------------- | --------- | ------------
|
|
|Assets                                                               |           |             
|Cash and due from banks                                              |           |             
|Federal funds sold                                                   |           |             
|Investment securities available for sale                             |           |             
|Investment securities held to maturity-                              |           |             
|(fair value $22,188,011 and $13,088,613)                             |           |             
|Other investments, at cost                                           |           |             
|Loans, net                                                           |           |             
|Property and equipment, net                                          |           |             
|Accrued interest receivable                                          |           |             
|Other real estate owned                                              |           |             
|Other assets                                                         |           |             
|                                                                     |           |             
|Total assets                                                         |           |             
|                                                                     |           |             
|Liabilities                                                          |           |             
|Deposits                                                             |           |             
|Official checks outstanding                                          |           |             
|Federal funds purchased and repurchase agreements                    |           |             
|Federal Home Loan Bank advances                                      |           |             
|Junior subordinated debentures                                       |           |             
|Accrued interest payable                                             |           |             
|Accounts payable and accrued expenses                                |           |             
|                                                                     |           |             
|Total liabilities                                                    |           |             
|                                                                     |           |             
|Commitments and contingencies                                        |           |             
|Shareholders' equity                                                 |           |             
|Preferred stock, par value $.01 per share, 10,000,000 shares         |           |             
|authorized, no shares issued                                         |           |             
|Common stock, par value $.01                                         |           |             
|Authorized, 10,000,000 shares. Issued and outstanding  2,652,875 and |           |             
|2,647,994 at March 31, 2005 and December 31, 2004, respectively      |           |             
|Additional paid-in capital                                           |           |             
|Accumulated other comprehensive income (expense)                     |           |             
|Retained earnings                                                    |           |             
|                                                                     |           |             
|Total shareholders' equity                                           |           |             
|                                                                     |           |             
|Total liabilities and shareholders' equity                           |           |             
|                                                                     |           |             

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

2

---

GREENVILLE FIRST BANCSHARES,
INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS
OF INCOME

|                                                    | For the three months ended | 
|--------------------------------------------------- | -------------------------- | 
|
|
|Interest income                                     |                            | 
|Loans                                               |                            | 
|Investment securities                               |                            | 
|Federal funds sold                                  |                            | 
|                                                    |                            | 
|Total interest income                               |                            | 
|                                                    |                            | 
|Interest expense                                    |                            | 
|Deposits                                            |                            | 
|Borrowings                                          |                            | 
|                                                    |                            | 
|Total interest expense                              |                            | 
|                                                    |                            | 
|Net interest income                                 |                            | 
|Provision for loan losses                           |                            | 
|                                                    |                            | 
|Net interest income after provision for loan losses |                            | 
|                                                    |                            | 
|Noninterest income                                  |                            | 
|Loan fee income                                     |                            | 
|Service fees on deposit accounts                    |                            | 
|Other income                                        |                            | 
|                                                    |                            | 
|Total noninterest income                            |                            | 
|                                                    |                            | 
|Noninterest expenses                                |                            | 
|Compensation and benefits                           |                            | 
|Professional fees                                   |                            | 
|Marketing                                           |                            | 
|Insurance                                           |                            | 
|Occupancy                                           |                            | 
|Data processing and related costs                   |                            | 
|Telephone                                           |                            | 
|Other                                               |                            | 
|                                                    |                            | 
|Total noninterest expenses                          |                            | 
|                                                    |                            | 
|Income before income taxes expense                  |                            | 
|Income tax expense                                  |                            | 
|                                                    |                            | 
|Net income                                          |                            | 
|                                                    |                            | 
|Earnings per common share:                          |                            | 
|Basic                                               |                            | 
|                                                    |                            | 
|Diluted                                             |                            | 
|                                                    |                            | 
|Weighted average common shares outstanding          |                            | 
|Basic                                               |                            | 
|                                                    |                            | 
|Diluted                                             |                            | 
|                                                    |                            | 

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

3

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GREENVILLE FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYAND COMPREHENSIVE INCOMEFOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)

|                          |  |  |  | Accumulated |  | Total
|------------------------- |  |  |  | ----------- |  | -----
|
|
|
|December 31, 2003         |  |  |  | 1,724,994   |  | $    
|                          |  |  |  |             |  |      
|Net income                |  |  |  | -           |  |      
|Comprehensive loss,       |  | 
|net of tax -              |  | 
|Unrealized holding gain   |  | 
|on securities available   |  | 
|for sale                  |  |  |  | -           |  |      
|                          |  |  |  |             |  |      
|Comprehensive income      |  |  |  | -           |  |      
|                          |  |  |  |             |  |      
|March 31, 2004            |  |  |  | 1,724,994   |  | $    
|                          |  |  |  |             |  |      
|December 31, 2004         |  |  |  | 2,647,994   |  | $    
|                          |  |  |  |             |  |      
|Net  income               |  |  |  | -           |  |      
|Comprehensive income,     |  | 
|net of tax -              |  | 
|Unrealized holding loss   |  | 
|on securities available   |  | 
|for sale                  |  |  |  | -           |  |      
|                          |  |  |  |             |  |      
|Comprehensive income      |  |  |  | -           |  |      
|Proceeds from exercise of |  | 
|options and  warrants     |  |  |  | 4,881       |  |      
|                          |  |  |  |             |  |      
|March 31, 2005            |  |  |  | 2,652,875   |  | $    
|                          |  |  |  |             |  |      

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

4

---

GREENVILLE FIRST
BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                  | For the three months ended | 
|----------------------------------------------------------------- | -------------------------- | 
|
|
|Operating activities                                              |                            | 
|Net income                                                        |                            | 
|Adjustments to reconcile net income to cash                       |                            | 
|provided by operating activities:                                 |                            | 
|Provision for loan losses                                         |                            | 
|Depreciation and other amortization                               |                            | 
|Accretion and amortization of securities                          |                            | 
|discounts and premium, net                                        |                            | 
|Decrease in deferred taxes asset                                  |                            | 
|Decrease (increase) in other assets, net                          |                            | 
|Increase in other liabilities, net                                |                            | 
|                                                                  |                            | 
|Net cash provided by operating activities                         |                            | 
|                                                                  |                            | 
|Investing activities                                              |                            | 
|Increase (decrease) in cash realized from:                        |                            | 
|Origination of loans, net                                         |                            | 
|Purchase of property and and equipment                            |                            | 
|Purchase of investment securities:                                |                            | 
|Available for sale                                                |                            | 
|Held to maturity                                                  |                            | 
|Other investments                                                 |                            | 
|Payments and maturity of investment securities:                   |                            | 
|Available for sale                                                |                            | 
|Held to maturity                                                  |                            | 
|Other investments                                                 |                            | 
|Proceeds from sale of real estate acquired in settlement of loans |                            | 
|                                                                  |                            | 
|Net cash used for investing activities                            |                            | 
|                                                                  |                            | 
|Financing activities                                              |                            | 
|Increase in deposits, net                                         |                            | 
|Increase in short-term borrowings                                 |                            | 
|Decrease in other borrowings                                      |                            | 
|Increase in Federal Home Loan Bank advances                       |                            | 
|Proceeds from the exercise of stock warrants                      |                            | 
|                                                                  |                            | 
|Net cash provided by financing activities                         |                            | 
|                                                                  |                            | 
|Net increase in cash and cash equivalents                         |                            | 
|Cash and cash equivalents at beginning of  the year               |                            | 
|                                                                  |                            | 
|Cash and cash equivalents at end of the year                      |                            | 
|                                                                  |                            | 
|Supplemental information                                          |                            | 
|Cash paid for                                                     |                            | 
|Interest                                                          |                            | 
|                                                                  |                            | 
|Income taxes                                                      |                            | 
|                                                                  |                            | 
|Schedule of non-cash transactions                                 |                            | 
|Foreclosure of  real estate                                       |                            | 
|                                                                  |                            | 
|Unrealized loss on securities, net of income taxes                |                            | 
|                                                                  |                            | 
|                                                                  |                            | 

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

5

---

GREENVILLE FIRST
BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# Note 1  Nature of
Business and Basis of Presentation

# Business activity

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

# Basis of Presentation

The
accompanying financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2005. For
further information, refer to the consolidated financial statements and footnotes thereto
included in the companys Form 10-KSB for the year ended December 31, 2004
(Registration Number 000-27719) as filed with the Securities and Exchange Commission. The
consolidated financial statements include the accounts of Greenville First Bancshares,
Inc., and its wholly owned subsidiary Greenville First Bank, N.A. As discussed in Note 3,
the financial statements related to the special purpose subsidiary, Greenville First
Statutory Trust I, have not been consolidated in accordance with FASB Interpretation No.
46.

# Cash and Cash Equivalents

For
purposes of the Consolidated Statement of Cash Flows, cash and federal funds sold are
included in cash and cash equivalents. These assets have contractual
maturities of less than three months.

# Note 2  Earnings
per Share

The
following schedule reconciles the numerators and denominators of the basic and diluted
earnings per share computations for the three months ended March 31, 2005 and 2004.
Dilutive common shares arise from the potentially dilutive effect of the companys
stock options and warrants that are outstanding. The assumed conversion of stock options
and warrants can create a difference between basic and dilutive net income per common
share. The average dilutive shares have been computed utilizing the treasury
stock method.

|                                  | Three months ended March 31, | 
|--------------------------------- | ---------------------------- | 
|
|Basic Earnings Per Share          |                              | 
|Average common shares             |                              | 
|Net income                        |                              | 
|Earnings per share                |                              | 
|Diluted Earnings Per Share        |                              | 
|Average common shares outstanding |                              | 
|Average dilutive common shares    |                              | 
|                                  |                              | 
|Adjusted average common shares    |                              | 
|Net income                        |                              | 
|Earnings per share                |                              | 

6

---

# Note 3  Accounting
for Variable Interest Entities

Effective
January 1, 2004, the company adopted FASB Interpretation No. 46, (FIN 46),
Consolidation of Variable Interest Entities. In accordance with FIN 46, the
$186,000 investment by the parent company, Greenville First Bancshares, Inc, in the
special purpose subsidiary, Greenville First Statutory Trust I, results in the special
purpose subsidiary being treated as a variable interest entity as defined in
FIN 46. Therefore, in accordance with the revised rules, the company did not consolidate
its special purpose trust subsidiary. Prior to the January 1, 2004, the effective date on
the adoption of FIN 46, the company had consolidated the special purpose subsidiary. The
2004 consolidated financial statements have been restated, resulting in the
deconsolidation of this wholly-owned subsidiary. The deconsolidation of this
wholly-owned subsidiary increased both the companys other assets by $186,000 and the
debt associated with the junior subordinated debentures. The companys maximum
exposure to loss on this debt is the $186,000 invested in the special purpose subsidiary.
However, in addition to the loss exposure related to the investment in the special purpose
subsidiary, the company has a full and unconditional guarantee for the $6,000,000 junior
subordinated debentures that were issued. The special purpose subsidiary was formed for
the sole purpose of issuing the junior subordinated debentures.

# Note 4  Stock
Based Compensation

The
company has a stock-based employee compensation plan. The company accounts for the plan
under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected in net
income, as all stock options granted under these plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the company had applied the
fair value recognition provisions of Financial Accounting Standards Board
(FASB), Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

|                                            | For the three months ended March 31, | 
|------------------------------------------- | ------------------------------------ | 
|
|Net income, as reported                     |                                      | 
|Deduct:  Total stock-based employee         |                                      | 
|compensation expense determined             |                                      | 
|under fair value based method               |                                      | 
|for all awards,  net of related tax effects |                                      | 
|                                            |                                      | 
|Pro forma net income                        |                                      | 
|Earnings  per common share-adjusted         |                                      | 
|for 3 for 2 stock split:                    |                                      | 
|Basic - as reported                         |                                      | 
|Basic - pro forma                           |                                      | 
|Diluted - as reported                       |                                      | 
|Diluted - pro-forma                         |                                      | 

The
fair value of the option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used for grants: expected volatility
of 10% for 2004, risk-free interest rate of 3.00% for 2004, expected lives of the options
10 years, and the assumed dividend rate was zero. No options were granted during the three
months ended March 31, 2005.

Note
5  Note Payable

The
company had an unused $4.5 million revolving line of credit with another bank that matured
on March 20, 2005. As of March 31, 2005, the company was in the process of renewing this
line of credit. The company anticipates that this line of credit will be renewed under
similar terms and conditions. The company anticipates that the line of credit will bear
interest at a rate of three-month libor plus 2.00%, which at March 31, 2005 was 5.12%. The
company plans to continue to pledge the stock of the bank as collateral for this line of
credit. The company is not aware of any circumstances that would prevent this loan from
being renewed, however no assurance can be given the renewal will be granted or be granted
under similar terms.

7

---

# Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The
following discussion reviews our results of operations and assesses our financial
condition. You should read the following discussion and analysis in conjunction with the
accompanying consolidated financial statements. The commentary should be read in
conjunction with the discussion of forward-looking statements, the financial statements
and the related notes and the other statistical information included in this report.

# DISCUSSION OF
FORWARD-LOOKING STATEMENTS

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

| | o | significant increases in competitive pressure in the banking and financial services
industries;
| | - | -----------------------------------------------------------------------------------------------

| | o | changes in the interest rate environment which could reduce anticipated or
actual margins;
| | - | ------------------------------------------------------------------------------------------

| | o | changes in political conditions or the legislative or regulatory
environment;
| | - | -----------------------------------------------------------------------------

| | o | general economic conditions, either nationally or regionally and especially
in our primary service area, becoming
less favorable than expected resulting in, among other things, a deterioration in credit
quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| | o | changes in
technology;
| | - | ----------------------

| | o | changes in monetary and tax policies;
| | - | -------------------------------------

| | o | the level of allowance for loan loss;
| | - | -------------------------------------

| | o | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| | o | the rates of loan growth;
| | - | -------------------------

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

| | o | loss of consumer confidence and economic disruptions resulting from terrorist
activities;
| | - | -----------------------------------------------------------------------------------------

| | o | changes in the securities markets; and
| | - | --------------------------------------

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

# Overview

We
were incorporated in March 1999 to organize and serve as the holding company for
Greenville First Bank, N.A. Since we opened our bank in January 2000, we have experienced
consistent growth in total assets, loans, deposits, and shareholders equity, which
has continued during the first three months of 2005.

On
September 24, 2004 and October 15, 2004, the company sold 800,000 and 120,000 shares,
respectively, of common stock. The net proceeds were approximately $15.0 million.

Like
most community banks, we derive the majority of our income from interest received on our
loans and investments. Our primary source of funds for making these loans and investments
is our deposits, on which we pay interest. Consequently, one of the key measures of our
success is our amount of net interest income, or the difference between the income on our
interest-earning assets, such as loans and investments, and the expense on our
interest-bearing liabilities, such as deposits and borrowings. Another key measure is the
spread between the yield we earn on these interest-earning assets and the rate we pay on
our interest-bearing liabilities, which is called our net interest spread.

There
are risks inherent in all loans, so we maintain an allowance for loan losses to absorb
probable losses on existing loans that may become uncollectible. We maintain this
allowance by charging a provision for loan losses against our operating earnings for each
period. We have included a detailed discussion of this process, as well as several tables
describing our allowance for loan losses.

8

---

In
addition to earning interest on our loans and investments, we earn income through fees and
other charges to our customers. We have also included a discussion of the various
components of this noninterest income, as well as of our noninterest expense.

The
following discussion and analysis also identifies significant factors that have affected
our financial position and operating results during the periods included in the
accompanying financial statements. We encourage you to read this discussion and analysis
in conjunction with our financial statements and the other statistical information
included in our filings with the Securities and Exchange Commission.

# Critical Accounting
Policies

We
have adopted various accounting policies that govern the application of accounting
principles generally accepted in the United States and with general practices within the
banking industry in the preparation of our financial statements. Our significant
accounting policies are described in the footnotes to our audited consolidated financial
statements as of December 31, 2004, as filed in our annual report on Form 10-KSB.

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

We
believe the allowance for loan losses is the critical accounting policy that requires the
most significant judgment and estimates used in preparation of our consolidated financial
statements. Some of the more critical judgments supporting the amount of our allowance for
loan losses include judgments about the credit worthiness of borrowers, the estimated
value of the underlying collateral, the assumptions about cash flow, determination of loss
factors for estimating credit losses, the impact of current events, and conditions, and
other factors impacting the level of probable inherent losses. Under different conditions
or using different assumptions, the actual amount of credit losses incurred by us may be
different from managements estimates provided in our consolidated financial
statements. Refer to the portion of this discussion that addresses our allowance for loan
losses for a more complete discussion of our processes and methodology for determining our
allowance for loan losses.

# Effect of Economic Trends

During
the three years ended December 31, 2004, and the first three months of 2005, our rates on
both short-term or variable rate earning assets and short-term or variable rate
interest-bearing liabilities declined primarily as a result of the actions taken by the
Federal Reserve. Our rates on both short-term or variable earning assets and short-term or
variable rate interest-bearing liabilities began to increase in the third quarter of 2004
as a result of actions taken by the Federal Reserve to increase short-term rates.

During
most of 2001 and during 2002, the United States experienced an economic decline. During
this period, the economy was affected by lower returns of the stock markets. Economic data
led the Federal Reserve to begin an aggressive program of reducing rates that moved the
Federal Funds rate down 11 times during 2001 for a total reduction of 475 basis points.
During the fourth quarter of 2002 and the first six months of 2003, the Federal Reserve
reduced the Federal Funds rate down an additional 75 basis points, bringing the Federal
Funds rate to its lowest level in 40 years.

Despite
sharply lower short-term rates, stimulus to the economy during 2003 was muted and consumer
demand and business investment activity remained weak. During all of 2003 and
substantially all of the first six months ended June 30, 2004, the financial markets
operated under historically low interest rates. As a result of these unusual conditions,
Congress passed an economic stimulus plan in 2003. During the first six months of 2004,
many economists believed the economy began to show signs of strengthening. During the last
six months of 2004, the Federal Reserve increased the short-term interest rate five times
for a total of 125 basis points. During the first quarter of 2005, the Federal Reserve
continued to increase rates an additional 50 basis points. Many economists believe that
the Federal Reserve will continue to increase rates during the remainder of 2005 and
during most of 2006. However, no assurance can be given that the Federal Reserve will take
such action.

9

---

# Results of Operations

Income Statement Review

Summary

Three months ended
March 31, 2005 and 2004

Our
net income was $660,148 and $387,950 for the three months ended March 31, 2005 and 2004,
respectively, an increase of $272,198, or 70.2%. The $272,198 increase in net income
resulted primarily from increases of $747,605 in net interest income and $51,052 in
noninterest income. These increases were partly offset by $364,629 of additional
noninterest expense and a $166,830 increase in income tax expense. Our efficiency ratio
has continued to improve because our net interest income and other income continue to
increase at a higher rate than the increases in our overhead expenses. Our efficiency
ratio was 51.3% and 53.4% for the three months ended March 31, 2005 and 2004,
respectively.

Net Interest Income

Our
level of net interest income is determined by the level of earning assets and the
management of our net interest margin. The continuous growth in our loan portfolio is the
primary driver of the increase in net interest income. During the three months ended March
31, 2005, our loan portfolio had increased an average of $71.1 million compared to the
first quarter of 2004. The growth in the first three months of 2005 was $15.0 million. We
anticipate the growth in loans will continue to drive the growth in assets and the growth
in net interest income. However, no assurance can be given that we will be able to
continue to increase loans at the same levels we have experienced in the past.

Our
decision to grow the loan portfolio at the current pace created the need for a higher
level of capital and the need to increase deposits and borrowings. This loan growth
strategy also resulted in a significant portion of our assets being in higher earning
loans than in lower yielding investments. At March 31, 2005, loans represented 85.3% of
total assets, while investments and federal funds sold represented 11.5% of total assets.
While we plan to continue our focus on increasing the loan portfolio, as rates on
investment securities begin to rise and additional deposits are obtained, we also
anticipate increasing the size of the investment portfolio.

The
historically low interest rate environment in the last three years allowed us to obtain
short-term borrowings and wholesale certificates of deposit at rates that were lower than
certificate of deposit rates being offered in our local market. Therefore, we decided not
to begin our retail deposit office expansion program until the beginning of 2005. This
funding strategy allowed us to continue to operate in one location, maintain a smaller
staff, and not incur marketing costs to advertise deposit rates, which in turn allowed us
to focus on the fast growing loan portfolio. At March 31, 2005, retail deposits
represented $136.0 million, or 39.8% of total assets, borrowings represented $91.8
million, or 26.8% of total assets, and wholesale out-of-market deposits represented $82.9
million, or 24.3% of total assets.

In
anticipation of rising interest rates, we opened one retail deposit office in March of
2005 and we plan to open a second retail deposit office in the third quarter of 2005. We
plan to focus our efforts in these two locations to obtain low cost transaction accounts
that are less affected by rising rates. Also, in anticipation of rising rates, during the
first three months of 2005 we offered aggressive rates on certificates of deposits. In
conjunction with the new retail office, we anticipate offering aggressive rates to obtain
checking accounts and new money market accounts. We anticipate that the higher rates being
offered will increase our overall cost of funds. Our goal is to increase both the
percentage of assets being funded by in market retail deposits and to increase
the percentage of low-cost transaction accounts to total deposits. No assurance can be
given that these objectives will be achieved; however, we anticipate that the two
additional retail deposit offices will assist us in meeting these objectives. We also
anticipate the current deposit promotion and the opening of the two new offices will have
a negative impact on earnings in the years ending 2005 and 2006. However, we believe that
these two strategies will provide additional clients in our local market and will provide
a lower alternative cost of funding in a higher or rising interest rate environment, which
we believe will increase earnings in future periods.

As
more fully discussed in the  Market Risk and  Liquidity and
Interest Rate Sensitivity sections

10

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below, at March 31, 2005, 68.8% of
our loans had variable rates. Given our high percentage of rate-sensitive loans, our
primary focus during the first three months of 2005 has been to obtain short-term
liabilities to fund our asset growth. This strategy allows us to manage the impact on our
earnings resulting from changes in market interest rates. At March 31, 2005, 69.9% of
interest-bearing liabilities had a maturity of less than one year.

We
believe that we are positioned to benefit from future increases in short-term rates. At
March 31, 2005, we had $64.0 million more assets than liabilities that reprice within the
next three months. We also intend to maintain a capital level for the bank that exceeds
the OCC requirements to be classified as a well capitalized bank.

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

Our
net interest income for the three months ended March 31, 2005 and the three months ended
March 31, 2004 increased because we had more interest-earning assets than interest-bearing
liabilities. For the first three months of 2005 and 2004, interest-earning assets exceeded
interest-bearing liabilities by $25.4 million and $7.5 million, respectively.

During
the three months ended March 31, 2005, our rates on both short-term or variable rate
earning-assets and short-term or variable rate interest-bearing liabilities declined
primarily as a result of the actions taken by the Federal Reserve in the first six months
of 2004 to lower short-term rates.

The
impact of the Federal Reserves actions resulted in a decline in both the yields on
our variable rate assets and the rates that we paid for our short-term deposits and
borrowings. Our net interest spread and net interest margins also declined since more of
our rate sensitive assets repriced sooner than our rate sensitive liabilities during the
12 month period ending March 31, 2005. Our net interest margin for the first three months
of 2005 was 3.34%.

We
anticipate that the six 25 basis point increases in short-term rates since July 1, 2004
will result in an increase in loan yields and deposit and borrowing costs. Accordingly, we
believe that our net interest margin may increase if further action is taken by the
Federal Reserve to continue to increase short-term rates.

We
have included a number of tables to assist in our description of various measures of our
financial performance. For example, the Average Balances tables show the
average balance of each category of our assets and liabilities as well as the yield we
earned or the rate we paid with respect to each category during both the three months
ended March 31, 2005 and 2004. A review of these tables shows that our loans typically
provide higher interest yields than do other types of interest-earning assets, which is
why we direct a substantial percentage of our earning assets into our loan portfolio.
Similarly, the Rate/Volume Analysis table helps demonstrate the effect of
changing interest rates and changing volume of assets and liabilities on our financial
condition during the periods shown. We also track the sensitivity of our various
categories of assets and liabilities to changes in interest rates, and we have included
tables to illustrate our interest rate sensitivity with respect to interest-earning
accounts and interest-bearing accounts. Finally, we have included various tables that
provide detail about our investment securities, our loans, our deposits, and other
borrowings.

11

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The
following table sets forth information related to our average balance sheets, average
yields on assets, and average costs of liabilities. We derived these yields by dividing
income or expense by the average balance of the corresponding assets or liabilities. We
derived average balances from the daily balances throughout the periods indicated. During
the three months ended March 31, 2005 and 2004, all investments were taxable. During the
same period, we had no interest-bearing deposits in other banks or any securities
purchased with agreements to resell. All investments were owned at an original maturity of
over one year. Nonaccrual loans are included in the following tables. Loan yields have
been reduced to reflect the negative impact on our earnings of loans on nonaccrual status.
The net of capitalized loan costs and fees are amortized into interest income on loans.

|                                    | Average Balances, Income and Expenses, and Rates
|----------------------------------- | ------------------------------------------------
|
|
|
|
|
|Earnings                            |                                                 
|Federal funds sold                  |                                                 
|Investment securities               |                                                 
|Loans                               |                                                 
|                                    |                                                 
|Total earning-assets                |                                                 
|                                    |                                                 
|Non-earning assets                  |                                                 
|                                    |                                                 
|Total assets                        |                                                 
|                                    |                                                 
|Interest-bearing liabilities:       |                                                 
|NOW accounts                        |                                                 
|Savings & money market              |                                                 
|Time deposits                       |                                                 
|                                    |                                                 
|Total interest-bearing deposits     |                                                 
|FHLB advances                       |                                                 
|Other borrowings                    |                                                 
|                                    |                                                 
|Total interest-bearing liabilities  |                                                 
|                                    |                                                 
|Non-interest bearing liabilities    |                                                 
|Shareholders' equity                |                                                 
|                                    |                                                 
|Total liabilities and shareholders' |                                                 
|Equity                              |                                                 
|                                    |                                                 
|Net interest spread                 |                                                 
|Net interest income / margin        |                                                 
|                                    |                                                 

______________(1) Annualized for the three month period.

Our
net interest spread was 3.14% for the three months ended March 31, 2005, compared to 3.19%
for the three months ended March 31, 2004.

Our
net interest margin for the three months ended March 31, 2005 was 3.34%, compared to 3.25%
for the three months ended March 31, 2004. During the three months ended March 31, 2005,
earning assets averaged $325.7 million, compared to $239.3 million in the three months
ended March 31, 2004. Interest earning assets exceeded interest bearing liabilities by
$25.4 million and $7.7 million for the three month periods ended March 31, 2005 and 2004,
respectively. The higher level of interest-earning assets compared to interest-bearing
liabilities in the 2005 period resulted from the proceeds from the secondary offering that
was completed in the third and fourth quarters of 2004. The impact of the additional
capital resulted in the net interest margin increasing 9 basis points in the first quarter
of 2005 compared to the same period in 2004, while the net interest spread in the 2005
period decreased 5 basis points compared to the first quarter of 2004. The decrease in net
interest spread resulted from the cost of interest-bearing liabilities repricing at a
faster rate than the repricing of interest-earning assets during the 12 months ended March
31, 2005.

12

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The
79 basis point increase in yields on loans for the three months ended March 31, 2005
compared to the three months ended March 31, 2004 resulted primarily from a 150 basis
point increase in the prime rate. The deposit cost increased as a result of our decision
to aggressively market interest-bearing transaction accounts by paying an above market
rate. Also, we extended the maturity dates on various jumbo time deposits. These decisions
along with the higher overall market rates resulted in the deposit costs in the first
quarter of 2005 being 56 basis points higher than in the first quarter of 2004. We also
extended the maturities of various FHLB advances resulting in higher borrowing cost in the
first quarter of 2005 compared to 2004. The 124 basis point increase in other borrowed
funds in the first quarter of 2005 compared to the same period in 2004 resulted from the
150 basis point increase in short-term market rates. All the other borrowings rates are
tied to short-term market interest rates.

Net
interest income, the largest component of our income, was $2.7 million and $1.9 million
for the three months ended March 31, 2005 and 2004, respectively. The significant increase
in the first quarter of 2005 related to higher levels of both average earning assets and
interest-bearing liabilities. Average earning assets were $86.4 million higher during the
three months ended March 31, 2005 compared to the same period in 2004.

The
$747,605 increase in net interest income for the three months ended March 31, 2005
compared to the same period in 2004 resulted primarily from a $750,000 increase in net
income related to the impact of higher average earning assets and interest-bearing
liabilities in the three months ended March 31, 2005 compared to the same period in 2004.
The impact of changes in rates was not significant.

Interest
income for the three months ended March 31, 2005 was $4.6 million, consisting of $4.2
million on loans, $405,090 on investments, and $5,811 on federal funds sold. Interest
income for the three months ended March 31, 2004 was $3.0 million, consisting of $2.7
million on loans, $224,814 on investments, and $4,590 on federal funds sold. Interest on
loans for the three months ended March 31, 2005 and 2004 represented 91.0% and 92.3%,
respectively, of total interest income, while income from investments and federal funds
sold represented only 9.0% and 7.3% of total interest income. The high percentage of
interest income from loans relates to our strategy to maintain a significant portion of
our assets in higher earning loans compared to lower yielding investments. Average loans
represented 88.4% and 90.6% of average interest-earning assets for the three months ended
March 31, 2005 and 2004, respectively. Included in interest income on loans for the three
months ended March 31, 2005 and 2004, was $118,797 and $99,976, respectively, related to
the net amortization of loan fees and capitalized loan origination costs.

Interest
expense for the three months ended March 31, 2005 was $1.9 million, consisting of $1.2
million related to deposits and $746,886 related to borrowings. Interest expense for the
three months ended March 31, 2004 was $1.0 million, consisting of $727,722 related to
deposits and $306,613 related to borrowings. Interest expense on deposits for the three
months ended March 31, 2005 and 2004 represented 60.7% and 70.4%, respectively, of total
interest expense, while interest expense on borrowings represented 39.3% and 29.6%,
respectively, of total interest expense for the three months ended March 31, 2005 and
2004. The lower percentage of interest expense on deposits and the higher percentage of
interest on borrowings for the three months ended March 31, 2005 compared to the three
months ended March 31, 2004 resulted from our decisions to delay our retail deposit office
expansion program and instead utilize additional borrowings from the FHLB and from the
sale of securities under agreements to repurchase with brokers. During the three months
ended March 31, 2005, average interest-bearing deposits increased by $35.5 million over
the same period in 2004, while other borrowing during the three months ended March 31,
2005 increased $33.1 million over the same period in 2004. During the three months ended
March 31, 2005, we were able to pledge additional collateral to the FHLB, allowing us the
ability to increase our FHLB borrowings. Both the short-term borrowings from the FHLB and
the sale of securities under agreements to repurchase provide us with the opportunity to
obtain low cost funding with various maturities similar to the maturities on our loans and
investments.

13

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Rate/Volume Analysis

Net
interest income can be analyzed in terms of the impact of changing interest rates and
changing volume. The following table sets forth the effect which the varying levels of
interest-earning assets and interest-bearing liabilities and the applicable rates have had
on changes in net interest income for the periods presented.

|                       |  |  | Three Months Ended |       |   | 
|---------------------- |  |  | ------------------ | ----- | - | 
|
|
|
|
|
|Interest income        |  |  |                    |       |   | 
|Loans                  |  |  | $                  | 877   |   | 
|Investment securities  |  |  |                    | 178   |   | 
|Federal funds sold     |  |  |                    | (3    | ) | 
|                       |  |  |                    |       |   | 
|Total interest income  |  |  |                    | 1,052 |   | 
|                       |  |  |                    |       |   | 
|Interest expense       |  | 
|Deposits               |  |  |                    | 150   |   | 
|FHLB advances          |  |  |                    | 126   |   | 
|Other borrowings       |  |  |                    | 26    |   | 
|                       |  |  |                    |       |   | 
|Total interest expense |  |  |                    | 302   |   | 
|                       |  |  |                    |       |   | 
|Net interest income    |  |  | $                  | 750   |   | 
|                       |  |  |                    |       |   | 

Provision for Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
as an expense on our statement of income. We review our loan portfolio periodically to
evaluate our outstanding loans and to measure both the performance of the portfolio and
the adequacy of the allowance for loan losses. Please see the discussion below under
Balance Sheet Review - Provision and Allowance for Loan Losses for a
description of the factors we consider in determining the amount of the provision we
expense each period to maintain this allowance.

Three months ended
March 31, 2005 and 2004

For
the three months ended March 31, 2005 and 2004, there was a noncash expense related to the
provision for loan losses of $345,000 and $350,000, respectively. The additional
provisions and recoveries on charged-off loans added to our allowance for loan losses in
the three months ended March 31, 2005 and 2004. The net increase in the allowance for loan
losses was $356,793 and $337,955 for the three months ended March 31, 2005 and 2004,
respectively. The allowance for loan losses increased $11,793 more than the provision for
loan losses in the three months ended March 31, 2005 as a result of a $11,793 recovery
combined with no charge-offs in the three month period. The allowance for loan losses at
March 31, 2004 did not increase by the entire amount of the provision for loan losses
because we reported net charge-offs of $12,045 for the three months ended March 31, 2004.
The $12,045 net charge-offs during the first quarter of 2004 represented less than 0.01%
of the average outstanding loan portfolio for the three months ended March 31, 2004. The
$356,793 and the $337,955 increases in the allowance for the three months ended March 31,
2005 and 2004, respectively, related to our decision to increase the allowance in response
to the $15.4 million and the $23.3 million growth in loans for the three months ended
March 31, 2005 and 2004, respectively. The loan loss reserve was $4.1 million and $3.0
million as of March 31, 2005 and 2004, respectively. The allowance for loan losses as a
percentage of gross loans was 1.38% at March 31, 2005 and 1.33% at March 31, 2004, while
the percentage of nonperforming loans to gross loans was 0.34% and 0.39% at March 31, 2005
and 2004, respectively.

14

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Noninterest Income

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

|                         | Three months ended | 
|------------------------ | ------------------ | 
|
|
|Loan fee income          |                    | 
|Service fees on deposits |                    | 
|Other income             |                    | 
|                         |                    | 
|Total noninterest income |                    | 
|                         |                    | 

Three months ended
March 31, 2005 and 2004

Noninterest
income in the first three month period of 2005 was $213,375, an increase of 31.5% over
noninterest income of $162,323 in the same period of 2004.

Loan
fees income consist primarily of late charge fees, fees from issuance of letters of credit
and mortgage origination fees we receive on residential loans funded and closed by a third
party. Loan fees were $46,624 and $26,035 for the three months ended March 31, 2005 and
March 31, 2004, respectively. The $20,589 increase for the three months ended March 31,
2005 compared to the same period in 2004 related primarily to an additional $9,143 in
mortgage origination fees and an additional $11,665 in fees received from the issuance of
letters of credit. Mortgage origination fees were $9,893 and $750 for the three months
ended March 31, 2005 and 2004, respectively, while income related to amortization of fees
on letters of credit was $21,104 and $9,439 for the first quarter of 2005 and 2004,
respectively. Late charge fees were $15,626 and $15,846 for the three months ended March
31, 2005 and 2004, respectively.

Service
fees on deposits consist primarily of income from NSF fees and service charges on
transaction accounts. Service fees on deposits were $73,537 and $66,750 for the three
months ended March 31, 2005 and 2004, respectively. The additional $6,787 of income
related to both higher service charges and an increase of NSF transactions resulting from
the larger number of client accounts. NSF income was $45,123 and $40,380 for the three
months ended March 31, 2005 and 2004, respectively, representing 63.4% of total service
fees on deposits in the 2005 period compared to 60.5% of total service fees on deposits in
the 2004 period.

Other
income consisted primarily of fees received on ATM transactions and sale of customer
checks. Other income was $93,214 and $69,538 for the three months ended March 31, 2005 and
2004, respectively. The $23,676 increase resulted primarily from an increase in the volume
of ATM transactions for which we receive fees. ATM transaction fees were $79,125 and
$60,831 for the three months ended March 31, 2005 and 2004, respectively. ATM transaction
fees represented 84.9% and 87.5% of total other income for the three months ended March
31, 2005 and 2004, respectively. Included in noninterest outside service expense is
$64,642 and $55,008 related to corresponding transaction costs associated with ATM
transaction fees for the three months ended March 31, 2005 and 2004, respectively. The net
impact of the fees received and the related cost of the ATM transactions on earnings for
the three months ended March 31, 2005 and 2004 was $14,483 and $5,823, respectively.

15

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Noninterest expenses

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

|                                  | Three months ended | 
|--------------------------------- | ------------------ | 
|
|
|Compensation and benefits         |                    | 
|Professional fees                 |                    | 
|Marketing                         |                    | 
|Insurance                         |                    | 
|Occupancy                         |                    | 
|Data processing and related costs |                    | 
|Telephone                         |                    | 
|Other                             |                    | 
|                                  |                    | 
|Total noninterest expense         |                    | 
|                                  |                    | 

We
incurred noninterest expenses of $1.5 million for the three months ended March 31, 2005
compared to $1.1 million for the three months ended March 31, 2004. Average
interest-earning assets increased 36.1% during this period, while general and
administrative expense increased only 32.6%.

For
the three months ended March 31, 2005, compensation and benefits, occupancy, and data
processing and related costs represented 79.2% of the total noninterest expense compared
to 82.3% for the same period in 2004.

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

|                                   | Three months ended | 
|---------------------------------- | ------------------ | 
|
|
|Base compensation                  |                    | 
|Incentive compensation             |                    | 
|                                   |                    | 
|Total compensation                 |                    | 
|Benefits                           |                    | 
|Capitalized loan origination costs |                    | 
|                                   |                    | 
|Total compensation and benefits    |                    | 
|                                   |                    | 

Compensation
and benefits expense was $794,793 and $598,645 for the three months ended March 31, 2005
and 2004, respectively. Compensation and benefits represented 53.5% of our total
noninterest expense for both of the three months ended March 31, 2005 and 2004. The
$196,148 increase in compensation and benefits in the first quarter of 2005 compared to
the same period in 2004 resulted from increases of $136,396 in base compensation, $10,500
in additional incentive compensation, and $52,152 higher benefits expense. These amounts
were partly offset by an increase of $2,900 in loan origination compensation expense,
which is required to be capitalized and amortized over the life of the loan as a reduction
of loan interest income.

The
$136,396 increase in base compensation expense related to the cost of 11 additional
employees as well as annual salary increases. Five of the new employees relate to the
staff that was hired for the new retail office that was opened in the first quarter of
2005. The remaining six employees were hired to support the growth in both loans and
deposit operations. Incentive compensation represented 16.4% and 20.0% of total
compensation and benefits for the three months ended March 31, 2005 and 2004,
respectively. The incentive compensation expense recorded for the first quarter of 2005
and 2004 represented an accrual of the portion of the estimated incentive compensation
earned during the first quarter of the respective year. Benefits expense increased $52,152
in the first quarter of 2005 compared to the same period in 2004. Benefits expense
represented 23.7% and 20.4% of the total compensation for the three months ended March 31,
2005 and 2004, respectively.

16

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

|                        | Three months ended | 
|----------------------- | ------------------ | 
|
|
|Data processing costs   |                    | 
|ATM transaction expense |                    | 
|Courier expense         |                    | 
|Other expenses          |                    | 
|                        |                    | 
|Total data processing   |                    | 
|and related costs       |                    | 
|                        |                    | 

Data
processing and related costs were $215,208 and $181,471 for the three months ended March
31, 2005 and 2004, respectively. During the three months ended March 31, 2005, our data
processing costs for our core processing system were $112,373 compared to $96,036 for the
three months ended March 31, 2005. We have contracted with an outside computer service
company to provide our core data processing services.

Data
processing costs increased $16,337, or 17.0%, for the three months ended March 31, 2005
compared to the same period in 2004. The increases in costs were caused by the higher
number of loan and deposit accounts. A significant portion of the fee charged by the third
party processor is directly related to the number of loan and deposit accounts and the
related number of transactions.

We
receive ATM transaction income from transactions performed by our clients. Since we also
outsource this service, we are charged related transaction fees from our ATM service
provider. ATM transaction expense was $64,642 and $55,008 for the three months ended March
31, 2005 and 2004, respectively. The increase relates to the higher transaction volume
during the respective periods.

Occupancy
expense, which represented 11.2% and 16.2% of total noninterest expense for the three
months ended March 31, 2005 and 2004, respectively, increased $24,955. Occupancy expense
was $165,725 and $140,770 for the three months ended March 31, 2005 and 2004,
respectively. The $24,955 increase resulted primarily from the annual increase rent
expense on the Haywood Road office and the increase depreciation expense related to
additional computer equipment.

The
remaining $95,744 increase in noninterest expense resulted primarily from $39,000 increase
in marketing expenses, an additional $29,310 in professional fees, and $30,690 in other
expenses. The $39,000 increase in marketing expenses related to expanding our market
awareness in the Greenville market, while a significant portion of the $30,690 increase in
other expenses was due to increased costs of postage and office supplies, additional staff
education and training, and higher dues and subscription costs. The additional
professional fees relates primarily to additional legal and accounting fees related to the
new SEC reporting requirements.

Income
tax expense was $404,606 for the three months ended March 31, 2005 compared to $237,776
during the same period in 2004. The increase related to the higher level of income before
taxes.

# Balance Sheet Review

General

At
March 31, 2005, we had total assets of $341.9 million, consisting principally of $291.6
million in loans, $39.2 million in investments, $1.5 million in federal funds sold, and
$4.4 million in cash and due from banks. Our liabilities at March 31, 2005 totaled $313.2
million, which consisted principally of $218.9 million in deposits, $67.0 million in FHLB
advances, $18.6 million in short-term borrowings, and $6.2 million in junior subordinated
debentures. At March 31, 2005, our shareholders equity was $28.7 million.

17

---

At
December 31, 2004, we had total assets of $315.8 million, consisting principally of $276.6
million in loans, $29.2 million in investments, $1.4 million in federal funds sold, and
$3.9 million in cash and due from banks. Our liabilities at December 31, 2004 totaled
$287.7 million, consisting principally of $204.9 million in deposits, $60.7 million in
FHLB advances, $13.1 million of short-term borrowings, and $6.2 million of junior
subordinated debentures. At December 31, 2004, our shareholders equity was $28.1
million.

Federal Funds Sold

At
March 31, 2005, our federal funds sold were $1.5 million, or 0.4% of total assets. At
December 31, 2004, our $1.4 million in short-term investments in federal funds sold on an
overnight basis comprised 0.4% of total assets. As a result of the historically low yields
paid for federal funds sold during the last two years, we have maintained a lower than
normal level of federal funds.

Investments

Contractual
maturities and yields on our investments that are available for sale and are held to
maturity at March 31, 2005 are shown in the following table. Expected maturities may
differ from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. At March 31, 2005, we had no
securities with a maturity of less than one year.

|                   | One to Five Years | Five to Ten Years | Over Ten Years | Total | 
|------------------ | ----------------- | ----------------- | -------------- | ----- | 
|
|
|Available for Sale |                   |                   |                |       | 
|U.S. Government    |                   |                  
|sponsored  agency  |                   |                   | $              | 1,036 | 
|Mortgage-backed    |                   |                  
|securities         |                   |                   |                | -     | 
|                   |                   |                   |                |       | 
|Total              |                   |                   | $              | 1,036 | 
|                   |                   |                   |                |       | 
|Held to Maturity   |                   |                  
|Mortgage-backed    |                   |                  
|securities         |                   |                   | $              | -     | 
|                   |                   |                   |                |       | 

At
March 31, 2005, our investments included securities issued by Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association with
carrying values of $1.0 million, $4.8 million, and $28.3 million, respectively.

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

|                     | March 31, 2005 | December 31, 2004
|-------------------- | -------------- | -----------------
|
|
|
|Available for Sale   |                |                  
|U.S. Government /    |                |                  
|government sponsored |                |                  
|agencies             |                |                  
|Mortgage-backed      |                |                  
|Securities           |                |                  
|                     |                |                  
|Total                |                |                  
|                     |                |                  
|Held to Maturity     |                |                  
|Mortgage-backed      |                |                  
|Securities           |                |                  
|                     |                |                  

Other
investments totaled $5.0 million at March 31, 2005. Other investments at March 31, 2005
consisted of Federal Reserve Bank stock with a cost of $485,150, an investment in
Greenville First Statutory Trust I of $186,000, and Federal Home Loan Bank stock with a
cost of $4.3 million.

18

---

At
December 31, 2004, the $29.2 million in our investment securities portfolio represented
approximately 9.2% of our total assets. We held U.S. Government agency securities and
mortgage-backed securities with a fair value of $25.2 million and an amortized cost of
$25.2 million for an unrealized gain of $75,739. As a result of the strong growth in our
loan portfolio and the historical low fixed rates that were available during the last two
and one-half years, we have maintained a lower than normal level of investments. As rates
on investment securities rise and additional capital and deposits are obtained, we
anticipate increasing the size of the investment portfolio.

Contractual
maturities and yields on our available for sale and held to maturity investments at
December 31, 2004 are shown in the following table. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties. At December 31, 2004, we had no securities
with a maturity of less than one year.

|                   | One to Five Years | Five to Ten Years | Over Ten Years | Total | 
|------------------ | ----------------- | ----------------- | -------------- | ----- | 
|
|
|Available for Sale |                   |                   |                |       | 
|U.S. Government    |                   |                  
|sponsored  agency  |                   |                   | $              | 1,053 | 
|Mortgage-backed    |                   |                  
|securities         |                   |                   |                | -     | 
|                   |                   |                   |                |       | 
|Total              |                   |                   | $              | 1,053 | 
|                   |                   |                   |                |       | 
|Held to Maturity   |                   |                  
|Mortgage-backed    |                   |                  
|securities         |                   |                   | $              | -     | 
|                   |                   |                   |                |       | 

At
December 31, 2004, our investments included securities issued by Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association with
carrying values of $1.1 million, $4.9 million, and $19.3 million, respectively.

Other
investments totaled $3.9 million at December 31, 2004. Other investments at December 31,
2004 consisted of Federal Reserve Bank stock with a cost of $485,150, an investment in
Greenville First Statutory Trust I of $186,000, and Federal Home Loan Bank stock with a
cost of $3.2 million.

Loans

Since
loans typically provide higher interest yields than other types of interest earning
assets, a substantial percentage of our earning assets are invested in our loan portfolio.
Average loans for the year ended December 31, 2004 were $248.1 million. Before allowance
for loan losses, total loans outstanding at December 31, 2004 were $280.3 million. For the
three months ended March 31, 2005 and 2004, average loans were $287.9 million and $216.8
million, respectively. Before allowance for loan losses, total loans outstanding at March
31, 2005 were $292.5 million.

19

---

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

The
following table summarizes the composition of our loan portfolio at March 31, 2005 and
December 31, 2004.

|                                | March 31, 2005 | December 31, 2004
|------------------------------- | -------------- | -----------------
|
|Real estate:                    |                |                  
|Commercial:                     |                |                  
|Owner occupied                  |                |                  
|Non-owner occupied              |                |                  
|Construction                    |                |                  
|                                |                |                  
|Total commercial real estate    |                |                  
|                                |                |                  
|Consumer:                       |                |                  
|Residential                     |                |                  
|Home equity                     |                |                  
|Construction                    |                |                  
|                                |                |                  
|Total consumer real estate      |                |                  
|                                |                |                  
|Total real estate               |                |                  
|Commercial business             |                |                  
|Consumer-other                  |                |                  
|Deferred origination fees, net  |                |                  
|                                |                |                  
|Total gross loans, net of       |                |                  
|deferred fees                   |                |                  
|                                |                |                  
|Less--allowance for loan losses |                |                  
|                                |                |                  
|Total loans, net                |                |                  
|                                |                |                  

20

---

Maturities and
Sensitivity of Loans to Changes in Interest Rates

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

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

|                                         |  | After one |   |       
|---------------------------------------- |  | --------- | - | ------
|
|
|
|Real estate - mortgage                   |  |           | $ | 40,710
|Real estate - construction               |  |           |   | 7,896 
|                                         |  |           |   |       
|Total real estate                        |  |           |   | 48,606
|Commercial business                      |  |           |   | 32,203
|Consumer-other                           |  |           |   | 4,562 
|Deferred origination fees, net           |  |           |   | (163  
|                                         |  |           |   |       
|Total gross loans, net of  deferred fees |  |           | $ | 85,208
|                                         |  |           |   |       
|Loans maturing after one                 |  |          
|year with:                               |  |          
|Fixed interest rates                     |  |           |   |       
|Floating interest rates                  |  |           |   |       

The
following table summarizes the loan maturity distribution by type and related interest
rate characteristics at December 31, 2004.

|                               |  | After one |   |       
|------------------------------ |  | --------- | - | ------
|
|
|
|Real estate - mortgage         |  |           | $ | 36,665
|Real estate - construction     |  |           |   | 6,093 
|                               |  |           |   |       
|Total real estate              |  |           |   | 42,758
|Commercial business            |  |           |   | 27,927
|Consumer - other               |  |           |   | 3,328 
|Deferred origination fees, net |  |           |   | (132  
|                               |  |           |   |       
|Total gross loans, net of      |  |          
|deferred fees                  |  |           | $ | 73,881
|                               |  |           |   |       
|Loans maturing after one       |  |          
|year with:                     |  |          
|Fixed interest rates           |  |           |   |       
|Floating interest rates        |  |           |   |       

21

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Provision and Allowance
for Loan Losses

We
have established an allowance for loan losses through a provision for loan losses charged
to expense on our statement of income. The allowance for loan losses represents an amount
which we believe will be adequate to absorb probable losses on existing loans that may
become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is
based on a number of assumptions about future events, which we believe to be reasonable,
but which may or may not prove to be accurate. Our determination of the allowance for loan
losses is based on evaluations of the collectibility of loans, including consideration of
factors such as the balance of impaired loans, the quality, mix, and size of our overall
loan portfolio, economic conditions that may affect the borrowers ability to repay,
the amount and quality of collateral securing the loans, our historical loan loss
experience, and a review of specific problem loans. We also consider subjective issues
such as changes in the lending policies and procedures, changes in the local/national
economy, changes in volume or type of credits, changes in volume/severity of problem
loans, quality of loan review and board of director oversight, concentrations of credit,
and peer group comparisons. Due to our limited operating history, the provision for loan
losses has been made primarily as a result of our assessment of general loan loss risk
compared to banks of similar size and maturity. Due to the rapid growth of our bank over
the past several years and our short operating history, a large portion of the loans in
our loan portfolio and of our lending relationships are of relatively recent origin. In
general, loans do not begin to show signs of credit deterioration or default until they
have been outstanding for some period of time, a process known as seasoning. As a result,
a portfolio of older loans will usually behave more predictably than a newer portfolio.
Because our loan portfolio is relatively new, the current level of delinquencies and
defaults may not be representative of the level that will prevail when the portfolio
becomes more seasoned, which may be higher than current levels. If delinquencies and
defaults increase, we may be required to increase our provision for loan losses, which
would adversely affect our results of operations and financial condition. Periodically, we
adjust the amount of the allowance based on changing circumstances. We charge recognized
losses to the allowance and add subsequent recoveries back to the allowance for loan
losses. There can be no assurance that charge-offs of loans in future periods will not
exceed the allowance for loan losses as estimated at any point in time or that provisions
for loan losses will not be significant to a particular accounting period.

The
following table summarizes the activity related to our allowance for loan losses for the
three months ended March 31, 2005 and 2004:

|                                           | March 31, | 
|------------------------------------------ | --------- | 
|
|
|Balance, beginning of period               |           | 
|                                           |           | 
|Loans charged-off                          |           | 
|Recoveries of loans previously charged-off |           | 
|                                           |           | 
|Net loans (charged-off) recovery           |           | 
|Provision for loan losses                  |           | 
|                                           |           | 
|Balance, end of period                     |           | 
|                                           |           | 
|Allowance for loan losses to gross loans   |           | 
|                                           |           | 
|Net charge-offs to average loans           |           | 
|                                           |           | 

We
do not allocate the allowance for loan losses to specific categories of loans. Instead, we
evaluate the adequacy of the allowance for loan losses on an overall portfolio basis
utilizing our credit grading system which we apply to each loan. We have retained an
independent consultant to review the loan files on a test basis to confirm the grading of
each loan.

22

---

Nonperforming Assets

The
following table shows the nonperforming assets, percentages of net charge-offs, and the
related percentage of allowance for loan losses for the three months ended March 31, 2005
and the year ended December 31, 2004.

|                                         | March 31, | December 31,
|---------------------------------------- | --------- | ------------
|
|
|Loans over 90 days past due              |           |             
|                                         |           |             
|Loans on nonaccrual:                     |           |             
|Mortgage                                 |           |             
|Commercial                               |           |             
|Consumer                                 |           |             
|                                         |           |             
|Total nonaccrual loans                   |           |             
|Troubled debt restructuring              |           |             
|                                         |           |             
|Total of nonperforming loans             |           |             
|Other nonperforming assets               |           |             
|                                         |           |             
|Total nonperforming assets               |           |             
|                                         |           |             
|Percentage of total assets               |           |             
|Percentage of nonperforming loans and    |           |             
|assets to gross loans                    |           |             
|Allowance for loan losses to gross loans |           |             
|Net charge-offs to average loans         |           |             

At
March 31, 2005 and December 31, 2004, the allowance for loan losses was $4.1 million and
$3.0 million, respectively, or 1.38% and 1.33% of outstanding loans, respectively. During
the year ended December 31, 2004, we had net charged off loans of $298,505. During the
three months ended March 31, 2005 we had a net recovery of $11,793. During the first three
months of 2004, our net charged-off loans were $12,045.

At
March 31, 2005 and December 31, 2004, nonaccrual loans represented 0.33% and 0.27% of
total loans, respectively. At March 31, 2005 and December 31, 2004, we had $1.1 million
and $739,126 of loans, respectively, on nonaccrual status. Generally, a loan is placed on
nonaccrual status when it becomes 90 days past due as to principal or interest, or when we
believe, after considering economic and business conditions and collection efforts, that
the borrowers financial condition is such that collection of the loan is doubtful. A
payment of interest on a loan that is classified as nonaccrual is recognized as income
when received.

The
amount of foregone interest income on the nonaccrual loans in the first three months of
2005 was approximately $14,000. The amount of interest income recorded in the first three
months of 2005 for loans that were on nonaccrual at March 31, 2005 was $0.

23

---

Deposits and Other
Interest-Bearing Liabilities

Our
primary source of funds for loans and investments is our deposits, advances from the FHLB,
and short-term repurchase agreements. National and local market trends over the past
several years suggest that consumers have moved an increasing percentage of discretionary
savings funds into investments such as annuities, stocks, and fixed income mutual funds.
Accordingly, it has become more difficult to attract deposits. We have chosen to obtain a
portion of our certificates of deposits from areas outside of our market. The deposits
obtained outside of our market area generally have comparable rates compared to rates
being offered for certificates of deposits in our local market. We also utilize
out-of-market deposits in certain instances to obtain longer-term deposits than are
readily available in our local market. We anticipate that the amount of out-of-market
deposits will decline after our new retail deposit offices become established. The amount
of out-of-market deposits was $77.3 million at December 31, 2004 and $82.9 at March 31,
2005.

We
anticipate being able to either renew or replace these out-of-market deposits when they
mature, although we may not be able to replace them with deposits with the same terms or
rates. Our loan-to-deposit ratio was 133% and 135% at March 31, 2005 and December 31,
2004, respectively.

The
following table shows the average balance amounts and the average rates paid on deposits
held by us for the three months ended March 31, 2005 and 2004.

|                                    | 2005 | 2004
|----------------------------------- | ---- | ----
|
|
|Noninterest bearing demand deposits |      |     
|Interest bearing demand deposits    |      |     
|Money market accounts               |      |     
|Saving accounts                     |      |     
|Time deposits less than $100,000    |      |     
|Time deposits greater than $100,000 |      |     
|                                    |      |     
|Total deposits                      |      |     
|                                    |      |     

Core
deposits, which exclude time deposits of $100,000 or more, provide a relatively stable
funding source for our loan portfolio and other earning assets. Our core deposits were
$116.0 million and $107.8 million at March 31, 2005 and December 31, 2004, respectively.

All
of our time deposits are certificates of deposits. The maturity distribution of our time
deposits of $100,000 or more at March 31, 2005 (in thousands) is as follows:

|                                | March 31,
|------------------------------- | ---------
|
|Three months or less            |          
|Over three through six months   |          
|Over six  through twelve months |          
|Over twelve months              |          
|                                |          
|Total                           |          
|                                |          

The
increase in time deposits of $100,000 or more for the three months ended March 31, 2005
resulted from both additional wholesale deposits and from an 18 month retail CD promotion
that raised approximately $14.0 million.

24

---

# Capital Resources

Total
shareholders equity was $28.1 million at December 31, 2004. At March 31, 2005, total
shareholders equity was $28.7 million. The increase during the first three months of
2005 resulted primarily from the $660,148 of net income earned.

The
following table shows the return on average assets (net income divided by average total
assets), return on average equity (net income divided by average equity), and equity to
assets ratio (average equity divided by average total assets) for the three months ended
March 31, 2005 and the year ended December 31, 2004. Since our inception, we have not paid
cash dividends.

|                         | March 31, 2005 | December 31, 2004
|------------------------ | -------------- | -----------------
|Return on average assets |                |                  
|                         |                |                  
|Return on average equity |                |                  
|                         |                |                  
|Equity to assets ratio   |                |                  

25

---

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

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

At
both the holding company and bank level, we are subject to various regulatory capital
requirements administered by the federal banking agencies. To be considered
adequately capitalized under these capital guidelines, we must maintain a
minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In
addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%. To be
considered well-capitalized, we must maintain total risk-based capital of at
least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

The
following table sets forth the holding companys and the banks various capital
ratios at March 31, 2005 and at December 31, 2004. For all periods, the bank was
considered well capitalized and the holding company met or exceeded its
applicable regulatory capital requirements.

|                          | March 31, 2005 | December 31, 2004
|------------------------- | -------------- | -----------------
|
|
|Total risk-based capital  |                |                  
|Tier 1 risk-based capital |                |                  
|Leverage capital          |                |                  

26

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# Borrowings

The
following table outlines our various sources of borrowed funds during the three months
ended March 31, 2005 and the year ended December 31, 2004, the amounts outstanding at the
end of each period, at the maximum point for each component during the periods and on
average for each period, and the average interest rate that we paid for each borrowing
source. The maximum month-end balance represents the high indebtedness for each component
of borrowed funds at any time during each of the periods shown.

|                                   |  |  | Maximum |        | 
|---------------------------------- |  |  | ------- | ------ | 
|
|
|
|At or for the Three months         |  |  |         |        | 
|Ended March 31, 2005               |  | 
|Federal Home Loan Bank advances    |  |  | $       | 67,030 | 
|Securities sold under agreement to |  | 
|repurchase                         |  |  |         | 18,572 | 
|Federal funds purchased            |  |  |         | -      | 
|Junior subordinated debentures     |  |  |         | 6,186  | 
|At or for the Year                 |  | 
|Ended December 31, 2004            |  | 
|Federal Home Loan Bank advances    |  |  | $       | 60,660 | 
|Securities sold under agreement to |  | 
|repurchase                         |  |  |         | 13,100 | 
|Federal funds purchased            |  |  |         | -      | 
|Correspondent bank line of credit  |  |  |         | -      | 
|Junior subordinated debentures     |  |  |         | 6,186  | 

# Effect of Inflation and
Changing Prices

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

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

27

---

# Off-Balance Sheet Risk

Commitments
to extend credit are agreements to lend to a client as long as the client has not violated
any material condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require the payment of a fee. At
December 31, 2004, unfunded commitments to extend credit were $51.6 million, of which
$17.6 million was at fixed rates and $34.0 million was at variable rates. At March 31,
2005, unfunded commitments to extend credit were $59.2 million, of which $20.1 million was
at fixed rates and $39.1 million was at variable rates. A significant portion of the
unfunded commitments related to consumer equity lines of credit. Based on historical
experience, we anticipate that a significant portion of these lines of credit will not be
funded. We evaluate each clients credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by us upon extension of credit, is
based on our credit evaluation of the borrower. The type of collateral varies but may
include accounts receivable, inventory, property, plant and equipment, and commercial and
residential real estate.

At
December 31, 2004, there was a $2.5 million commitment under a letter of credit. At March
31, 2005, there was a $2.6 million commitment under a letter of credit. The credit risk
and collateral involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Since most of the letters of credit
are expected to expire without being drawn upon, they do not necessarily represent future
cash requirements.

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

# Market Risk

Market
risk is the risk of loss from adverse changes in market prices and rates, which
principally arises from interest rate risk inherent in our lending, investing, deposit
gathering, and borrowing activities. Other types of market risks, such as foreign currency
exchange rate risk and commodity price risk, do not generally arise in the normal course
of our business. Our asset/liability management committee (ALCO) monitors and
considers methods of managing exposure to interest rate risk. We have both an internal
ALCO consisting of senior management that meets at various times during each month and a
board ALCO that meets monthly. The ALCOs are responsible for maintaining the level of
interest rate sensitivity of our interest sensitive assets and liabilities within
board-approved limits.

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

Approximately
68% of our loans were variable rate loans at December 31, 2004 and March 31, 2005, and we
were asset sensitive during most of the year ended December 31, 2004 and the three months
ended March 31, 2005. As of March 31, 2005, we expect to be asset sensitive for the next
12 months. The ratio of cumulative gap to total earning assets after 12 months was 5.0%
because $17.2 million more assets will reprice in a 12 month period than liabilities.
However, our gap analysis is not a precise indicator of our interest sensitivity position.
The analysis presents only a static view of the timing of maturities and repricing
opportunities, without taking into consideration that changes in interest rates do not
affect all assets and liabilities equally. For example, rates paid on a substantial
portion of core deposits may change contractually within a relatively short time frame,
but those rates are viewed by us as significantly less interest-sensitive than
market-based rates such as those paid on noncore deposits. Net interest income may be
affected by other significant factors in a given interest rate environment, including
changes in the volume and mix of interest-earning assets and interest-bearing liabilities.

28

---

# Liquidity and Interest
Rate Sensitivity

Liquidity
represents the ability of a company to convert assets into cash or cash equivalents
without significant loss, and the ability to raise additional funds by increasing
liabilities. Liquidity management involves monitoring our sources and uses of funds in
order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity
management is made more complicated because different balance sheet components are subject
to varying degrees of management control. For example, the timing of maturities of our
investment portfolio is fairly predictable and subject to a high degree of control at the
time investment decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to the same degree of control.

At
March 31, 2005, our liquid assets, consisting of cash and due from banks and federal funds
sold, amounted to $5.8 million, or 1.7% of total assets. Our investment securities at
March 31, 2005 amounted to $34.2 million, or 10.0% of total assets. Investment securities
traditionally provide a secondary source of liquidity since they can be converted into
cash in a timely manner. However, $22.7 million of these securities are pledged against
outstanding debt. Therefore, the related debt would need to be repaid prior to the
securities being sold in order for these securities to be converted to cash. At December
31, 2004, our liquid assets amounted to $5.3 million, or 1.7% of total assets. Our
investment securities at December 31, 2004 amounted to $29.2 million, or 9.2% of total
assets. However, $17.0 million of these securities are pledged against outstanding debt.

Our
ability to maintain and expand our deposit base and borrowing capabilities serves as our
primary source of liquidity. We plan to meet our future cash needs through the liquidation
of temporary investment, the generation of deposits, and from additional borrowings. In
addition, we will receive cash upon the maturity and sale of loans and the maturity of
investment securities. During most of 2004 and the first three months of 2005, as a result
of historically low rates that were being earned on short-term liquidity investments, we
chose to maintain a lower than normal level of short-term liquidity securities. In
addition, we maintain three lines of credit with correspondent banks totaling $14.5
million. We are also a member of the Federal Home Loan Bank of Atlanta, from which
applications for borrowings can be made for leverage purposes. The FHLB requires that
securities, qualifying mortgage loans, and stock of the FHLB owned by the bank be pledged
to secure any advances from the FHLB. The unused borrowing capacity currently available
from the FHLB at March 31, 2005 was $21.7 million, assuming that the banks $4.3
million investment in FHLB stock, as well as qualifying mortgages, would be available to
secure any future borrowings.

Prior
to March 31, 2005, the company entered into a commitment to construct a new office for
approximately $900,000. As of March 31, 2005, approximately $62,000 has been paid. The
office is expected to be completed in the late third quarter or early fourth quarter of
2005.

We
believe that our existing stable base of core deposits, borrowings from the FHLB, and
short-term repurchase agreements will enable us to successfully meet our long-term
liquidity needs.

Asset/liability
management is the process by which we monitor and control the mix and maturities of our
assets and liabilities. The essential purposes of asset/liability management are to ensure
adequate liquidity and to maintain an appropriate balance between interest sensitive
assets and liabilities in order to minimize potentially adverse impacts on earnings from
changes in market interest rates. We have both an internal ALCO consisting of senior
management that meets at various times during each month and a board ALCO that meets
monthly. The ALCOs are responsible for maintaining the level of interest rate sensitivity
of our interest sensitive assets and liabilities within board-approved limits.

29

---

The
following table sets forth information regarding our rate sensitivity as of March 31, 2005
for each of the time intervals indicated. The information in the table may not be
indicative of our rate sensitivity position at other points in time. In addition, the
maturity distribution indicated in the table may differ from the contractual maturities of
the earning assets and interest-bearing liabilities presented due to consideration of
prepayment speeds under various interest rate change scenarios in the application of the
interest rate sensitivity methods described above.

|                               | Within | After three but | After one but | After   |  
|------------------------------ | ------ | --------------- | ------------- | ------- | -
|
|
|
|Interest-earning assets:       |        |                 |               |         |  
|Federal funds sold             |        |                 | $             | 1,462   |  
|Investment securities          |        |                 |               | 1,338   |  
|Loans                          |        |                 |               | 206,479 |  
|                               |        |                 |               |         |  
|Total earning assets           |        |                 | $             | 209,279 |  
|                               |        |                 |               |         |  
|Interest-bearing liabilities:  |        |                
|Money market and NOW           |        |                 | $             | 75,281  |  
|Regular savings                |        |                 |               | 1,372   |  
|Time deposits                  |        |                 |               | 16,812  |  
|Repurchase agreements          |        |                 |               | 18,572  |  
|FHLB advances                  |        |                 |               | 27,030  |  
|Junior subordinated debentures |        |                 |               | 6,186   |  
|                               |        |                 |               |         |  
|Total interest-bearing         |        |                
|liabilities                    |        |                 | $             | 145,253 |  
|                               |        |                 |               |         |  
|Period gap                     |        |                 | $             | 64,026  |  
|Cumulative gap                 |        |                 |               | 64,026  |  
|Ratio of cumulative gap total  |        |                
|assets total earning assets    |        |                 |               | 19.3    | %

The
following table sets forth information regarding our rate sensitivity, as of December 31,
2004, at each of the time intervals.

|                               | Within | After three but | After one but | After   |  
|------------------------------ | ------ | --------------- | ------------- | ------- | -
|
|
|
|Interest-earning assets:       |        |                 |               |         |  
|Federal funds sold             |        |                 | $             | 1,394   |  
|Investment securities          |        |                 |               | 1,572   |  
|Loans                          |        |                 |               | 196,066 |  
|                               |        |                 |               |         |  
|Total earning assets           |        |                 | $             | 199,032 |  
|                               |        |                 |               |         |  
|Interest-bearing liabilities:  |        |                
|Money market and NOW           |        |                 | $             | 87,081  |  
|Regular savings                |        |                 |               | 1,244   |  
|Time deposits                  |        |                 |               | 23,369  |  
|Repurchase agreements          |        |                 |               | 13,100  |  
|FHLB advances                  |        |                 |               | 30,660  |  
|Junior subordinated debentures |        |                 |               | 6,186   |  
|                               |        |                 |               |         |  
|Total interest-bearing         |        |                
|liabilities                    |        |                 | $             | 161,640 |  
|                               |        |                 |               |         |  
|Period gap                     |        |                 | $             | 37,392  |  
|Cumulative gap                 |        |                 |               | 37,392  |  
|Ratio of cumulative gap total  |        |                
|assets total earning assets    |        |                 |               | 12.2    | %

30

---

# Accounting, Reporting,
and Regulatory Matters

Recently Issued
Accounting Standards

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

In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)). SFAS No. 123(R) will require companies to
measure all employee stock-based compensation awards using a fair value method and record
such expense in its financial statements. In addition, the adoption of SFAS No. 123(R)
requires additional accounting and disclosure related to the income tax and cash flow
effects resulting from share-based payment arrangements. SFAS No. 123(R) is effective for
the company beginning as of the quarter ending March 31, 2006. The Company is currently
evaluating the impact that the adoption of SFAS No. 123(R) will have on its financial
position, results of operations and cash flows. The company is in the process of
determining the effect of adoption which will be recognized in the statement of income.

In January 2004,  the FASB issued FIN No. 46,  "Consolidation of Variable Interest  Entities." FIN No. 46
requires a variable  interest  entity to be  consolidated by a company if that company is subject to a majority of the risk
of loss from the  variable  interest  entity's  activities  or  entitled  to receive a majority  of the  entity's  residual
returns,  or both. FIN No. 46 also requires  disclosures  about variable  interest  entities that a company is not required
to consolidate,  but in which it has a significant variable interest.  FIN No. 46 provides guidance for determining whether
an entity  qualifies as a variable  interest entity by considering,  among other  considerations,  whether the entity lacks
sufficient equity or its equity holders lack adequate  decision-making  ability. The consolidation  requirements of FIN No.
46 apply immediately to variable interest entities created after  January 31,  2004. The consolidation  requirements  apply
to existing  entities in the first fiscal year or interim period beginning after June 15,  2004.  Certain of the disclosure
requirements  apply in all financial  statements  issued after January 31,  2004,  regardless of when the variable interest
entity was established.  The adoption of FIN No. 46 will not have a material effect on the Company's  financial position or
results of  operations.  As a result of  adoption  of FIN No. 46, the Company  deconsolidated  the Trust for periods  ended
December  31,  2004.  In  November  2003,  the  Emerging  Issues  Task Force  ("EITF")  reached a  consensus  that  certain
quantitative  and  qualitative  disclosures  should be required for debt and  marketable  equity  securities  classified as
available  for sale or held to maturity  under SFAS No. 115 and SFAS No. 124 that are  impaired  at the balance  sheet date
but for which  other-than-temporary  impairment has not been  recognized.  Accordingly  the EITF issued EITF No. 03-1, "The
Meaning of  Other-Than-Temporary  Impairment and Its Application to Certain  Investments." This issue addresses the meaning
of  other-than-temporary  impairment and its application to investments  classified as either available for sale or held to
maturity  under  SFAS  No.  115  and  provides  guidance  on  quantitative  and  qualitative  disclosures.  The  disclosure
requirements  of EITF No. 03-1 are effective for annual  financial  statements for fiscal years ending after June 15, 2004.
The effective  date for the  measurement  and  recognition  guidance of EITF No. 03-1 has been delayed.  The FASB staff has
issued  a  proposed  Board-directed  FASB  Staff  Position  ("FSP"),  FSP EITF  03-1-a,  "Implementation  Guidance  for the
Application  of Paragraph 16 of Issue No.  03-1." The proposed FSP would  provide  implementation  guidance with respect to
debt   securities   that  are   impaired   solely  due  to  interest   rates  and/or   sector   spreads  and  analyzed  for
other-than-temporary  impairment  under the  measurement  and  recognition  requirements of EITF No. 03-1. The delay of the
effective date for the  measurement and  recognition  requirements of EITF No. 03-1 will be superseded  concurrent with the
final  issuance of FSP EITF 03-1-a.  Adopting  the  disclosure  provisions  of EITF No. 03-1 did not have any impact on the
Company's financial position or results of operations.

Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the consolidated financial statements upon adoption.

31

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# Item 3. Quantitative and
Qualitative Disclosures About Market Risk.

See Market Risk and
Liquidity and Interest Rate Sensitivity in Item 2, Management Discussion and
Analysis of Financial Condition and Results of Operations for quantitative and qualitative
disclosures about market risk, which information is incorporated herein by reference.

# Item 4. Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of March 31, 2005. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended March 31, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

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

# PART II. OTHER
INFORMATION

# Item 1. Legal
Proceedings.

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

# Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds.

Not applicable

# Item 3. Defaults Upon
Senior Securities.

Not applicable

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

Not applicable

# Item 5. Other
Information.

Not applicable

# Item 6. Exhibits.

31.1     Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2     Rule 13a-14(a) Certification of the Principal Financial Officer.

32        Section 1350
Certifications.

32

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# SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

| |  | GREENVILLE FIRST BANCSHARES, INC                   Registrant
| |  | -------------------------------------------------------------

|Date:  May 12, 2005 |  | /s/  R. Arther Seaver, Jr.
|------------------- |  | --------------------------
|                    |  | R. Arther Seaver, Jr.     
|                    |  | Chief Executive Officer   

|Date:  May 12, 2005 |  | /s/  James M. Austin, III
|------------------- |  | -------------------------
|                    |  | James M. Austin, III     
|                    |  | Chief Financial Officer  

33

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# INDEX TO EXHIBITS

ExhibitNumber      Description

31.1     Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2     Rule 13a-14(a) Certification of the Principal Financial Officer.

32        Section 1350
Certifications.