UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

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

For the quarter ended June 30, 2003


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

For the transition period from ___________ to _____________

Commission file number 333-83851

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)

          State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 1,150,000 shares of common stock, par value $.01 per share, were issued and outstanding as of May 9, 2003.

          Transitional Small Business Disclosure Format (check one): Yes      No  X  


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.




2


GREENVILLE FIRST BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

,
June 30, December 31,
2003
2002
(Unaudited)
(Audited)
                                                                                                           Assets            
    Cash and due from banks   $ 4,426,394   $ 4,503,420  
    Federal funds sold    4,429,290    41,736  
    Investment securities available for sale    4,709,690    14,592,190  
    Other investments, at cost    1,605,000    905,000  
    Loans, net    173,584,374    148,079,012  
    Accrued interest    681,683    730,028  
    Property and equipment    749,280    785,942  
    Other real estate owned    598,356    524,625  
    Other assets    689,782    269,840  


             Total assets   $ 191,547,979   $ 170,357,663  


                                                                                      Liabilities and Shareholders' Equity      
Liabilities  
    Deposits   $ 144,546,324   $ 133,563,270  
    Official checks outstanding    3,951,560    889,270  
    Federal funds purchased and repurchase agreements    -    9,107,000  
    Federal Home Loan Bank advances    25,500,000    13,000,000  
    Note payable    -    2,500,000  
    Trust preferred securities    6,000,000    -  
    Accrued interest payable    601,857    606,072  
    Accounts payable and accrued expenses    347,682    460,262  


         Total liabilities    180,947,423    160,125,874  


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 per share, 10,000,000 shares  
      authorized, 1,150,000 issued    11,500    11,500  
    Additional paid-in capital    10,635,200    10,635,200  
    Accumulated other comprehensive income    120,119    147,733  
    Retained deficit    (166,263 )  (562,644 )


         Total shareholders' equity    10,600,556    10,231,789  


         Total liabilities and shareholders' equity   $ 191,547,979   $ 170,357,663  


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

3


GREENVILLE FIRST BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

For the Three Months Ended
June 30,
2003
2002
Interest income            
    Loans   $ 2,219,654   $ 1,734,959  
    Investment securities    62,569    188,250  
    Federal funds sold    5,179    13,511  


            Total interest income    2,287,402    1,936,720  
Interest expense   
   Deposits    682,896    841,523  
   Borrowings    177,924    43,097  


                Total interest expense    860,820    884,620  


           Net interest income before provision for loan losses    1,426,582    1,052,100  
   Provision for loan losses    200,000    220,000  


           Net interest income after provision for loan losses    1,226,582    832,100  


Noninterest income (loss)   
    Loan fee income    59,312    27,212  
    Service fees on deposit accounts    63,567    45,821  
    Writedown on real estate owned    (100,000 )  -  
    Other income    61,075    48,781  


            Total noninterest income    83,954    121,814  


Noninterest expenses  
    Salaries and benefits    488,564    430,024  
    Professional fees    40,958    43,141  
    Marketing    43,396    37,786  
    Insurance    26,580    21,791  
    Occupancy    137,965    145,708  
    Data processing and related costs    154,473    109,628  
    Telephone    5,717    6,554  
    Other    42,794    38,156  


            Total noninterest expenses    940,447    832,788  


            Income before income taxes    370,089    121,126  
  
Income tax expense     140,634    -  


Net income    $ 229,455   $ 121,126  


Income per common share:   
    Basic   $ .20   $ .11  


    Diluted   $ .18   $ .10  


Weighted average common shares outstanding:   
    Basic    1,150,000    1,150,000  


    Diluted    1,257,599    1,162,398  


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

4


GREENVILLE FIRST BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOMES
(Unaudited)

For the Six Months Ended
June 30,
2003
2002
Interest income            
    Loans   $ 4,307,650   $ 3,321,614  
    Investment securities    199,113    369,403  
    Federal funds sold    11,668    36,061  


            Total interest income    4,518,431    3,727,078  
Interest expense  
   Deposits    1,412,376    1,611,120  
   Borrowings    340,394    119,680  


                Total interest expense    1,752,770    1,730,800  


           Net interest income before provision for loan losses    2,765,661    1,996,278  
   Provision for loan losses    500,000    420,000  


           Net interest income after provision for loan losses    2,265,661    1,576,278  


Noninterest income (loss)  
    Loan fee income    103,666    54,445  
    Service fees on deposit accounts    123,296    81,434  
    Writedown on real estate operations    (100,000 )  -  
    Other income    104,145    88,885  


            Total noninterest income    231,107    224,764  


Noninterest expenses  
    Salaries and benefits    967,842    861,547  
    Professional fees    74,559    83,200  
    Marketing    78,745    62,184  
    Insurance    53,265    43,034  
    Occupancy    299,362    291,733  
    Data processing and related costs    287,530    203,527  
    Telephone    11,187    11,730  
    Other    84,954    80,148  


            Total noninterest expenses    1,857,444    1,637,103  


            Income before income taxes    639,322    163,939  
  
Income tax expense    242,941    -  


Net income   $ 396,381   $ 163,939  


Income per common share:  
    Basic   $ .34   $ .14  


    Diluted   $ .32   $ .14  


Weighted average common shares outstanding:  
     Basic    1,150,000    1,150,000  


    Diluted    1,240,247    1,156,199  


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

5


GREENVILLE FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

Accumulated
Additional other Total
Common stock paid-in comprehensive Retained Shareholders'
Shares
Amount
capital
income
deficit
equity
December 31, 2001      1,150,000   $ 11,500   $ 10,635,200   $ 127,779   $ (1,315,060 ) $ 9,459,419  
   
Net income    -    -    -    -    163,939    163,939  
   
Comprehensive income  
(loss), net of  
tax  
  Unrealized holding gain  
  on securities available  
  for sale    -    -    -    11,663    -    11,663  

Comprehensive income    -    -    -    -    -    175,602  






June 30, 2002    1,150,000   $ 11,500   $ 10,635,200   $ 139,442   $ (1,151,121 ) $ 9,635,021  






  
   
December 31, 2002    1,150,000   $ 11,500   $ 10,635,200   $ 147,733   $ (562,644 ) $ 10,231,789  
   
Net income    -    -    -    -    396,381    396,381  
   
Comprehensive income, net  
of tax  
   Change in unrealized  
   holding gain on  
   securities  
   available for sale    -    -    -    (27,614 )  -    (27,614 )

Comprehensive income    -    -    -    -    -    368,767  






June 30, 2003    1,150,000   $ 11,500   $ 10,635,200   $ 120,119   $ (166,263 ) $ 10,600,556  






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

6


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

For the Six Months Ended
June 30,
2003
2002
Operating activities            
    Net income   $ 396,381   $ 163,939  
    Adjustments to reconcile net income to cash  
      provided by (used for) operating activities:  
      Provision for loan losses    500,000    420,000  
      Depreciation and other amortization    69,704    101,369  
      Accretion and amortization of securities  
         discounts and premium, net    50,869    17,017  
      Increase in other assets, net    (445,328 )  (73,769 )
     2,959,721    (395,425 )


           Net cash provided by operating activities    3,531,347    233,131  


Investing activities  
    Increase (decrease) in cash realized from:  
      Origination of loans, net    (26,005,362 )  (27,680,931 )
      Purchase of property and equipment    (33,042 )  (53,736 )
      Purchase of securities available for sale    (800,000 )  (7,007,887 )
      Payments and maturity of securities  
         available for sale    9,889,791    9,491,635  


           Net cash used for investing activities    (16,948,613 )  (25,250,919 )


Financing activities  
    Increase in deposits, net    10,983,054    31,034,685  
    Decrease in short-term borrowings    (9,107,000 )  (2,407,600 )
    Increase(decrease) in other borrowings    (2,500,000 )  1,000,000  
    Proceeds from trust preferred securities    6,000,000    -  
    Increase (decrease) in Federal Home Loan Bank advances    12,500,000    (3,000,000 )


           Net cash provided by financing activities    17,876,054    26,627,085  


           Net increase in cash and cash equivalents    4,458,788    1,609,297  
  
Cash and cash equivalents at beginning of the year    4,471,026    2,982,956  


Cash and cash equivalents at end of the year   $ 8,929,814   $ 4,592,253  


Supplemental information  
    Cash paid for  
      Interest   $ 1,748,555   $ 1,873,912  


      Income taxes   $ 382,302    -  


Supplemental schedule of non-cash transaction  
    Foreclosure of real estate   $ -   $ 362,987  


    Unrealized gain on securities, net of income taxes   $ (27,614 ) $ 11,663  


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

7


GREENVILLE FIRST BANCSHARES AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Business and Basis of Presentation

Business activity and organization

        Greenville First Bancshares, Inc. (the “company”) is a South Carolina corporation organized for the purpose of owning and controlling all of the capital stock of Greenville First Bank, N.A (the “bank”). The bank is a national bank organized under the laws of the United States located in Greenville County, South Carolina. The bank began operations on January 10, 2000.

        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.

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-QSB. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles 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 and the six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the company’s Form 10-KSB (Registration Number 333-83851) as filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of Greenville First Bancshares, Inc., its wholly owned subsidiaries Greenville First Bank, N.A., and Greenville Statutory Trust I.

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 – Note Payable

        At June 30, 2003, the company had an unused $3.5 million revolving line of credit with another bank with a maturity of March 20, 2004. The line of credit bears interest at a rate of three-month libor plus 2.00%, which at June 30, 2003 was 3.06%. The company has pledged the stock of the bank as collateral for this line of credit. The line of credit agreement contains various covenants related to earnings and asset quality. As of June 30, 2003, the company was in compliance with all covenants.

Note 3 – Trust Preferred Securities

        On June 26, 2003, Greenville First Bancshares, Inc., through a newly formed wholly-owned subsidiary, issued $6.0 million floating rate trust preferred securities. The initial pricing of the transaction calls for a floating rate coupon beginning at 4.16%. The rate is determined quarterly.

        The company used $3.0 million of the proceeds to repay the outstanding balance on a $3.5 million revolving line of credit. The $3.5 million revolving line of credit will remain available. The Company invested $2.7 million in the Company’s wholly-owned subsidiary, Greenville First Bank. The remaining balance will be used by the Company to fund operations.

8


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”), SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

For the Three Months ended June 30,
2003
2002
Net income, as reported     $ 229,455   $ 121,126  
Deduct: Total stock-based employee  
   compensation expense determined  
   under fair value based method  
   for all awards, net of related tax effects    (19,613 )  (17,613 )


Pro forma net income   $ 209,842   $ 103,513  


Earnings per common share:  
   Basic - as reported   $ .20   $ .11  


   Basic - pro forma   $ .18   $ .09  


   Diluted - as reported   $ .18   $ .10  


   Diluted - pro-forma   $ .17   $ .09  




For the Six Months ended June 30,
2003
2002
Net income, as reported     $ 396,381   $ 163,939  
Deduct: Total stock-based employee  
   compensation expense determined  
   under fair value based method  
   for all awards, net of related tax effects    (39,226 )  (35,226 )


Pro forma net income   $ 357,155   $ 128,713  


Earnings per common share:  
   Basic - as reported   $ .34   $ .14  


   Basic - pro forma   $ .31   $ .11  


   Diluted - as reported   $ .32   $ .14  


   Diluted - pro-forma   $ .29   $ .11  


        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 2003 and 2002, risk-free interest rate of 3.00% for 2003 and 2002, respectively, and expected lives of the options 10 years and the assumed dividend rate was zero.

9


Note 5 – Earnings per Share

        The following schedule reconciles the numerators and denominators of the basic and diluted earnings per share computations for the three and six months ended June 30, 2003 and 2002. Dilutive common shares arise from the potentially dilutive effect of Greenville First Bancshares, Inc.‘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.

Three Months Three Months
Ended Ended
June 30, 2003
June 30, 2002
Basic Earnings Per Share            
  Average common shares    1,150,000    1,150,000  
  Net income   $ 229,455   $ 121,126  
  Earnings per share   $ .20   $ .11  
Diluted Earnings Per Share  
  Average common shares outstanding    1,150,000    1,150,000  
  Average dilutive common shares    107,599    12,398  


  Adjusted average common shares    1,257,599    1,162,398  
  Net income   $ 229,455   $ 121,126  
  Earnings per share   $ .18   $ .10  

Six Months Six Months
Ended Ended
June 30, 2003
June 30, 2002
Basic Earnings Per Share            
  Average common shares    1,150,000    1,150,000  
  Net income   $ 396,381   $ 163,939  
  Earnings per share   $ .34   $ .14  
Diluted Earnings Per Share  
  Average common shares outstanding    1,150,000    1,150,000  
  Average dilutive common shares    90,247    6,199  


  Adjusted average common shares    1,240,247    1,156,199  
  Net income   $ 396,382   $ 163,939  
  Earnings per share   $ .32   $ .14  

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

DISCUSSION OF FORWARD-LOOKING STATEMENTS

This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors that are beyond our control. The words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements.

10


        Potential risks and uncertainties include, but are not limited to:

  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 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 general economic conditions, either nationally or regionally, and especially in 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 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.

CRITICAL ACCOUNTING POLICIES

        We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2002 as filed on 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 our carrying values of assets and liabilities and our results of operations.



11


        We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses.

GENERAL

        The following is a discussion of our financial condition as of June 30, 2003 and the results of operations for the three months and six months ended June 30, 2003. These comments should be read in conjunction with our consolidated financial statements and accompanying consolidated footnotes appearing in this report. The significant accounting policies are described throughout the management’s discussion section of this document.

NATIONAL AND ECONOMIC EVENTS

        During most of the last two and one-half years, the United States experienced a slowing economy following ten years of expansion. During this period, the economy was affected by lower returns and expectations of the stock markets. Economic data led the Federal Reserve to begin an aggressive program of rate cutting, which moved the Federal Funds rate down 11 times during 2001 for a total reduction of 475 basis points, bringing the Federal Funds rate to its lowest level in 40 years. During the fourth quarter of 2002, the Federal Reserve adjusted the Federal Funds rate down an additional 50 basis points. At the end of the second quarter of 2003, the Federal Reserve again reduced Federal Funds rates by an additional 25 basis points. The total reduction during the last two and half years as been 550 basis points.

        Despite sharply lower short-term rates, stimulus to the economy has been muted because the yield curve has steepened and consumer demand and business investment activity has been weak. The financial markets are operating now under very low historical interest rates. Under these unusual conditions, many observers expect Congress to pass an economic stimulus plan. Many economists believe the Federal Reserve will begin increasing interest rates in 2004. No assurance can be given that the Federal Reserve will take such action. We continue to believe that the markets we serve generally perform better than national markets, even in times of recession.

INCOME STATEMENT REVIEW

Comparison of the three months ended June 30, 2003 and the three months ended June 30, 2002.

Net Interest Income

        Net interest income, the largest component of our income, was $1,426,582 for the three months ended June 30, 2003 compared to $1,052,100 for the same period in 2002, or an increase of 35.6%. The level of net interest income is determined by the balances of earning assets and interest-bearing liabilities combined with the bank’s management of the net interest margin. The following events affect the changes in net interest income: interest rates earned on assets and paid on liabilities, the rate of growth of the asset and liability base, the ratio of interest-earning assets to interest-bearing liabilities, and the management of the balance sheet’s interest rate sensitivity.

        Interest income for the second quarter of 2003 was $2,287,402 and consisted of $2,219,654 on loans, $62,569 in investments and $5,179 on federal funds sold. Interest income for the same period in 2002 was $1,936,720 and included $1,734,959 on loans, $188,250 on investments and $13,511 on federal funds sold.

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        Interest expense for the second quarter of 2003 was $860,820 and consisted of $682,896 related to deposits and $177,924 related to borrowings. Our interest expense of $884,620 during the second quarter of 2002 consisted of $841,523 related to deposits and $43,097 related to borrowings. Our interest expense decreased $23,800, or 2.7%, while our average deposits and borrowings increased from $127.1 million for the quarter ended June 30, 2002 to $166.8 million for the quarter ended June 30, 2003, an increase of 31.2%. The decrease in our interest expense compared to the increase in our deposits and borrowings resulted from a 72 basis point reduction in the rates paid. The lower borrowing rates resulted from the declining interest rate environment.

        The following table sets forth, for the three months ended June 30, 2003 and 2002, information related to our average balance sheet and average yields on assets and average costs of liabilities. We derived these yields by dividing annualized 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.

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

For the Three Months Ended June 30,
2003
2002
Average Income Yield/ Average Income Yield/
Balance
Expense
Rate
Balance
Expense
Rate
  Federal funds sold     $ 1,558   $ 5    1.29 % $ 3,220   $ 14    1.74 %
  Investment securities    6,815    63    3.71 %  15,435    188    4.89 %
  Loans    165,143    2,219    5.39 %  114,706    1,735    6.07 %






       Total earning-assets    173,516    2,287    5.29 %  133,361    1,937    5.83 %




  Non-interest earning assets    6,404            6,947          


       Total assets   $ 179,920           $ 140,308          


  NOW accounts   $ 28,902   $ 27    .37 % $ 29,181   $ 95    1.31 %
  Savings & money market    20,922    29    .56 %  22,294    93    1.67 %
  Time deposits    87,040    627    2.89 %  71,248    654    3.68 %






       Total interest-bearing deposits    136,864    683    2.00 %  122,723    842    2.75 %
  FHLB advances    26,099    148    2.27 %  3,000    36    4.81 %
  Other borrowings    3,807    30    3.16 %  1,387    7    2.02 %






       Total interest-bearing liabilities    166,770    861    2.07 %  127,110    885    2.79 %




  Non-interest bearing liabilities    2,396            3,655          
  Shareholders'equity    10,754            9,543          


Total liabilities and shareholders'equity   $ 179,920           $ 140,308          


  Net interest spread            3.22 %          3.04 %
  Net interest income/margin       $ 1,426    3.30 %     $ 1,052    3.16 %


        Our net interest spread was 3.22% for the three months ended June 30, 2003 as compared to 3.04% for the three months ended June 30, 2002. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities.

        Our net interest margin for the quarter ended June 30, 2003 was 3.30% as compared to 3.16% for the three months ended June 30, 2002. The net interest margin is calculated as the annualized net interest income divided by quarterly average earning assets.

        In pricing deposits, we considered our liquidity needs, the direction and levels of interest rates and local market conditions.

13


Rate/Volume Analysis

        Net interest income can be analyzed in terms of the impact of changing rates and changing volume. The following table sets forth the effect which the varying levels of 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 June 30,
2003 vs 2002
2002 vs 2001
Increase (Decrease) Due to
Increase (Decrease) Due to
Rate/ Rate/
Volume
Rate
Volume
Total
Volume
Rate
Volume
Total
Interest income                                    
  Loans   $ 763    (194 )  (85 )  484    1,167    (330 )  (317 )  520  
  Investment securities    (105 )  (45 )  25    (125 )  15    (66 )  (4 )  (55 )
  Federal funds sold    (7 )  (4 )  2    (9 )  (8 )  (47 )  14    (41 )












   Total interest income    651    (243 )  (58 )  350    1,174    (443 )  (307 )  424  












Interest expense  
  Deposits    97    (230 )  (26 )  (159 )  609    (348 )  (254 )  7  
  FHLB advances    277    (19 )  (146 )  112    36    -    -    36  
  Other borrowings    12    4    7    23    7    -    -    7  












   Total interest expense    386    (245 )  (165 )  (24 )  652    (348 )  (254 )  50  












Net interest income   $ 265    2    107    374    522    (95 )  (53 )  374  












        As the above table demonstrates, the change in our net interest income is primarily due to the increase in our assets and liabilities, reflecting the continued growth of the bank. These increases are partially offset by the decrease in the rates as a result of the significant reduction in market rates over the last two years.

Provision for Loan Losses

        Included in the results of operations for the quarters ended June 30, 2003 and 2002 is a non-cash expense of $200,000 and $220,000, respectively, related to the provision for loan losses. The loan loss reserve was $2,313,374 at June 30, 2003 and $1,824,149 at December 31, 2002. The allowance for loan losses as a percentage of gross loans was 1.32% at June 30, 2003 and 1.22% at December 31, 2002. The loan portfolio is periodically reviewed to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. For information about how we determine the provision for loan losses, please see our discussion under “Provision and Allowance for Loan Losses.”

        For the three months ended June 30, 2003 and 2002, we reported net charge-offs of $5,806 and $101,015, respectively. The $5,806 net charge-offs in the second quarter of 2003 and $1,015 of charge-offs in the second quarter of 2002 relate to consumer loans and credit lines associated with customer checking accounts. In the second quarter of 2002, the bank incurred a write-down on a non-accruing commercial loan in the amount of $100,000.

14


Noninterest Income and Expenses

        Noninterest income in the second quarter of 2003 was $83,954, a decrease of 31.1% compared to noninterest income of $121,814 in the second quarter of 2002. During the second quarter of 2003, the bank incurred a $100,000 write-down on a house that was previously acquired in foreclosure that is under construction. Excluding the $100,000 loss on real estate owned, noninterest income from loan and service fees increased $62,140 or 51.0%. This increase was primarily due to the increases in the volume of service charges on deposits, increases in the volume of fees charged on ATM transactions, and additional loan fees received on the origination of mortgage loans that were sold.

        We incurred general and administrative expenses of $940,447 for the three months ended June 30, 2003 compared to $832,788 for the same period in 2002. The $107,659 increase in general and administrative expenses resulted primarily from additional data processing costs and the additional staff hired to handle the increases in both loans and deposits. Salaries and benefits in second quarter 2003 were $488,564, or an increase of $58,540. Salaries and benefits represented 52.0% of the total noninterest expense. Salaries and benefits in second quarter 2002 were $430,024. All other expenses increased only $49,119. This increase relates primarily to $44,845 additional data processing and related costs, resulting from the higher number of loan and deposit accounts.

        Income tax expense was $140,634 for three months ended June 30, 2003. No income tax or benefit was record in the 2002 period.

Comparison of the six months ended June 30, 2003 and the six months ended June 30, 2002.

Net Interest Income

        Net interest income, the largest component of our income, was $2,765,661 for the six months ended June 30, 2003 compared to $1,996,278 for the same period in 2002, or an increase of 38.5%. The level of net interest income is determined by the balances of earning assets and interest-bearing liabilities combined with the bank’s management of the net interest margin. The following events affect the changes in net interest income: interest rates earned on assets and paid on liabilities, the rate of growth of the asset and liability base, the ratio of interest-earning assets to interest-bearing liabilities, and the management of the balance sheet’s interest rate sensitivity.

        Interest income for the first six months of 2003 was $4,518,431 and consisted of $4,307,650 on loans, $199,113 in investments and $11,668 on federal funds sold. Interest income for the same period in 2002 was $3,727,078 and included $3,321,614 on loans, $369,403 on investments and $36,061 on federal funds sold.

        Interest expense for the first six months of 2003 was $1,752,770 and consisted of $1,412,376 related to deposits and $340,394 related to borrowings. Our interest expense of $1,730,800 during the same period in 2002 consisted of $1,611,120 related to deposits and $119,680 related to borrowings. Our interest expense increased $21,970, or 1.3%, while our average deposits and borrowings increased from $121.1 million for the quarter ended June 30, 2002 to $163.2 million for the quarter ended June 30, 2003, an increase of 34.8%. The increase in our interest expense was proportionately less than the increase in our deposits and borrowings because of the declining interest rate environment.

15


        The following table sets forth, for the six months ended June 30, 2003 and 2002, information related to our average balance sheet and average yields on assets and average costs of liabilities. We derived these yields by dividing annualized 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.

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

For the Six Months Ended June 30,
2003
2002
Average Income Yield/ Average Income Yield/
Balance
Expense
Rate
Balance
Expense
Rate
  Federal funds sold     $ 1,953   $ 12    1.24 % $ 4,105   $ 36    1.77 %
  Investment securities    10,274    199    3.91 %  14,400    369    5.17 %
  Loans    159,722    4,308    5.44 %  109,691    3,322    6.11 %






       Total earning-assets    171,949    4,519    5.30 %  128,196    3,727    5.86 %




  Non-interest earning assets    6,306            6,389          


       Total assets   $ 178,255           $ 134,585          


  NOW accounts   $ 28,248   $ 59    .42 % $ 24,551   $ 142    1.178 %
  Savings & money market    20,712    62    .60 %  22,296    187    1.69 %
  Time deposits    85,908    1,291    3.03 %  66,915    1,282    3.86 %






       Total interest-bearing deposits    134,868    1,412    2.14 %  113,762    1,611    2.86 %
  FHLB advances    23,646    266    2.27 %  4,425    86    3.92 %
  Other borrowings    6,739    75    2.24 %  2,917    34    2.35 %






       Total interest-bearing liabilities    165,253    1,753    2.17 %  121,104    1,731    2.88 %




  Non-interest bearing liabilities    2,375            3,983          
  Shareholders'equity    10,627            9,498          


Total liabilities and shareholders'equity   $ 178,255           $ 134,585          


  Net interest spread            3.13 %          2.98 %
  Net interest income/margin       $ 2,766    3.24 %     $ 1,996    3.14 %


        Our net interest spread was 3.13% for the six months ended June 30, 2003 as compared to 2.98% for the six months ended June 30, 2002. The net interest spread is the difference between the yield we earn on our interest-earning assets and the rate we pay on our interest-bearing liabilities.

        Our net interest margin for the quarter ended June 30, 2003 was 3.24% as compared to 3.14% for the six months ended June 30, 2002. The net interest margin is calculated as the annualized net interest income divided by quarterly average earning assets.

        In pricing deposits, we considered our liquidity needs, the direction and levels of interest rates and local market conditions.

16


Rate/Volume Analysis

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

Six months ended June 30,
2003 vs 2002
2002 vs 2001
Increase (Decrease) Due to
Increase (Decrease) Due to
Rate/ Rate/
Volume
Rate
Volume
Total
Volume
Rate
Volume
Total
Interest income                                    
  Loans   $ 1,515    (363 )  (166 )  986    2,331    (680 )  (675 )  976  
  Investment securities    (106 )  (90 )  26    (170 )  22    (109 )  (6 )  (93 )
  Federal funds sold    (19 )  (11 )  6    (24 )  (4 )  (85 )  8    (81 )












   Total interest income    1,390    (464 )  (134 )  792    2,349    (874 )  (673 )  802  












Interest expense  
  Deposits    270    (402 )  (67 )  (199 )  1,203    (707 )  (520 )  (24 )
  FHLB advances    374    (36 )  (157 )  181    86    -    -    86  
  Other borrowings    45    (2 )  (2 )  41    34    -    -    34  












   Total interest expense    689    (440 )  (226 )  24    1,323    (707 )  (520 )  96  












Net interest income   $ 701    (24 )  92    768    1,026    (167 )  (153 )  706  












        As the above table demonstrates, the change in our net interest income is primarily due to the increase in our assets and liabilities, reflecting the continued growth of the bank. This increase is partially offset by the decrease in the rates as a result of the significant reduction in market rates over the last two years.

Provision for Loan Losses

        Included in the results of operations for the six months ended June 30, 2003 and 2002 is a non-cash expense of $500,000 and $420,000, respectively, related to the provision for loan losses. The loan loss reserve was $2,313,374 at June 30, 2003 and $1,824,149 at December 31, 2002. The allowance for loan losses as a percentage of gross loans was 1.32% at June 30, 2003 and 1.22% at December 31, 2002. The loan portfolio is periodically reviewed to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. For information about how we determine the provision for loan losses, please see our discussion under “Provision and Allowance for Loan Losses.”

        For the six months ended June 30, 2003 and 2002, we reported net charge-offs of $10,775 and $105,136, respectively. The $10,775 net charge-offs in the 2003 period and $5,136 of charge-offs in the 2002 same period relate to consumer loans and credit lines associated with customer checking accounts. In the second quarter of 2002, the bank incurred a write-down on a non-accruing commercial loan in the amount of $100,000.

17


Noninterest Income and Expenses

        Noninterest income in the first six months of 2003 was $231,107, an increase of 2.8% over noninterest income of $224,764 in the same period in 2002. During the second quarter of 2003, the bank incurred a $100,000 write-down on a house that was previously acquired in foreclosure that is under construction. Excluding the $100,000 loss on real estate owned, noninterest income from loan and service fees increased $106,343, or 47.3%. This increase was primarily due to the increases in the volume of service charges on deposits, increases in the volume of fees charged on ATM transactions, and additional loan fees received on the origination of mortgage loans that were sold.

        We incurred general and administrative expenses of $1,857,444 for the six months ended June 30, 2003 compared to $1,637,103 for the same period in 2002. The $220,341 increase in general and administrative expenses resulted primarily from additional data processing costs and the additional staff hired to handle the increases in both loans and deposits. Salaries and benefits in second quarter 2003 were $967,842, or an increase of $106,295. Salaries and benefits represented 52.1% of the total noninterest expense. Salaries and benefits in first six months of 2002 were $861,547. All other expenses increased only $114,046. This increase relates primarily to $84,003 additional data processing and related costs, resulting from the higher number of loan and deposit accounts.

        Income tax expense was $242,941 for six months ended June 30, 2003. No income tax or benefit was record in the 2002 period.

BALANCE SHEET REVIEW

General

        At June 30, 2003, we had total assets of $191.5 million, consisting principally of $173.6 million in loans, $10.7 million in investments and $4.5 million in cash and due from banks. Liabilities at June 30, 2003 totaled $180.9 million, consisting principally of $144.5 million in deposits, $25.5 million in FHLB advances and $6.0 million in trust preferred securities. At June 30, 2003, shareholders’ equity was $10.6 million.

Investments

        At June 30, 2003, the $4.7 million of investment securities portfolio available for sale represented approximately 2.5% of our total assets. We invested in U.S. Government agency securities and mortgage-backed securities with a fair value of $4.7 million and an amortized cost of $4.5 million for an unrealized gain of $181,998.

        Contractual maturities and yields on our investments available for sale at June 30, 2003 are shown in the following table (dollars in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

After one but
Within Within five Over
one year
Yield
Years
Yield
Five years
Yield
Total
Yield
U.S.Government                                      
    agencies   $-   - $1,145 5.29 % $- $ -   $ 1,145    5.29 %
  Mortgage-backed  
    securities   -   -    -    -    3,565    4.70 %  3,565    4.70 %








   Total   -   -   $ 1,145    5.29 % $ 3,565    4.70 % $ 4,710    4.84 %








18


        At June 30, 2003, the $4.4 million of short-term investments in federal funds sold on an overnight basis comprised 2.31% of total assets at June 30, 2003, as compared to $41,736, or .02%, of total assets at December 31, 2002.

Loans

        Since loans typically provide higher interest yields than do other types of interest earning assets, it is our intent to channel a substantial percentage of our earning assets into the loan portfolio. Average loans for the six months ended June 30, 2003 and 2002 were $159.7 million and $109.7 million, respectively. Total loans outstanding at June 30, 2003 and December 31, 2002 were $175.9 million and $149.9 million, respectively, before allowance for loan losses.

        The following table summarizes the composition of the loan portfolio:

          June 30, 2003             December 31, 2002
Amount Percentage Amount Percentage
Real estate:                    
  Commercial  
   Owner occupied   $ 33,357,376    19.09 % $ 22,653,311    15.11 %
   Non-owner occupied    42,361,284    24.08 %  43,076,993    28.74 %
   Construction    7,142,696    4.06 %  4,007,650    2.67 %




     83,079,356    47.23 %  69,737,954    46.52 %




  Consumer  
    Residential    27,347,046    15.55 %  25,499,625    17.01 %
    Home Equity    21,551,384    12.25 %  18,069,407    12.05 %
    Construction    4,380,585    2.49 %  4,199,848    2.80 %




     53,279,015    30.29 %  47,768,880    31.86 %




      Total real-estate    136,358,371    77.52 %  117,506,834    78.39 %
  
Commercial business    34,912,197    19.85 %  28,192,407    18.81 %
Consumer-other    5,035,618    2.86 %  4,590,552    3.06 %
Deferred origination fees, net    (408,439 )  (.23 %)  (386,632 )  (.26 %)




     175,897,747    100.00 %  149,903,161    100.00 %


Less allowance for loan  
  Losses    (2,313,374 )      (1,824,149 )    


      Total loans, net   $ 173,584,373       $ 148,079,012      


        The principal component of our loan portfolio at June 30, 2003 and at December 31, 2002 was loans secured by real estate mortgages. Due to the short time the portfolio has existed, the current mix of loans may not be indicative of the ongoing portfolio mix. Management will attempt to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration of collateral.

19


Provision and Allowance for Loan Losses

        We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential credit problems.

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

        Our evaluation is inherently subjective, as it requires estimates that are susceptible to significant change. In addition, regulatory agencies periodically review our allowance for loan losses as part of their examination process, and they may require us to record additions to the allowance based on their judgment about information available to them at the time of their examinations. Our losses will undoubtedly vary from our estimates, and there is a possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.

        We do not allocate the allowance for loan losses to specific categories of loans but evaluate the adequacy on an overall portfolio basis utilizing our credit grading system that we apply to each loan. We have engaged an independent consultant to review the loan files on a test basis to verify that the lenders have properly graded each loan. Due to our limited operating history, the provision for loan losses has been made primarily as a result of management’s assessment of general loan loss risk as compared to banks of similar size and maturity.

        At June 30, 2003 and at December 31, 2002, the allowance for loan losses was $2.3 million and $1.8 million, respectively, or 1.32% of outstanding loans at June 30, 2003 and 1.22% at December 31, 2002, respectively. During the six months ended June 30, 2003 and 2002, we charged off loans of $10,175 and $105,136, respectively.

        At June 30, 2003, nonaccrual loans totaled $242,584, which represented .14% of total loans. Included in the $242,584 are nonaccrual commercial loans of $225,253 and consumer loans of $17,331. During the second quarter of 2002, the bank obtained ownership through foreclosure procedures on the residential construction loan that was on nonaccrual status at December 31, 2001. At June 30, 2003, the bank carried this asset as real estate owned with a carrying value of approximately $598,356. The bank is in the process of completing the construction of this home. The bank carries all real estate acquired through foreclosure at the lower of cost or market value.

        Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the loan is doubtful.

Maturities and Sensitivity of Loans to Changes in Interest Rates

        The information in the following table 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 their maturity. Actual repayments of loans may differ from maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties.

20


        The following table summarizes the loan maturity distribution, by type, and related interest rate characteristics at June 30, 2003 (dollars in thousands):

After one but
One year Within five After
or less
Years
five years
Total
Commercial     $ 20,570   $ 14,157   $ 164   $ 34,891  
Real estate - construction    5,032    3,944    2,547    11,523  
Real estate- mortgage    20,130    101,800    2,514    124,444  
Consumer and other    2,311    2,419    310    5,040  




    Total loans   $ 48,043   $ 122,320   $ 5,535   $ 175,898  




Loans maturing after one year with:                  
  Fixed interest rates               $ 30,940  
  Floating interest rates               $ 96,915  

Deposits and Other Interest-Bearing Liabilities

        Our primary sources of funds for loans and investments are our deposits, advances from the FHLB, and short-term repurchase agreements. We believe that conditions in 2003 were favorable for deposit growth and that factors such as the low returns on investments and mutual funds may have increased traditional deposit inflows during 2003.

        The following is a table of deposits by category (dollars in thousands):

June 30, 2003
December 31, 2002
Demand deposit accounts     $ 15,481    10.71 % $ 13,809    10.34 %
NOW accounts    16,372    11.33 %  15,378    11.51 %
Money market accounts    19,820    13.71 %  19,727    14.77 %
Savings accounts    1,556    1.08 %  1,774    1.33 %
Time deposits less than $100,000    30,964    21.42 %  32,024    23.98 %
Time deposits of $100,000 or more    60,354    41.75 %  50,851    38.07 %




   Total deposits   $ 144,547    100.00 % $ 133,563    100.00 %




        Core deposits, which traditionally 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 $84.2 million and $82.7 million at June 30, 2003 and December 31, 2002, respectively. Our loan-to-deposit ratio was 120.09% and 110.87% at June 30, 2003 and December 31, 2002, respectively.

        A significant portion of the time deposits over $100,000 relate to deposits that were obtained outside of our local market. The maturities on these deposits range from three months to five years. These deposits were obtained at rates that were either comparable to or lower than rates paid in the local market.

21


        The maturity distribution of our time deposits of $100,000 or more is as follows:

June 30, 2003
December 31, 2002
(Dollars in thousands)
 
Three months or less     $ 15,292   $ 13,226  
Over three through six months    14,139    9,155  
Over six through twelve months    13,437    10,391  
Over twelve months    17,486    18,079  


Total   $ 60,354   $ 50,851  


Borrowings

        At June 30, 2003, the bank had two unused federal funds purchased line of credit totaling $6,700,000. These lines of credit are unsecured and bears interest at the daily rate of federal funds plus 25 basis points (1.25% at June 30, 2003).

        At June 30, 2003, the bank had $25,500,000 of advances from the FHLB. These advances are secured with approximately $79,400,000 of first mortgage loans and the bank’s stock in the FHLB. The bank had collateral available to borrow an additional $24,400,000 advances at June 30, 2003. Listed below is a summary of the term and maturities of the advances:

o   The maturity on $5,000,000 of the advances with a weighted rate of 1.63% is July 16, 2004. The FHLB has the option to re-price this    advance as of April 16, 2003.
o   The maturity on $7,500,000 of the advances with a weighted rate of 1.21% is March 10, 2006. The FHLB has the option to re-price this    advance as of March 10, 2004.
o   The maturity on $5,000,000 of the advances with a weighted rate of 1.56% is October 15, 2007. The FHLB has the option to re-price this    advance as of October 15, 2003.
o   The maturity on $3,000,000 of the advances with a weighted rate of 4.86% is August 24, 2011. The FHLB has the option to re-price this    advance as of August 24, 2006.
o   The maturity on $5,000,000 of the advances with a weighted rate of 3.36% is January 30, 2013. The FHLB has the option to re-price this    advance as of January 30, 2008.

        At June 30, 2003, the company had an unused $3,500,000 revolving line of credit with another bank with a maturity of June 20, 2004. The line of credit bears interest at a rate of the three-month libor rate plus 200 basis points, which at June 30, 2003 was 3.30%. The company has pledged all of the stock of the bank as collateral for this line of credit. The line of credit agreement contains various covenants related to net income and asset quality. As of June 30, 2003, the company believes it is in compliance with all covenants.

        On June 26, 2003, Greenville First Bancshares, Inc. issued $6.0 million floating rate trust preferred securities. The initial pricing of the transaction calls for a floating rate coupon beginning at 4.16%. The rate is determined quarterly.

        The company used $3.0 million of the proceeds to repay the outstanding balance on a $3.5 million revolving line of credit. The $3.5 million revolving line of credit will remain available. The Company will invest $2.7 million in the Company’s wholly-owned subsidiary, Greenville First Bank. The remaining balance will be used by the company to fund operations.

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CAPITAL RESOURCES

        Total shareholders’ equity amounted to $10.6 million at June 30, 2003 and $10.2 million at December 31, 2002. The increase during the six months ended June 30, 2003 resulted from $396,381 of net income partly offset by $27,614 decrease in the unrealized gains on investment securities.

        The following table shows the annualized return on average assets (annualized net income divided by average total assets), return on average equity (annualized net income divided by average equity), and equity to assets ratio (average equity divided by average total assets). Since our inception, we have not paid any cash dividends.

June 30, 2003
December 31, 2002
                               Return on average assets      .45 %  .051 %
                               Return on average equity    7.52 %  7.73 %
                               Equity to assets ratio    5.96 %  6.57 %

        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, 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 stockholders’ equity, excluding the unrealized gain or loss on securities available for sale, plus a portion of trust preferred securities subject to certain limitations, 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 inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the remaining portion of trust preferred securities not included in Tier 1, plus the general reserve for loan losses subject to certain limitations. The bank is also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.

        The bank is subject to various regulatory capital requirements administered by the federal banking agencies. Under these capital guidelines, we must maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at least 4%. To be considered “well-capitalized”, we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

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        The following table sets forth the company’s and the bank’s various capital ratios at June 30, 2003 and December 31, 2002. At June 30, 2003 and December 31, 2002, both the company and the bank were in compliance with each of the applicable regulatory capital requirements and were both considered to be “well capitalized.”

June 30, 2003
December 31, 2002
Company
Bank
Company
Bank
    Total risk-based capital      11.6 %  11.6 %  8.6 %  10.3 %
   Tier 1 risk-based capital    8.8 %  10.1 %  7.4 %  9.1 %
   Leverage capital    7.2 %  8.9 %  6.1 %  7.5 %

        Our objective is to maintain the capital levels such that the bank will continue to be considered well capitalized.

EFFECT OF INFLATION AND CHANGING PRICES

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

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

OFF-BALANCE SHEET RISK

        Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At June 30, 2003, unfunded commitments to extend credit were $53.4 million, of which approximately $13.3 million is at fixed rates and $40.1 million is at variable rates. The significant portion of the unfunded commitments relates to consumer equity lines of credit. The bank anticipates, based on historical experience, that the significant portion of these lines of credit will not be funded. The bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the bank upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

        At June 30, 2003, there was a $671,000 commitment under a letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral varies but may include accounts receivable, inventory, equipment, marketable securities and property. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements.

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        Except as disclosed in this report, we are not involved in off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements, or transactions that result in liquidity needs or other commitments that we believe are likely to 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 normally arise in the normal course of our business. We actively monitor and manage our interest rate risk exposure.

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

        Because approximately 76% of our loans are variable rate loans at June 30, 2003, we are currently asset sensitive over the one-year time frame. However, our gap analysis is not a precise indicator of our interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by management as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.

LIQUIDITY & INTEREST RATE SENSITIVITY

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

        At June 30, 2003 and December 31, 2002, our liquid assets, consisting of cash, due from banks and federal funds sold, amounted to $8.9 million and $4.5 million, representing 4.7% and 2.6% of total assets, respectively. Investment securities at June 30, 2003 and December 31, 2002 amounted to $6.3 million and $15.5 million, representing 3.3% and 9.1% of total assets, respectively; these securities provide a secondary source of liquidity since they can be converted into cash in a timely manner. Our ability to maintain and expand our deposit base and borrowing capabilities also serves as a source of liquidity.

        We plan to meet our future cash needs through the liquidation of temporary investments, maturities and sale of loans, maturity of investment securities, generation of deposits and additional borrowings. During 2003, we have utilized proceeds from the short-term advances from the FHLB and short-term

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repurchase agreements from brokerage firms, proceeds from sales of participations in loans originated, and an increase in deposits to fund the significant portion of the 2003 loan production. By utilizing the various short-term sources of funding, we have been able to reduce the bank’s level of interest sensitivity while obtaining low cost funds. The bank is a member of the Federal Home Loan Bank of Atlanta from which applications for borrowings can be made for leverage purposes, if so desired. The FHLB requires securities, qualifying single family and commercial mortgage loans, and stock of the FHLB owned by the bank is pledged to secure any advances from the FHLB. The unused borrowing capacity at June 30, 2003 that is currently available from the FHLB based on the amount of collateral pledged is approximately $24.4 million. In addition, the bank maintains two federal funds purchased line of credit with a correspondent bank, totaling $6.7 million. At June 30, 2003, the unused portion of the lines was $6.7 million. We have also obtained a $10.0 million line of credit that is available from a brokerage firm based on the amount of collateral held by the firm. At June 30, 2003, the firm held $4.0 million of investment securities as collateral. As of June 30, 2003, the bank had no outstanding borrowings from the brokerage firm.

        During the second quarter of 2003, the bank, in the planning phase, announced intentions to open two branch locations. The two branches are expected to open during the second half of 2004 or the first half of 2005. The bank anticipates being able to fund this expansion program from normal operations.

        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 liquidity needs for the foreseeable future.

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

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        The following table presents our rate sensitivity at each of the time intervals indicated as of June 30, 2003. The table may not be indicative of our rate sensitivity position at other points in time. In addition, the table’s maturity distribution 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
three within twelve within five five
months
months
years
years
Total
(Dollars in thousands)
 Interest-earning assets:                        
  Federal funds sold   $ 4,426   $ -   $ -   $ -   $ 4,426  
  Investment securities    500    1,350    2,800    60    4,710  
  Loans    136,928    7,229    31,394    346    175,897  





  Total earning assets   $ 141,854   $ 8,579   $ 34,194   $ 406   $ 185,033  





Interest-bearing liabilities:  
  Money market and NOW   $ 19,364   $ -   $ -   $ -   $ 19,564  
  Regular savings    500    -    -    -    500  
  Time deposits    22,913    40,692    27,713    -    91,318  
  Trust preferred securities    6,000    -    -    -    6,000  
  FHLB advances    5,000    12,500    8,000    -    25,500  





 Total interest-bearing  
   liabilities   $ 53,777   $ 53,192   $ 35,713   $ -   $ 142,882  





 Period gap   $ 88,077   $ (44,613 ) $ (1,519 )  406   $ 42,351  
 Cumulative gap   $ 88,077   $ 43,464   $ 41,945   $ 42,351 $42,351  
  
 Ratio of cumulative gap to  
   total earning assets    47.6 %  23.5 %  22.7 %  22.9 %    

ACCOUNTING, REPORTING AND REGULATORY MATTERS

        Accounting standards have been issued or proposed by the Financial Accounting Standards Board and are not required to be adopted until a future date and are not expected to have a material impact on the consolidated financial statements upon adoption.

Item 3. Controls and Procedures

        As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of June 30, 2003.

        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.

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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. Changes in Securities

      On June 26, 2003, Greenville First Bancshares, Inc. issued $6.0 million floating rate trust preferred securities. The initial pricing of the transaction calls for a floating rate coupon beginning at 4.16%. The rate is determined quarterly.

Item 3. Defaults Upon Senior Securities

     Not applicable

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

        The annual meeting of shareholders was held on May 14, 2003 for which the election of four members of the board of directors as Class I directors for a three-year term was the only matter submitted to a vote of security holders. The following describes the matter voted upon at the annual meeting and sets forth the number of votes cast for, against or withheld and the number of abstentions as to each such matter (except as provided below, there were no broker non-votes).

        At the company’s annual meeting of shareholders held May 14, 2003, the election of four members of the board of directors as Class I directors for a three-year term was the only matter submitted to a vote of security holders during the six months ended June 30, 2003.

        Our board of directors is divided into three classes with each class to be as nearly equal in number as possible. The three classes of directors have staggered terms, so that the terms of only approximately one-third of the board members expire at each annual meeting of shareholders. The current Class I directors are Mark A. Cothran, Rudolph G. Johnsonstone, III, M.D., Keith J. Marrero, and R. Arthur Seaver, Jr. The current Class II directors are Leighton M. Cubbage, David G. Ellison, James B. Orders, and William B. Sturgis. The current Class III directors are Andrew B. Cajka, Anne S. Ellefson, Fred Gilmer, Jr. and Tecumseh Hooper, Jr.

        The terms of the Class I directors expired at the Annual Meeting. Each of the four current Class I directors was nominated for election and stood for election at the Annual Meeting on May 14, 2003 for a three-year term. The number of votes for the election of the Class I directors were as follows: For Mr. Cothran – 1,062,087; for Dr. Johnstone – 1,062,387; for Mr. Marrero – 1,123,587; and for Mr. Seaver – 1,062,587. The number of votes against the directors were as follows: Mr. Cothran – 61,800; Dr. Johnstone – 61,500; Mr. Marrero –300; and Mr. Seaver –61,300. No shareholders voted to abstain.

        Since a plurality of the votes were attained for the directors that stood for re-election, the approval of the Class I directors to serve a three-year term, expiring at the 2006 annual meeting of shareholders was recorded in our minute book from the annual meeting of shareholders. There were no other matters voted on by the company’s shareholders at our annual meeting held on May 14, 2003.

Item 5. Other Information

      None

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Item 6. Exhibits and Reports on Form 8-K

    (a)        Exhibits: See Exhibit Index attached hereto.

               Exhibit          Description

  31  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This  exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by  applicable rules of the Securities and Exchange Commission.

    (b)    Reports on Form 8-K

              The following reports were filed on Form 8-K during the second quarter ended June 30, 2003.

              The Company filed a Form 8-K on April 10, 2003 to disclose the issuance of a press release announcing its financial
              results for the first quarter ended March 31, 2003.

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SIGNATURES

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


GREENVILLE FIRST BANCSHARES, INC


Date:  August 12, 2003 /s/  R. Arther Seaver, Jr.
R. Arther Seaver, Jr.
Chief Executive Officer

Date:  August 12, 2003 /s/  James M. Austin, III
James M. Austin, III
Chief Financial Officer




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INDEX TO EXHIBITS

Exhibit
Number            Description

  31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit is not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 but is instead furnished as provided by applicable rules of the Securities and Exchange Commission.



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