UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant To Section 13 Or 15(d)of The Securities Exchange
Act Of 1934 For The Fiscal Year December 31, 2002.
Or
[ ] Transition Report Pursuant To Section 13 Or 15 (D) Of The Securities
Exchange Act Of 1934
For the Transition Period from to
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Commission file number 333-83851
Greenville First Bancshares, Inc.
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(Exact name of registrant as specified in its charter)
South Carolina 58-2459561
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(State of Incorporation) (I.R.S. Employer Identification No.)
112 Haywood Road
Greenville , S.C. 29607
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(Address of principal executive offices) (Zip Code)
864-679-9000
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(Telephone Number)
Not Applicable
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(Former name, former address
and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenue for its most recent fiscal year was $8,673,081. As of
March 20, 2002, 1,150,000 shares of Common Stock were issued and outstanding.
The estimated aggregate market value of the Common Stock held by
non-affiliates (shareholders holding less than 5% of an outstanding class of
stock, excluding directors and executive officers) of the Company on March 20,
2002 is $11,265,450. This calculation is based upon an estimate of the fair
market value of the Common Stock of $14.00 per share, which was the price of the
last trade of which management is aware prior to this date.
Transitional Small Business Disclosure Format. (Check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
Company's Proxy Statement for the 2002 Annual Meeting of Shareholders Part III
Item 1. Description of Business
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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 which are beyond our control. The words "may," "would," "could," "will,"
"expect," "anticipate," "believe," "intend," "plan," and "estimate," as well as
similar expressions, are meant to identify such forward-looking statements.
Potential risks and uncertainties include, but are not limited to:
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 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 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.
General
Greenville First Bancshares, Inc., was incorporated to operate as a bank
holding company pursuant to the Federal Bank Holding Company Act of 1956 and the
South Carolina Banking and Branching Efficiency Act, and to purchase 100% of the
issued and outstanding stock of Greenville First Bank, N.A., an association
organized under the laws of the United States, to conduct a general banking
business in Greenville, South Carolina.
In October 1999 we commenced our initial public offering and raised
$10,646,700 net of underwriting discounts and commissions. On January 10, 2000,
we opened the bank. Of the net proceeds from the offering, we have used
$10,400,000 to capitalize the bank. The bank's funds were applied primarily to
provide funds for the bank's investments and lending operations, for leasing our
temporary and permanent facilities, for furnishing and equipping the bank, and
for other general corporate purposes.
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Marketing Focus
The bank is the first independent bank organized in the City of Greenville
in over ten years. Because there are few locally owned banks left in Greenville,
we believe we offer a unique banking alternative for the market by offering a
higher level of client service and a management team more focused on the needs
of the community than most of our competitors. We believe that this approach
will be enthusiastically supported by the community. The bank uses the theme
"Welcome to Hometown Banking," and actively promotes it in our target market.
While the bank has the ability to offer a breadth of products similar to large
banks, we emphasize the client relationship. We believe that the continued
community focus of the bank will succeed in this market, and that the area will
react favorably to the bank's emphasis on service to small businesses,
individuals, and professional concerns. We will continue to take advantage of
existing contacts and relationships with individuals and companies in this area
to more effectively market the services of the bank.
Location and Service Area
Our primary service area consists of Greenville County, South Carolina. We
will draw a large percentage of our business from the central portion of
Greenville County, within a ten mile radius of our main office. This principal
service area is bounded by Rutherford Road to the north, Poinsett Highway to the
west, Mauldin Road and Butler Road to the south, and Highway 14 and Batesville
Road to the east. Included in this area is the highest per capita income tract
in the county. Our expansion plans include the development of two "service
centers" located along the periphery of our service area. These service centers
will extend the market reach of our bank, and they will increase our personal
service delivery capabilities to all of our clients.
Lending Activities
General. We emphasize a range of lending services, including real estate,
commercial, and equity- line consumer loans to individuals and small- to
medium-sized businesses and professional firms that are located in or conduct a
substantial portion of their business in the bank's market area. We compete for
these loans with competitors who are well established in the Greenville County
area and have greater resources and lending limits. As a result, we may have to
charge lower interest rates to attract borrowers.
Loan Approval and Review. The bank's loan approval policies provide for
various levels of officer lending authority. When the amount of aggregate loans
to a single borrower exceeds an individual officer's lending authority, the loan
request will be considered and approved by an officer with a higher lending
limit or the officers' loan committee. The officers' loan committee has lending
limits, and any loans in excess of this lending limit will be approved by the
directors' loan committee. The bank does not make any loans to any director,
officer, or employee of the bank unless the loan is approved by the board of
directors of the bank and is made on terms not more favorable to such person
than would be available to a person not affiliated with the bank. The bank
generally adheres to Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation guidelines in its mortgage loan review process, but may
alter this policy in the future. The bank currently intends to sell its mortgage
loans into the secondary market, but may choose to hold them in the portfolio in
the future.
Lending Limits. The bank's lending activities are subject to a variety of
lending limits imposed by federal law. In general, the bank is subject to a
legal limit on loans to a single borrower equal to 15% of the bank's capital and
unimpaired surplus. Different limits may apply in certain circumstances based on
the type of loan or the nature of the borrower, including the borrower's
relationship to the bank. These limits will increase or decrease as the bank's
capital increases or decreases. Based upon the capitalization of the bank, at
December 31, 2002, the bank has a self-imposed loan limit of $1.8 million, which
represents approximately 100% of our legal lending limit at December 31, 2002.
However, these limits could drop should the bank incur losses, and therefore
have less capital. Unless the bank is able to sell participations in its loans
to other financial institutions, the bank will not be able to meet all of the
lending needs of loan customers requiring aggregate extensions of credit above
these limits.
3
Real Estate Mortgage Loans. At December 31, 2002, loans secured by first or
second mortgages on real estate made up 78% of the bank's loan portfolio. These
loans will generally fall into one of four categories: commercial real estate
loans, construction and development loans, residential real estate loans, or
home equity loans. Each of these categories is discussed in more detail below,
including their specific risks. Interest rates for all categories may be fixed
or adjustable, and will more likely be fixed for shorter-term loans. The bank
will generally charge an origination fee for each loan.
Real estate loans are subject to the same general risks as other loans.
They are particularly sensitive to fluctuations in the value of real estate,
which is generally the underlying security for real estate loans. Fluctuations
in the value of real estate, as well as other factors arising after a loan has
been made, could negatively affect a borrower's cash flow, creditworthiness, and
ability to repay the loan.
We have the ability to originate real estate loans for sale into the
secondary market. We can limit our interest rate and credit risk on these loans
by locking the interest rate for each loan with the secondary investor and
receiving the investor's underwriting approval prior to originating the loan.
o Commercial Real Estate Loans. Commercial real estate loans generally
have terms of five years or less, although payments may be structured
on a longer amortization basis. We evaluate each borrower on an
individual basis and attempt to determine its business risks and credit
profile. We attempt to reduce credit risk in the commercial real estate
portfolio by emphasizing loans on owner-occupied office and retail
buildings where the loan-to-value ratio, established by independent
appraisals, does not exceed 80%. We also generally require that debtor
cash flow exceed 115% of monthly debt service obligations. We typically
review all of the personal financial statements of the principal owners
and require their personal guarantees. These reviews generally reveal
secondary sources of payment and liquidity to support a loan request.
o Construction and Development Real Estate Loans. We offer adjustable and
fixed rate residential and commercial construction loans to builders
and developers and to consumers who wish to build their own home. The
term of construction and development loans generally is limited to
eighteen months, although payments may be structured on a longer
amortization basis. Most loans mature and require payment in full upon
the sale of the property. Construction and development loans generally
carry a higher degree of risk than long term financing of existing
properties. Repayment depends on the ultimate completion of the project
and usually on the sale of the property. Specific risks include:
o cost overruns;
o mismanaged construction;
o inferior or improper construction techniques;
o economic changes or downturns during construction;
o a downturn in the real estate market;
o rising interest rates which may prevent sale of the property;
and
o failure to sell completed projects in a timely manner.
We attempt to reduce risk by obtaining personal guarantees where possible,
and by keeping the loan-to-value ratio of the completed project below specified
percentages. We also reduce risk by selling participations in larger loans to
other institutions when possible.
Residential Real Estate Loans. Residential real estate loans generally have
longer terms up to 30 years. We offer fixed and adjustable rate mortgages. We
have limited credit risk on these loans as most are sold to third parties soon
after closing.
Commercial Loans. We make loans for commercial purposes in various lines of
businesses. Commercial loans are generally considered to have greater risk than
first or second mortgages on real estate because they may be unsecured, or if
they are secured, the value of the security may be difficult to assess and more
likely to decrease than real estate.
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We also offer small business loans utilizing government enhancements such
as the Small Business Administration's 7(a) program and SBA's 504 programs.
These loans typically are partially guaranteed by the government, which helps to
reduce the bank's risk. Government guarantees of SBA loans do not exceed 80% of
the loan value and are generally less. As of December 31, 2002, the bank has not
originated any small business loans utilizing government enhancements.
The well-established banks in the Greenville County area make
proportionately more loans to medium to large-sized businesses than we can. Many
of the bank's commercial loans are made to small- to medium-sized businesses
that may be less able to withstand competitive, economic, and financial
conditions than larger borrowers.
Consumer Loans. The bank makes a variety of loans to individuals for
personal and household purposes, including secured and unsecured installment
loans and revolving lines of credit. Installment loans typically carry balances
of less than $50,000 and are amortized over periods up to 60 months. Consumer
loans are offered with a single maturity basis where a specific source of
repayment is available. Revolving loan products typically require monthly
payments of interest and a portion of the principal. Consumer loans are
generally considered to have greater risk than first or second mortgages on real
estate because they may be unsecured, or if they are secured, the value of the
security may be difficult to assess and more likely to decrease than real
estate.
We also offer home equity loans. Our underwriting criteria for, and the
risks associated with, home equity loans and lines of credit will generally be
the same as those for first mortgage loans. Home equity lines of credit
typically have terms of 15 years or less, typically carry balances less than
$125,000, and may extend up to 100% of the available equity of each property.
Deposit Services
We offer a full range of deposit services that are typically available in
most banks and savings and loan associations, including checking accounts,
commercial accounts, savings accounts, and other time deposits of various types,
ranging from daily money market accounts to longer-term certificates of deposit.
The transaction accounts and time certificates are tailored to our primary
market area at rates competitive to those offered in the Greenville County area.
In addition, we offer certain retirement account services, such as IRAs. We
solicit these accounts from individuals, businesses, associations,
organizations, and governmental authorities.
Other Banking Services
The bank offers other bank services including safe deposit boxes,
traveler's checks, direct deposit, U.S. Savings Bonds, and banking by mail. The
bank is associated with the Honor, Cirrus, and Master-Money ATM networks, which
are available to its customers throughout the country. We believe that by being
associated with a shared network of ATMs, we are better able to serve our
customers and are able to attract customers who are accustomed to the
convenience of using ATMs, although we do not believe that maintaining this
association is critical to our success. We began offering Internet services in
the second quarter of 2000. We do not expect the bank to exercise trust powers
during its next few years of operation.
Market Share
As of June 30, 2002, the most recent date for which market data is
available, total deposits in the bank's primary service area were almost $6.1
billion, which represented a 13.9% deposit increase from 2001. At June 30, 2002
the bank represented 2.1% of the market. Our plan over the next five years is to
grow our deposit base to $250 million. Of course, we cannot be sure that these
deposit growth rates will continue, or that we will accomplish this objective.
Employees
As of March 20, 2003, the bank had 26 employees and the holding company had
no full-time employees.
5
Supervision and Regulation
Both the company and the bank are subject to extensive state and federal
banking laws and regulations that impose specific requirements or restrictions
on and provide for general regulatory oversight of virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. The following summary is qualified by reference to
the statutory and regulatory provisions discussed. Changes in applicable laws or
regulations may have a material effect on our business and prospects. Beginning
with the enactment of the Financial Institution Report Recovery and Enforcement
Act in 1989 and following with the FDIC Improvement Act in 1991 and the
Gramm-Leach Bliley Act in 1999, numerous additional regulatory requirements have
been placed on the national banking industry in the past several years and
additional changes have been proposed. Our operations may be affected by
legislative changes and the policies of various regulatory authorities. We
cannot predict the effect that fiscal or monetary policies, economic control, or
new federal or state legislation may have on our business and earnings in the
future.
USA Patriot Act of 2001
In October 2001, the USA Patriot Act of 2001 was enacted in response to the
terrorist attacks in New York, Pennsylvania and Washington D.C. that occurred on
September 11, 2001. The Patriot Act is intended to strengthen U.S. law
enforcement's and the intelligence communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial institutions of all kinds is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations, including standards for verifying client
identification at account opening, and rules to promote cooperation among
financial institutions, regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.
Gramm-Leach-Bliley Act
On November 4, 1999, the U.S. Senate and House of Representatives each
passed the Gramm-Leach-Bliley Act, previously known as the Financial Services
Modernization Act of 1999. President Clinton signed the Act into law on November
12, 1999. Among other things, the Act repeals the restrictions on banks
affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also permits bank holding companies to engage in a
statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance
company portfolio investment activities. The Act also authorizes activities that
are "complementary" to financial activities.
The Act is intended, in part, to grant to community banks certain powers as
a matter of right that larger institutions have accumulated on an ad hoc basis.
Nevertheless, the Act may have the result of increasing the amount of
competition that we face from larger institutions and other types of companies.
In fact, it is not possible to predict the full effect that the Act will have on
us. From time to time, other changes are proposed to laws affecting the national
banking industry, and these changes could have a material effect on our business
and prospects.
The Act also contains provisions regarding consumer privacy. These
provisions require financial institutions to disclose their policy for
collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing personal financial information with
nonaffiliated third parties except for third parties that market an
institution's own products and services. Additionally, financial institutions
generally may not disclose consumer account numbers to any nonaffiliated third
party for use in telemarketing, direct mail marketing, or other marketing to the
consumer.
6
Greenville First Bancshares, Inc.
We own the outstanding capital stock of the bank, and therefore we are
considered to be a bank holding company under the federal Bank Holding Company
Act of 1956 and the South Carolina Banking and Branching Efficiency Act.
The Bank Holding Company Act. Under the Bank Holding Company Act, we are
subject to periodic examination by the Federal Reserve and required to file
periodic reports of its operations and any additional information that the
Federal Reserve may require. Our activities at the bank and holding company
level are limited to:
o banking and managing or controlling banks;
o furnishing services to or performing services for its subsidiaries; and
o engaging in other activities that the Federal Reserve determines to be
so closely related to banking and managing or controlling banks as to
be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions, the
Bank Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before:
o acquiring substantially all the assets of any bank;
o acquiring direct or indirect ownership or control of any voting shares
of any bank if after the acquisition it would own or control more than
5% of the voting shares of such bank (unless it already owns or
controls the majority of such shares); or
o merging or consolidating with another bank holding company.
In addition, and subject to certain exceptions, the Bank Holding Company
Act and the Change in Bank Control Act, together with regulations thereunder,
require Federal Reserve approval prior to any person or company acquiring
"control" of a bank holding company. Control is conclusively presumed to exist
if an individual or company acquires 25% or more of any class of voting
securities of a bank holding company. Control is rebuttably presumed to exist if
a person acquires 10% or more, but less than 25%, of any class of voting
securities and either the company has registered securities under Section 12 of
the Securities Exchange Act of 1934 or no other person owns a greater percentage
of that class of voting securities immediately after the transaction. Our common
stock is registered under the Securities Exchange Act of 1934. The regulations
provide a procedure for challenge of the rebuttable control presumption.
Under the Bank Holding Company Act, a bank holding company is generally
prohibited from engaging in, or acquiring direct or indirect control of more
than 5% of the voting shares of any company engaged in nonbanking activities
unless the Federal Reserve Board, by order or regulation, has found those
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Some of the activities that the Federal
Reserve Board has determined by regulation to be proper incidents to the
business of a bank holding company include:
o making or servicing loans and certain types of leases;
o engaging in certain insurance and discount brokerage activities;
o performing certain data processing services;
o acting in certain circumstances as a fiduciary or investment or
financial adviser;
o owning savings associations; and
o making investments in certain corporations or projects designed
primarily to promote community welfare.
The Federal Reserve Board imposes certain capital requirements on the
company under the Bank Holding Company Act, including a minimum leverage ratio
and a minimum ratio of "qualifying" capital to risk-weighted assets. These
requirements are described below under "Capital Regulations." Subject to its
capital requirements and certain other restrictions, we are able to borrow money
to make a capital contribution to the bank, and these loans may be repaid from
dividends paid from the bank to the company. Our ability to pay dividends will
be subject to regulatory restrictions as described below in "Greenville First
Bank - Dividends." We are also able to raise capital for contribution to the
bank by issuing securities without having to receive regulatory approval,
subject to compliance with federal and state securities laws.
7
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
Board policy, we are expected to act as a source of financial strength to the
bank and to commit resources to support the bank in circumstances in which we
might not otherwise do so. Under the Bank Holding Company Act, the Federal
Reserve Board may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary, other than a nonbank subsidiary of a
bank, upon the Federal Reserve Board's determination that such activity or
control constitutes a serious risk to the financial soundness or stability of
any subsidiary depository institution of the bank holding company. Further,
federal bank regulatory authorities have additional discretion to require a bank
holding company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.
South Carolina State Regulation. As a South Carolina bank holding company
under the South Carolina Banking and Branching Efficiency Act, we are subject to
limitations on sale or merger and to regulation by the South Carolina Board of
Financial Institutions. Prior to acquiring the capital stock of a national bank,
we are not required to obtain the approval of the Board, but we must notify them
at least 15 days prior to doing so. We must receive the Board's approval prior
to engaging in the acquisition of a South Carolina state chartered bank or
another South Carolina bank holding company.
Greenville First Bank
The bank operates as a national banking association incorporated under the
laws of the United States and subject to examination by the Office of the
Comptroller of the Currency. Deposits in the bank are insured by the FDIC up to
a maximum amount, which is generally $100,000 per depositor subject to
aggregation rules.
The Office of the Comptroller of the Currency and the FDIC regulate or
monitor virtually all areas of the bank's operations, including:
o security devices and procedures;
o adequacy of capitalization and loss reserves;
o loans;
o investments;
o borrowings;
o deposits;
o mergers;
o issuances of securities;
o payment of dividends;
o interest rates payable on deposits;
o interest rates or fees chargeable on loans;
o establishment of branches;
o corporate reorganizations;
o maintenance of books and records; and
o adequacy of staff training to carry on safe lending and deposit
gathering practices.
The Office of the Comptroller of the Currency requires the bank to maintain
specified capital ratios and imposes limitations on the bank's aggregate
investment in real estate, bank premises, and furniture and fixtures. The Office
of the Comptroller of the Currency requires the bank to prepare quarterly
reports on the bank's financial condition and to conduct an annual audit of its
financial affairs in compliance with its minimum standards and procedures.
Under the FDIC Improvement Act, all insured institutions must undergo
regular on site examinations by their appropriate banking agency. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the appropriate agency against each institution or affiliate as it
deems necessary or appropriate. Insured institutions are required to submit
annual reports to the FDIC, their federal regulatory agency, and their state
supervisor when applicable. The FDIC Improvement Act directs the FDIC to develop
a method for insured depository institutions to provide supplemental disclosure
of the estimated fair market value of assets and liabilities, to the extent
8
feasible and practicable, in any balance sheet, financial statement, report of
condition or any other report of any insured depository institution. The FDIC
Improvement Act also requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating, among other things, to the
following:
o internal controls;
o information systems and audit systems;
o loan documentation;
o credit underwriting;
o interest rate risk exposure; and
o asset quality.
National banks and their holding companies which have been chartered or
registered or have undergone a change in control within the past two years or
which have been deemed by the Office of the Comptroller of the Currency or the
Federal Reserve Board to be troubled institutions must give the Office of the
Comptroller of the Currency or the Federal Reserve Board thirty days' prior
notice of the appointment of any senior executive officer or director. Within
the 30 day period, the Office of the Comptroller of the Currency or the Federal
Reserve Board, as the case may be, may approve or disapprove any such
appointment.
Deposit Insurance. The FDIC has adopted a risk-based assessment system for
determining an insured depository institutions' insurance assessment rate. The
system that takes into account the risks attributable to different categories
and concentrations of assets and liabilities. An institution is placed into one
of three capital categories: (1) well capitalized; (2) adequately capitalized;
or (3) undercapitalized. The FDIC also assigns an institution to one of three
supervisory subgroups, based on the FDIC's determination of the institution's
financial condition and the risk posed to the deposit insurance funds.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution's capital group and supervisory subgroup. In addition, the FDIC
imposes assessments to help pay off the $780 million in annual interest payments
on the $8 billion Financing Corporation bonds issued in the late 1980s as part
of the government rescue of the thrift industry.
Transactions With Affiliates and Insiders. The bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which places limits on the
amount of loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The aggregate of
all covered transactions is limited in amount, as to any one affiliate, to 10%
of the bank's capital and surplus and, as to all affiliates combined, to 20% of
the bank's capital and surplus. Furthermore, within the foregoing limitations as
to amount, each covered transaction must meet specified collateral requirements.
Compliance is also required with certain provisions designed to avoid the taking
of low quality assets.
The bank is subject to the provisions of Section 23B of the Federal Reserve
Act which, among other things, prohibits an institution from engaging in certain
transactions with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies. The bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with third parties
and (ii) must not involve more than the normal risk of repayment or present
other unfavorable features.
The Federal Reserve Board has recently issued Regulation W, which codifies
prior regulations under Sections 23A and 23B of the Federal Reserve Act and
interpretative guidance with respect to affiliate transactions. Regulation W
incorporates the exemption from the affiliate transaction rules but expands the
exemption to cover the purchase of any type of loan or extension of credit from
an affiliate. In addition, under Regulation W:
o a bank and its subsidiaries may not purchase a low-quality asset from
an affiliate;
o covered transactions and other specified transactions between a bank or
its subsidiaries and an affiliate must be on terms and conditions that
are consistent with safe and sound banking practices; and
9
o with some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging
from 100% to 130%, depending on the type of collateral, of the amount
of the loan or extension of credit.
Regulation W generally excludes all non-bank and non-savings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the Federal Reserve Board decides to treat these subsidiaries as affiliates.
Concurrently with the adoption of Regulation W, the Federal Reserve Board has
proposed a regulation which would further limit the amount of loans that could
be purchased by a bank from an affiliate to not more than 100% of the bank's
capital and surplus. Comments on the proposed rule were due by January 13, 2003.
Dividends. A national bank may not pay dividends from its capital. All
dividends must be paid out of undivided profits then on hand, after deducting
expenses, including reserves for losses and bad debts. In addition, a national
bank is prohibited from declaring a dividend on its shares of common stock until
its surplus equals its stated capital, unless there has been transferred to
surplus no less than one-tenth of the bank's net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval
of the Office of the Comptroller of the Currency is required if the total of all
dividends declared by a national bank in any calendar year exceeds the total of
its net profits for that year combined with its retained net profits for the
preceding two years, less any required transfers to surplus.
Branching. National banks are required by the National Bank Act to adhere
to branch office banking laws applicable to state banks in the states in which
they are located. Under current South Carolina law, the bank may open branch
offices throughout South Carolina with the prior approval of the Office of the
Comptroller of the Currency. In addition, with prior regulatory approval, the
bank is able to acquire existing banking operations in South Carolina.
Furthermore, federal legislation has been passed which permits interstate
branching. The new law permits out-of-state acquisitions by bank holding
companies, interstate branching by banks if allowed by state law, and interstate
merging by banks.
Community Reinvestment Act. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
respective jurisdictions, the Federal Reserve, the FDIC, or the Office of the
Comptroller of the Currency, shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low
and moderate income neighborhoods. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or facility.
Failure to adequately meet these criteria could impose additional requirements
and limitations on our bank. Under the Gramm-Leach-Bliley Act, banks with
aggregate assets of not more than $250 million will be subject to a Community
Reinvestment Act examination only once every 60 months if the bank receives an
outstanding rating, once every 48 months if it receives a satisfactory rating,
and as needed if the rating is less than satisfactory. Additionally, under the
Gramm-Leach-Bliley Act, banks are required to publicly disclose the terms of
various Community Reinvestment Act-related agreements.
Other Regulations. Interest and other charges collected or contracted for
by the bank are subject to state usury laws and federal laws concerning interest
rates. The bank's loan operations are also subject to federal laws applicable to
credit transactions, such as:
o the federal Truth-In-Lending Act, governing disclosures of credit terms
to consumer borrowers;
o the Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling
its obligation to help meet the housing needs of the community it
serves;
o the Equal Credit Opportunity Act, prohibiting discrimination on the
basis of race, creed or other prohibited factors in extending credit;
o the Fair Credit Reporting Act of 1978, governing the use and provision
of information to credit reporting agencies;
o the Fair Debt Collection Act, governing the manner in which consumer
debts may be collected by collection agencies; and
o the rules and regulations of the various federal agencies charged with
the responsibility of implementing such federal laws.
10
o The deposit operations of the bank also are subject to:
o the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records; and
o the Electronic Funds Transfer Act and Regulation E issued by the
Federal Reserve Board to implement that act, which governs automatic
deposits to and withdrawals from deposit accounts and customers' rights
and liabilities arising from the use of automated teller machines and
other electronic banking services.
Capital Regulations. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profiles among banks and bank holding companies and account for
off-balance sheet items. The guidelines are minimums, and the federal regulators
have noted that banks and bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios in excess of the minimums. We have not received any
notice indicating that either the company or the bank is subject to higher
capital requirements. The current guidelines require all bank holding companies
and federally-regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common shareholders' equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but excludes
goodwill and most other intangibles and excludes the allowance for loan and
lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight applies. These computations result
in the total risk-weighted assets. Most loans are assigned to the 100% risk
category, except for first mortgage loans fully secured by residential property
and, under certain circumstances, residential construction loans, both of which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% rating, and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage
ratio, which is equal to Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
The FDIC Improvement Act established a new capital-based regulatory scheme
designed to promote early intervention for troubled banks, which requires the
FDIC to choose the least expensive resolution of bank failures. The new
capital-based regulatory framework contains five categories of compliance with
regulatory capital requirements, including "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well capitalized" institution, a
bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%, and
the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. Initially, we
will qualify as "well capitalized."
Under the FDIC Improvement Act regulations, the applicable agency can treat
an institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution increases, and the
permissible activities of the institution decreases, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to do some or all of the following:
o submit a capital restoration plan;
o raise additional capital;
o restrict their growth, deposit interest rates, and other activities;
11
o improve their management;
o eliminate management fees; or
o divest themselves of all or a part of their operations.
These capital guidelines can affect us in several ways. If we grow at a
rapid pace, our capital may be depleted too quickly, and a capital infusion from
the holding company may be necessary which could impact our ability to pay
dividends. Our capital levels currently are more than adequate; however, rapid
growth, poor loan portfolio performance, poor earnings performance, or a
combination of these factors could change our capital position in a relatively
short period of time.
Failure to meet these capital requirements would mean that a bank would be
required to develop and file a plan with its primary federal banking regulator
describing the means and a schedule for achieving the minimum capital
requirements. In addition, such a bank would generally not receive regulatory
approval of any application that requires the consideration of capital adequacy,
such as a branch or merger application, unless the bank could demonstrate a
reasonable plan to meet the capital requirement within a reasonable period of
time. Bank holding companies controlling financial institutions can be called
upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
Enforcement Powers. The Financial Institution Report Recovery and
Enforcement Act expanded and increased civil and criminal penalties available
for use by the federal regulatory agencies against depository institutions and
certain "institution-affiliated parties." Institution-affiliated parties
primarily include management, employees, and agents of a financial institution,
as well as independent contractors and consultants such as attorneys and
accountants and others who participate in the conduct of the financial
institution's affairs. These practices can include the failure of an institution
to timely file required reports or the filing of false or misleading information
or the submission of inaccurate reports. Civil penalties may be as high as
$1,000,000 a day for such violations. Criminal penalties for some financial
institution crimes have been increased to 20 years. In addition, regulators are
provided with greater flexibility to commence enforcement actions against
institutions and institution-affiliated parties. Possible enforcement actions
include the termination of deposit insurance. Furthermore, banking agencies'
power to issue cease-and-desist orders were expanded. Such orders may, among
other things, require affirmative action to correct any harm resulting from a
violation or practice, including restitution, reimbursement, indemnification or
guarantees against loss. A financial institution may also be ordered to restrict
its growth, dispose of certain assets, rescind agreements or contracts, or take
other actions as determined by the ordering agency to be appropriate.
Effect of Governmental Monetary Policies. Our earnings are affected by
domestic economic conditions and the monetary and fiscal policies of the United
States government and its agencies. The Federal Reserve Bank's monetary policies
have had, and are likely to continue to have, an important impact on the
operating results of commercial banks through its power to implement national
monetary policy in order, among other things, to curb inflation or combat a
recession. The monetary policies of the Federal Reserve Board have major effects
upon the levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of
the discount rate on borrowings of member banks and the reserve requirements
against member bank deposits. It is not possible to predict the nature or impact
of future changes in monetary and fiscal policies.
Proposed Legislation and Regulatory Action. New regulations and statutes
are regularly proposed that contain wide-ranging proposals for altering the
structures, regulations, and competitive relationships of the nation's financial
institutions. We cannot predict whether or in what form any proposed regulation
or statute will be adopted or the extent to which our business may be affected
by any new regulation or statute.
Location and Service Area
We conduct a general commercial and retail banking business, emphasizing
the needs of individuals and small- to medium-sized businesses. We operate our
banking business through our bank, Greenville First Bank, N.A. Our main office
is located at 212 Haywood Road in Greenville, South Carolina. We primarily serve
Greenville, South Carolina and the surrounding area.
12
Competition
The banking business is highly competitive. We compete with other
commercial banks, savings and loan associations, credit unions and money market
mutual funds operating in the Greenville County area and elsewhere. As of March
20, 2003, there were 24 commercial banks and 2 savings banks operating in
Greenville County. Some of these competitors have been in business for a long
time and have already established their customer base and name recognition. We
believe that our community bank focus, with our emphasis on service to small
businesses, individuals, and professional concerns, gives us an advantage in the
market. Nevertheless, a number of these competitors have greater financial and
personnel resources than we may have. Most of them offer services, including
extensive and established branch networks and trust services, that we do not
currently provide. In addition, competitors that are not depository institutions
are generally not subject to the extensive regulations that apply to our bank.
As a result of these competitive factors, we may have to pay higher rates of
interest to attract deposits.
Item 2. Description of Property
----------------------------------
Our main office facility opened on January 16, 2001 at 112 Haywood Road,
Greenville, South Carolina. We intend to lease the main office for approximately
$27,000 per month for 20 years. The facility is located at the corner of Haywood
Road and Halton Road in downtown Greenville. The bank is leasing the building.
The building is a full service banking facility with three drive-through-banking
stations and an automatic teller machine. Between January 10, 2000, the date the
bank opened for business and the opening of our new facility, we operated our
headquarters and a full-service branch in a temporary facility that was located
on the same site as the permanent facility.
Item 3. Legal Proceedings.
----------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
--------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Item 5. Market for Common Equity and Related Stockholder Matters.
-------------------------------------------------------------------
Since our public offering on October 26, 1999, our common stock has been
quoted on the OTC Bulletin Board under the symbol "GVBK." However, trading and
quotations in our common stock have been limited and sporadic and we do not
believe that there is a publicly established trading market in the common stock.
The price of the last trade of which we are aware is $14.00 per share, but we
have not determined that this trade was the result of arm's length negotiations
between the parties and we can provide no assurance this price reflects the
market value of our common stock. Our articles of incorporation authorize us to
issue up to 10,000,000 shares of common stock, of which 1,150,000 shares were
outstanding as of March 20, 2003. We have approximately 950 shareholders of
record.
To date, we have not paid cash dividends on our common stock. We currently
intend to retain earnings to support operations and finance expansion and
therefore do not anticipate paying cash dividends in the foreseeable future. All
of our outstanding shares of common stock are entitled to share equally in
dividends from funds legally available when, and if, declared by the board of
directors.
13
The following table sets forth equity compensation plan information at December
31, 2002.
Equity Compensation Plan Information
Number of securities
Number of securities remaining available for
to be issued Weighted-average future issuance under
upon exercise of exercise price of equity compensation plans (c)
outstanding options, outstanding options, (excluding securities)
Plan Category warrants and rights (a) warrants and rights (b) reflected in column (a))
------------- ------------------- ------------------- ------------------------
Equity compensation
plans approved by
security holders (1) 124,000 $10.13 48,500
Equity compensation
plans not approved
by security holders(2) 129,950 $10.00 -
Total 253,950 $10.06 48,500
(1) The 172,500 of shares of common stock available under the 2000 Greenville
First Bancshares, Inc. Stock Incentive Plan will automatically increase
each time we issue additional shares so that it continues to equal 15% of
our total outstanding shares.
(2) Each of our organizers received, for no additional consideration, a warrant
to purchase one share of common stock for $10.00 per share for each share
purchased during our initial public offering. The warrants are represented
by separate warrant agreements. One third of the warrants vest on each of
the first three anniversaries of the date our bank opened for business, and
they are exercisable in whole or in part during the ten year period
following that date. The warrants may not be assigned, transferred,
pledged, or hypothecated in any way. The 129,950 of shares issued pursuant
to the exercise of such warrants are transferable, subject to compliance
with applicable securities laws. If the South Carolina Board of Financial
Institutions or the FDIC issues a capital directive or other order
requiring the bank to obtain additional capital, the warrants will be
forfeited, if not immediately exercised.
The following is a summary of the bid prices for our common stock reported
by the OTC Bulletin Board for the periods indicated:
2002 High Low
---- ---- ---
First Quarter $ 12.00 $ 10.50
Second Quarter 19.00 10.90
Third Quarter 12.00 10.25
Fourth Quarter 13.50 11.00
2001 High Low
---- ---- ---
First Quarter $ 10.38 $ 8.62
Second Quarter 12.90 8.50
Third Quarter 11.07 10.10
Fourth Quarter 11.50 10.06
The prices listed above are quotations, which reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.
14
Item 6. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operation.
---------------------
DISCUSSION OF FORWARD-LOOKING STATEMENTS
The following is our discussion and analysis of certain significant factors that
have affected our financial position and operating results and those of our
subsidiary, Greenville First Bank, N.A., during the periods included in the
accompanying financial statements. This commentary should be read in conjunction
with the financial statements and the related notes and the other statistical
information included in this report.
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," "may," 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 the effects of future economic conditions;
o governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
o changes in interest rates and their effect on the level and composition
of deposits, loan demand, and the values of loan collateral, securities
and other interest-sensitive assets and liabilities;
o our ability to control costs, expenses, and loan delinquency rates; and
o the effects of competition from other commercial banks, thrifts,
mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other
mutual funds and other financial institutions operating in our market
area and elsewhere, including institutions operating regionally,
nationally, and internationally, together with such competitors
offering banking products and services by mail, telephone, computer and
the Internet.
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;
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.
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.
15
GENERAL
The following is a discussion of our financial condition as of December 31,
2002 and the results of operations for the year ended December 31, 2002. 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 and
Discussion section of this document and included in Note 1 to the consolidated
financial statements.
NATIONAL AND ECONOMIC EVENTS
Nationally, during most of 2001 and during 2002, the United States
experienced a slowing economy following a tenth year of expansion. During this
period, the economy was also 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 reduced the Federal Funds rate down an additional 50 basis points.
Despite sharply lower short-term rates, stimulus to the economy has been
muted 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 rate in the second half of the 2003 year. 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.
We believe that the economic impact of the terrorist attacks of September
11, 2001 did not materially affect our operations. It is evident from recent
economic data that the U.S. economy was affected significantly by these events.
The extent and duration of the economic impact from the attacks are not
predictable but could affect consumer confidence and the financial activities of
retail and business customers. Prior to these events, many economists were
predicting that the U.S. had been in a recession. Official economic data
released in November 2001 confirms that the U.S. has been in a recession for
several months and it is likely that recovery will not occur until sometime
later in 2003 or beyond.
INCOME STATEMENT REVIEW
Net Interest Income
Net interest income, the largest component of our income, was $4,660,647 in
2002 compared to $2,957,313 in 2001, or an increase of 57.6%. The level of net
interest income is determined by the level of earning assets and the
successfully managing of the net interest margin. Changes in interest rates paid
on assets and liabilities, the rate of growth of the asset and liability base,
the ratio of interest-earning assets to interest-bearing liabilities, and
management of the balance sheet's interest rate sensitivity all factor into
changes in net interest income.
Interest income for 2002 of $8,152,830 consisted of $7,390,202 on loans,
$712,699 in investments, and $49,929 on federal funds sold. Interest income for
the year 2001 of $6,310,254 included $5,186,555 on loans, $963,087 on
investments, and $160,612 on federal funds sold.
Interest expense for 2002 of $3,492,183 consisted of $3,160,563 related to
deposits and $331,620 related to borrowings. Interest expense for 2001 of
$3,352,941 consisted of $3,243,960 related to deposits and $108,981 related to
borrowings.
16
The following table sets forth, for the years ended December 31, 2002 and
2001, information related to our average balance sheet and 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.
Average Balances, Income and Expenses, and Rates (in $000's)
For the years ended December 31,
2002 2001
---- ----
Average Income/ Yield/ Average Income Yield/
Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
Earning Assets:
Federal funds sold $ 2879 $ 50 1.74% $ 3,716 $ 160 4.31%
Investment securities 14,913 713 4.78% 15,456 963 6.23%
Loans 123,261 7,390 6.00% 67,046 5,187 7.74%
--------------------------- ----------------------------
Total earning-assets 141,053 8,153 5.78% 86,218 6,310 7.32%
------ -------
Non-earning assets 7,112 5,364
-------- --------
Total assets $148,165 $ 91,582
========= ========
Interest-bearing liabilities:
NOW accounts $ 27,367 $ 261 .95% $ 12,559 $ 164 1.31%
Savings & money market 22,811 316 1.39% 19,588 675 3.45%
Time deposits 71,846 2,584 3.60% 42,982 2,405 5.60%
Total interest-bearing deposits 122,024 3,161 2.59% 75,129 3,244 4.32%
FHLB advance 7,090 216 3.05% 1,858 74 3.98%
Other borrowings 5,293 116 2.19% 1,333 35 2.63%
--------------------------- ----------------------------
Total interest-bearing liabilities 134,407 3,493 2.60% 78,320 3,353 4.28%
------ -------
Non-interest bearing liabilities 4,023 3,813
Shareholders' equity 9,735 9,449
-------- --------
Total liabilities and shareholders'
equity $148,165 $ 91,582
======== ========
Net interest spread 3.18% 3.04%
Net interest income/margin $4,660 3.30% $ 2,957 3.43%
------ -------
Our net interest spread was 3.18% for the year ended December 31, 2002 as
compared to 3.04% for the year ended December 31, 2001. 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 period ended December 31, 2002 was 3.30% as
compared to 3.43% for the year ended December 31, 2001. During 2002, earning
assets averaged $141.1 million as compared to $86.2 million in 2001. The net
interest margin is calculated as net interest income divided by year-to-date
average earning assets.
In pricing deposits, we considered our liquidity needs, the direction and
levels of interest rates and local market conditions. As such, higher rates have
been paid initially to attract deposits.
17
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.
December 31, 2002 vs 2001 December 31, 2001 vs 2000
------------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ ------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------------------------------------------------------------------------------------
Interest income
Loans $ 4,349 (1,167) (979) 2,203 4,213 (477) (867) 2,869
Investment securites (34) (224) 8 (250) 543 (10) (12) 521
Federal funds sold (36) (96) 22 (110) (150) (127) 49 (228)
------------------------------------------------------------------------------------
Total interest income 4,279 (1,487) (949) 1,843 4,606 (614) (830) 3,162
------------------------------------------------------------------------------------
Interest expense
Deposits 2,025 (1,298) (810) (83) 2,532 (305) (507) 1,720
FHLB advances 208 (17) (49) 142 74 - - 74
Other borrowings 104 (6) (17) 81 35 - - 35
------------------------------------------------------------------------------------
Total interest expense 2,337 (1,321) (876) 140 2,641 (305) (507) 1,829
------------------------------------------------------------------------------------
Net interest income $ 1,942 (166) (73) 1,703 1,965 (309) (323) 1,333
====================================================================================
Provision for Loan Losses
Included in the results of operations for the periods ended December 31,
2002 and 2001 is a non-cash expense of $1.1 million and $600,000, respectively,
related to the provision for loan losses. The loan loss reserve was $1.8 million
and $1.2 million as of December 31, 2002 and 2001, respectively. The allowance
for loan losses as a percentage of gross loans was 1.22% at December 31, 2002
and 1.24% at December 31, 2001. 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. Management's
judgment as to the adequacy of the allowance is based upon a number of
assumptions about future events that it believes to be reasonable, but which may
or may not be accurate. Because of the inherent uncertainty of assumptions made
during the evaluation process, there can be no assurance that loan losses in
future periods will not exceed the allowance for loan losses or that additional
allocations will not be required. For the year ended December 31, 2002, we
reported net charge-offs of $418,098. Included in the $418,098 was the writedown
on a commercial business loan in the amount of $410,000. The remaining $8,098 of
the charge-offs in 2002 related to credit lines associated with customer
checking accounts. For the year ended December 31, 2001, we reported net
charge-offs of $7,753. All of the charge-offs in 2001 related to credit lines
associated with customer checking accounts.
Noninterest Income and Expense
Noninterest income in 2002 was $520,251, an increase of 83.2% over
noninterest income of $283,991 in 2001. This increase was primarily due to
increases in service charges on deposits, increases in 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 $3.4 million for the
year ended December 31, 2002 compared to $2.8 million for the 2001 year. The
$596,000 additional general and administrative expenses resulted primarily from
the additional staff hired during 2001 to handle the current and anticipated
future growth in both loans and deposits.
18
Salaries and benefits in 2002 were $1.8 million, or an increase of $288,000.
Salaries and benefits represented 52.4% of the total noninterest expense.
Salaries and benefits in 2001 were $1.5 million. All other expenses increased
only $308,295. This increase relates primarily to $184,784 additional cost for
outside services, $25,841 of added professional fees, and $61,482 of additional
occupancy expenses. The primary reason for the higher level of outside services
is the additional data processing expense associated with the higher level of
activity that resulted from the significant increases in both loans and
deposits. The significant portion of the increase in professional fees relates
to legal fees associated with loan collection efforts. The primary reason for
the increase in occupancy cost is that the bank increased the amount of square
footage that was being rented in the 2002 period. The significant portion of the
remaining increases are related to $9,454 additional marketing expense and
$30,355 of additional insurance expenses. The significant portion of the
increase in insurance expense relates to the higher cost of deposit insurance
resulting from the higher level of deposits.
No income tax income tax benefit or expense was recorded in 2002. A $22,000
benefit for income taxes was recorded in 2001.
BALANCE SHEET REVIEW
General
At December 31, 2002, we had total assets of $170.4 million, consisting
principally of $148.1 million in loans, $14.8 million in investments and $4.4
million in cash and due from banks. Liabilities at December 31, 2002 totaled
$160.1 million, consisting principally of $133.6 million in deposits, $13.0
million in FHLB advances, and $9.1 million of short-term borrowings. At December
31, 2002, shareholders' equity was $10.2 million.
Investments
At December 31, 2002, the $14.6 million of investment securities portfolio
represented approximately 8.6% of our total assets. We were invested in U.S.
Government agency securities and mortgage-backed securities with a fair value of
$14.6 million and an amortized cost of $14.4 million for an unrealized gain of $
224 thousand.
Contractual maturities and yields on our investments (all available for
sale) at December 31, 2002 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. Based on the comparison of investment securities coupon
rates and the market interest rate as of December 31, 2002, the bank anticipates
that approximately $8.6 million will be called during the 2003 year.
After one but
Within Within five Over
one year Yield Years Yield Five years Yield Total Yield
-------- ----- ----------- ----- ---------- ----- ----- ------
U.S.Government
agencies $ - - $ 8,157 4.54% $ 1,627 6.05% $ 9,784 4.79%
Mortgage-backed
securities - - - -% 4,808 4.73% 4,808 4.73%
----------------- -------------------- ------------------- ------------------
Total - - $ 8,157 4.54% $ 6,435 5.06% $ 14,592 4.77%
================= ==================== =================== ==================
At December 31, 2002, the $42,000 of short-term investments in federal
funds sold on an overnight basis comprised .02% of total assets at December 31,
2002, as compared to $101,000, or .09% of total assets, at December 31, 2001.
19
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 years ended
December 31, 2002 and 2001 were $123.3 million and $67.0 million, respectively.
Total loans outstanding at December 31, 2002 and 2001 were $149.9 million and
$96.5 million, respectively, before allowance for loan losses.
The following table summarizes the composition of the loan portfolio at
December 31:
2002 2001
---- ----
Amount % of Total Amount % of Total
------ ---------- ------ ----------
Real estate:
Commercial
Owner occupied $ 22,653,311 15.11% $ 16,532,696 17.13%
Non-owner occupied 43,076,993 28.74% 22,813,424 23.63%
Construction 4,007,650 2.67% 8,292,228 8.59%
-------------------------------------------------------------------
Total commercial real-estate 69,737,954 46.52% 47,638,348 49.35%
-------------------------------------------------------------------
Consumer
Residential 25,499,625 17.01% 12,898,543 13.36%
Home Equity 18,069,407 12.05% 8,937,054 9.26%
Construction 4,199,848 2.80% 3,972,206 4.11%
-------------------------------------------------------------------
Total consumer real-estate 47,768,880 31.86% 25,807,803 26.73%
-------------------------------------------------------------------
Total real-estate 117,506,834 78.39% 73,446,151 76.08%
Commercial business 28,192,407 18.81% 20,529,004 21.27%
Consumer-other 4,590,552 3.06% 2,812,703 2.91%
Deferred origination fees, net (386,632) (.26%) (255,990) (.26%)
-------------------------------------------------------------------
Total gross loans, net of deferred fees 149,903,161 100.00% 96,531,868 100.00%
======== ========
Less--allowance for loan losses (1,824,149) (1,192,247)
------------ ------------
Total loans, net $148,079,012 $ 95,339,621
============ ============
The principal component of our loan portfolio at year-end 2002 and 2001
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.
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. Management's judgment as to the adequacy of the allowance is
based on a number of assumptions about future events, which it believes to be
reasonable, but which may or may not be valid. Based on our judgments,
evaluation, and analysis of the loan portfolio, we consider the allowance for
loan losses to be adequate. However, there can be no assurance that charge-offs
in future periods will not exceed the allowance for loan losses as estimated at
any point in time or that provisions for loan losses may be significant to a
particular accounting period.
We have established an allowance for loan losses through a provision for
loan losses charged to expense on our statement of operations. The allowance
represents an amount which we believe will be adequate to absorb probable losses
on existing loans that may become uncollectible. Our judgment in determining the
adequacy of the allowance is based on evaluations of the collectibility of
loans, including consideration of factors such as the balance of impaired loans;
the quality, mix and size of our overall loan portfolio; economic conditions
that may affect the borrower's ability to repay; the amount and quality of
collateral securing the loans; our historical loan loss experience and a review
of specific problem loans. We adjust the amount of the allowance periodically
based on changing circumstances as a component of the provision for loan losses.
We charge recognized losses to the allowance and add subsequent recoveries back
to the allowance.
20
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 which we apply to each loan. The bank has an independent
consultant to review the loan files on a test basis, to verify that the lenders
have properly graded each loan. The bank's analysis of the adequacy of the
allowance also considers subjective issues such as changes in the lending
policies and procedures, changes in 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
comparisions. 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 December 31, 2002 and 2001, the allowance for loan losses was $1.8
million and $1.2 million, respectively, or 1.22% of outstanding loans at
December 31, 2002 and 1.24% at December 31, 2001, respectively. During the year
ended December 31, 2002, we charged off loans of $418,098. During the year ended
December 31, 2001, we charged off loans of $7,753.
At December 31, 2002, nonaccrual loans represented .1% of total loans. At
December 31, 2002 and 2001, the bank had $113,105 and $359,987, respectively on
non-accrual status. Generally, a loan is placed on nonaccrual status when it
becomes 90 days past due as to principal or interest, or when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of the
loan is doubtful. A payment of interest on a loan that is classified as
nonaccrual is recognized as income when received.
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.
The following table summarizes the loan maturity distribution, by type, and
related interest rate characteristics at December 31, 2002 (dollars in
thousands):
After one but
One year within five After
or less years five years Total
------- ----- ---------- -----
Commercial $ 17,039 $ 11,098 $ 55 $ 28,192
Real estate - construction 7,173 1,034 - 8,207
Real estate - mortgage 15,810 89,479 3,624 108,913
Consumer and other 1,651 2,546 394 4,591
----------- ----------- ----------- ----------
Total loans $ 41,673 $ 104,157 $ 4,073 $ 149,903
----------- ----------- ----------- ----------
Loans maturing after one year with:
Fixed interest rates $ 30,812
Floating interest rates $ 77,418
21
Deposits and Other Interest-Bearing Liabilities
Our primary source of funds for loans and investments is our deposits,
advances from 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 and stock and fixed income mutual funds.
The following is a table of deposits by category at December 31 (dollars in
thousands):
2002 2001
---- ----
Demand deposit accounts $ 13,809 10.34% $ 7,729 8.34%
NOW accounts 15,378 11.51% 8,295 8.95%
Money market accounts 19,727 14.77% 24,139 26.04%
Savings accounts 1,774 1.33% 255 .27%
Time deposits less than $100,000 32,024 23.98% 31,900 34.41%
Time deposits of $100,000 or more 50,851 38.07% 20,382 21.99%
---------------------------------------------------------
Total deposits $ 133,563 100.00% $ 92,700 100.00%
=========================================================
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 $82.7 million and $72.3 million at December 31,
2002 and 2001, respectively. The increase in time deposits of $100,000 or more
resulted from the bank utilizing deposits that were obtained outside of the
bank's primarily market. At December 31, 2002 the total of deposits outside of
the bank's primary market totaled $46.2 million. The bank anticipates being able
to either renew or replace these deposits when they mature, however, no
assurance can be given that the bank will be able to replace these deposits with
the same terms or rates. Our loan-to-deposit ratio was 111% and 103% at year-end
2002 and 2001, respectively. The maturity distribution of our time deposits of
$100,000 or more at December 31, 2002 and 2001 is as follows:
2002 2001
---- ----
(Dollars in thousands)
Three months or less $ 13,226 $ 7,929
Over three through six months 9,155 3,680
Over three through twelve months 10,391 5,023
Over twelve months 18,079 3,750
--------------------------------------
Total $ 50,851 $ 20,382
======================================
Borrowings
At December 31, 2002 the bank had $7,892,000 sales of securities under
agreements to repurchase with brokers with a weighted rate of 1.38% that mature
in less than 90 days. These agreements are secured with approximately $8,000,000
of investment securities. The securities under agreement to repurchase averaged
$4,349,076 during 2002, with $8,482,600 being the maximum amount outstanding at
any month-end.
At December 31, 2001 the bank had $7,682,600 sales of securities under
agreements to repurchase with brokers with a weighted rate of 1.96% that mature
in less than 90 days. These agreements are secured with approximately $8,000,000
of investment securities. The securities under agreement to repurchase averaged
$1,335,382 during 2001, with $7,682,600 being the maximum amount outstanding at
any month-end.
At December 31, 2002 the bank had utilized $1,215,000 of its $3,700,000 of
federal funds purchased line of credit. At December 31, 2001 the bank had
utilized $800,000 of its $2,800,000 of federal funds purchased line of credit.
These lines of credit are unsecured and bear interest at the daily rate of
federal funds plus 25 basis points (1.50% at December 31, 2002).
22
At December 31, 2002 the bank had $13,000,000 of advances from the FHLB.
These advances are secured with approximately $22,400,000 of first mortgage
loans and stock in the FHLB. 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 $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.
At December 31, 2001 the bank had $6,000,000 of advances from the FHLB of
Atlanta. These advances are secured by a combination of approximately $9,000,000
of first mortgage loans, investment securities and stock in the FHLB. The
maturity on $3,000,000 of the advances with a weighted rate of 2.67% is March
27, 2002 and the remaining $3,000,000 with a weighted rate of 4.83% has a
maturity of August 24, 2011. The FHLB has the option to re-price this advance as
of August 24, 2006.
At December 31, 2002 the company had a $2,500,000 revolving line of credit
with another bank with a maturity of June 30, 2003. At December 31, 2002, the
company had outstanding $2,500,000. The company used $2,375,000 of the proceeds
to increase its investment in the Bank. The remaining $125,000 was used to
establish a $125,000 escrow fund to be used to pay interest payments. The line
of credit bears interest at a rate of prime minus 1.25%, which at December 31,
2002 was 3.00%. 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 December 31,
2002, the company believes it is in compliance with all covenants.
CAPITAL RESOURCES
Total shareholders' equity amounted to $10,231,789 at December 31, 2002 and
$9,459,419 at December 31, 2001. The increase between 2001 and 2002 primarily
resulted from the $752,416 of net income incurred during 2002, and the $19,954
increase in unrealized gain on investment securities, net of tax.
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 2002 and 2001. Since our inception, we have not paid cash
dividends.
2002 2001
---- ----
Return on average assets 0.5% -0.1%
Return on average equity 7.73% -1.3%
Equity to assets ratio 6.0% 8.0%
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%.
23
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, 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 general reserve for loan losses subject to certain limitations. The bank is
also required to maintain capital at a minimum level based on total average
assets, which is known as the Tier 1 leverage ratio.
We are both subject to various regulatory capital requirements administered
by the federal banking agencies. Under these capital guidelines, we must
maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1
capital. In addition, we must maintain a minimum Tier 1 leverage ratio of at
least 4%. To be considered "well-capitalized", we must maintain total risk-based
capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of
at least 5%.
The following table sets forth the company's and the bank's various capital
ratios at December 31, 2002 and 2001. At December 31, 2002 and 2001, we both
were in compliance with each of the applicable regulatory capital requirements
and were considered to be "well capitalized" at the bank level.
2002 2001
---- ----
The The The The
Company Bank Company Bank
------- ---- ------- ----
Total risk-based capital 8.6% 10.3% 10.4% 10.1%
Tier 1 risk-based capital 7.4% 9.1% 9.2% 8.9%
Leverage capital 6.1% 7.5% 8.2% 7.9%
We believe that capital is sufficient to fund the activities of the bank
over the next two years. The company is currently evaluating various
alternatives for increasing capital. It is management's objective to maintain
the capital levels such that the bank will continue to be considered well
capitalized. However, no assurance can be given that this objective will be
achieved. We do anticipate that capital levels will be maintained at levels that
will allow the company and the bank to qualify as being adequately capitalized
as defined by OCC regulations. Depending on the timing of when additional
capital is obtained, the bank may be required to limit the level of growth that
has been experienced in the past three years. As of December 31, 2002, there
were no significant firm commitments outstanding for capital expenditures.
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.
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 mange the relationships between interest
sensitive assets and liabilities in order to protect against wide rate
fluctuations, including those resulting from inflation.
24
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 December 31, 2002, unfunded commitments
to extend credit were $34,086,000, of which $2,103,000 is at fixed rates and
$31,983,000 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 December 31, 2002, there was a $877,000 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.
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 could result in liquidity
needs or other commitments or 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. Management actively
monitors and manages its 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.
Due to the fact that approximately 75% of our loans were variable rate
loans at December 31, 2002, we are currently asset sensitive during 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.
25
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 December 31, 2002 and 2001, our liquid assets, consisting of cash and
due from banks and federal funds sold, amounted to $4,471,026 and $2,982,956,
representing 2.6% and 2.5% of total assets, respectively. Investment securities
at December 31, 2002 and 2001 amounted to $15,497,190 and $18,468,460,
representing 9.10% and 15.6% 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 and maturity of investment securities,
and generation of deposits. During most of 2002, 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, the bank maintains federal funds purchased lines of credit with
correspondent banks in the amount of $3,700,000. The bank is also 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 that securities,
qualifying single family 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 December 31, 2002 was $3.7 million and
assumes that the bank's $650,000 investment in FHLB stock as well as qualifying
mortgages would be pledged to secure any future borrowings. During the first
quarter of 2003, the bank became eligible to pledge first mortgage commercial
loans. The pledging of the commercial mortgage loans increase the bank's
borrowing capacity by $18.6 million. The bank plans to use the additional
borrowing capacity to both fund anticipated additional loans and for short-term
liquidity needs that may arise.
Management believes that our existing stable base of core deposits,
borrowings from the FHLB, and short-term repurchase agreements will enable us to
successfully meets 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 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
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.
26
The following table presents our rate sensitivity at each of the time
intervals indicated as of December 31, 2002. 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 $ 42 $ - $ - $ - $ 42
Investment securities 8,917 750 4,518 407 14,592
Loans 112,052 7,039 30,090 722 149,903
-------------- ----------------- --------------- ------------- ------------
Total earning assets $ 121,011 $ 7,789 $ 34,608 $ 1,129 $ 164,537
-------------- ----------------- --------------- ------------- -------------
Interest-bearing liabilities:
Money market and NOW $ 35,104 $ - $ - $ - $ 35,104
Regular savings 1,774 - - - 1,774
Time deposits 22,915 33,689 26,273 - 82,877
Federal funds purchased 1,215 - - - 1,215
Repurchase Agreements 7,892 - - - 7,892
Note payable 2,500 - - - 2,500
FHLB advances 5,000 5,000 3,000 - 13,000
-------------- ----------------- --------------- ------------- -------------
Total interest-bearing
liabilities $ 76,400 $ 38,689 $ 29,273 $ - $ 144,362
-------------- ----------------- --------------- ------------- -------------
Period gap $ 44,611 $ (30,900) $ 5,335 $ 1,129 $ 20,175
Cumulative gap $ 44,611 $ 13,711 $ 19,046 $ 20,175 $ 20,175
Ratio of cumulative gap to
total earning assets 27.1% 8.3% 11.6% 12.3%
ACCOUNTING, REPORTING AND REGULATORY MATTERS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires companies to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use of
assets. A corresponding asset (which is depreciated over the life of the asset)
must also be recorded. The company adopted the provisions of SFAS NO. 143 on
January 1, 2003 with no impact on financial position and results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes prior pronouncements
associated with impairment or disposal of long-lived assets. The statement
establishes methodologies for assessing impairment of long-lived assets,
including assets to be disposed of by sale or by other means. The adoption of
this standard had no impact on the financial position of the company.
27
In April 2002, The FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This statement also rescinds SFAS No. 44, Accounting
for Intangible Assets of Motor Carriers and amends SFAS No. 13, Accounting for
Leases. This new statement requires gains and losses from extinguishment of debt
to be classified as an extraordinary item only if they meet the criteria of APB
Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, which will distinguish transactions that are
part of an entity's recurring operations from those that are unusual or
infrequent or that meet the criteria for classification as an extraordinary
item. The adoption of the provisions of SFAS No. 145 had no impact on the
Company's financial position or results of operations
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement applies to
costs associated with specific exit activities and requires a liability for a
cost associated with an exit or disposal activity to be recognized and measured
initially at its fair value in the period in which the liability is incurred. A
liability for a cost associated with an exit or disposal activity is incurred
when the definition of a liability is met. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The company adopted the provisions of this statement on January 1, 2003
with no impact on financial position or results of operations.
In October 2002, the FASB issued SFAS No. 147, Acquisition of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9, which brings all business combinations involving financial
institutions, except mutual financial institutions, into the scope of SFAS No.
141, Business Combinations. This statement requires that all acquisitions of
financial institutions that meet the definition of a business, including
acquisitions of part of a financial institution that meet the definition of a
business, must be accounted for in accordance with SFAS No. 141 and the related
intangibles accounted for in accordance with SFAS No. 142. SFAS No. 147 removes
such acquisitions from the scope of SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions. SFAS No. 147 also amends SFAS
No. 144 to include in its scope long-term customer relationship intangibles of
financial institutions. SFAS No. 147 was effective upon issuance and had no
impact on the company's financial statements.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The company
adopted this standard effective December 31, 2002 and has included the required
disclosures in the footnotes to the financials. The company has not elected the
fair value treatment of stock-based compensation and the adoption of this
standard had no impact on its financial position.
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.
28
Item 7. Financial Statements
-----------------------------
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Report of Independent Public Accountant.......................................31
Consolidated Balance Sheets...................................................32
Consolidated Statements of Operations.........................................33
Consolidated Statements of Shareholders' Equity...............................34
Statements of Cash Flows......................................................35
Notes to Consolidated Financial Statements....................................36
29
GREENVILLE FIRST BANCSHARES, INC.
AND SUBSIDIARY
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Directors
Greenville First Bancshares, Inc. and Subsidiary
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of Greenville
First Bancshares, Inc. and Subsidiary as of December 31, 2002 and 2001 and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Greenville
First Bancshares, Inc. and Subsidiary as of December 31, 2002 and 2001 and the
results of their operations and their cash flows for the years ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Elliott Davis, LLC
Elliott Davis, LLC
Greenville, South Carolina
February 14, 2003
31
GREENVILLE FIRST BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
2002 2001
----------------- -----------------
Assets
Cash and due from banks $ 4,429,290 $ 2,882,115
Federal funds sold 41,736 100,841
Investment securities available for sale 14,592,190 17,913,460
Other investments, at cost 905,000 555,000
Loans, net 148,079,012 95,339,621
Accrued interest 730,028 840,448
Property and equipment, net 785,942 890,761
Other real estate owned 524,625 -
Other assets 269,840 42,764
------------------ -----------------
Total assets $ 170,357,663 $ 118,565,010
================== =================
Liabilities and Shareholders' Equity
Liabilities
Deposits $ 133,563,270 $ 92,700,010
Official checks outstanding 889,270 891,129
Federal funds purchased and repurchase agreements 9,107,000 8,482,600
Federal Home Loan Bank advances 13,000,000 6,000,000
Note payable 2,500,000 -
Accrued interest payable 606,072 748,091
Accounts payable and accrued expenses 460,262 283,761
------------------ -----------------
Total liabilities 160,125,874 109,105,591
------------------ -----------------
Commitments and contingencies - Note 11
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 147,733 127,779
Retained deficit (562,644) (1,315,060)
------------------ -----------------
Total shareholders' equity 10,231,789 9,459,419
------------------ -----------------
Total liabilities and shareholders' equity $ 170,357,663 $ 118,565,010
================== =================
See notes to consolidated financial statements that are an integral part of
these consolidated statements.
32
GREENVILLE FIRST BANCSHARES, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
December 31,
--------------------------------------
2002 2001
------------------ ------------------
Interest income
Loans $ 7,390,202 $ 5,186,555
Investment securities 712,699 963,087
Federal funds sold 49,929 160,612
------------------ ------------------
Total interest income 8,152,830 6,310,254
Interest expense
Deposits 3,160,563 3,243,960
Borrowings 331,620 108,981
------------------ ------------------
Total interest expense 3,492,183 3,352,941
------------------ ------------------
Net interest income before provision for loan losses 4,660,647 2,957,313
Provision for loan losses 1,050,000 600,000
------------------ ------------------
Net interest income after provision for loan losses 3,610,647 2,357,313
------------------ ------------------
Noninterest income
Loan fee income 155,401 81,974
Service fees on deposit accounts 182,667 94,612
Other income 182,183 107,405
------------------ ------------------
Total noninterest income 520,251 283,991
------------------ ------------------
Noninterest expenses
Salaries and benefits 1,768,878 1,481,173
Professional fees 153,257 127,416
Marketing 123,553 114,099
Insurance 93,282 62,927
Occupancy 587,783 526,301
Data processing and related costs 473,577 288,793
Telephone 23,674 20,663
Other 154,478 161,110
------------------ ------------------
Total noninterest expenses 3,378,482 2,782,482
------------------ ------------------
Income (loss) before income taxes benefit 752,416 (141,178)
Income tax benefit - 22,000
------------------ ------------------
Net income (loss) $ 752,416 $ (119,178)
================== ==================
Earnings (loss) per common share:
Basic $ .65 $ (.10)
================== ==================
Diluted $ .64 $ (.10)
================== ==================
Weighted average common shares outstanding
Basic 1,150,000 1,150,000
================== ==================
Diluted 1,169,251 1,150,000
================== ==================
See notes to consolidated financial statements that are an
integral part of these consolidated statements.
33
GREENVILLE FIRST BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
Accumu-
lated
other Total
Additional compre- share-
Common stock paid-in hensive Retained holders'
---------------------------
Shares Amount capital income deficit equity
----------- -------------- -------------- --------------- --------------- --------------
December 31, 2000 1,150,000 $ 11,500 $10,635,200 $ 24,162 $ (1,195,882) $ 9,474,980
Net loss - - - - (119,178) (119,178)
Comprehensive loss, net
of tax -
Unrealized holding gain
on securities available
for sale - - - 103,617 - 103,617
--------------
Comprehensive loss - - - - - (15,561)
----------- -------------- -------------- --------------- --------------- --------------
December 31, 2001 1,150,000 11,500 10,635,200 127,779 (1,315,060) 9,459,419
Net income - - - - 752,416 752,416
Comprehensive income, net
of tax -
Unrealized holding gain
on securities available
for sale - - - 19,954 - 19,954
--------------
Comprehensive income - - - - - 772,370
----------- -------------- -------------- --------------- --------------- --------------
December 31, 2002 1,150,000 $ 11,500 $10,635,200 $ 147,733 $ (562,644) $ 10,231,789
=========== ============== ============== =============== =============== ==============
See notes to consolidated financial statements that are an integral part of
these consolidated statements.
34
GREENVILLE FIRST BANCSHARES, INC.AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended
December 31,
--------------------------------------------
2002 2001
-------------------- ---------------------
Operating activities
Net income (loss) $ 752,416 $ (119,178)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Provision for loan losses 1,050,000 600,000
Depreciation and other amortization 209,810 192,546
Accretion and amortization of securities
discounts and premium, net 56,320 (32,917)
Increase in other assets, net (278,294) (292,561)
Increase (decrease) in other liabilities, net 22,344 (89,176)
-------------------- ---------------------
Net cash provided by operating activities 1,812,596 258,714
-------------------- ---------------------
Investing activities
Origination of loans, net (54,152,378) (49,914,594)
Purchase of property and equipment (104,991) (466,686)
Purchase of securities available for sale (11,494,137) (18,328,767)
Principal repayments and maturity of investment securities
available for sale 14,439,320 9,394,736
-------------------- ---------------------
Net cash used for investing activities (51,312,186) (59,315,311)
-------------------- ---------------------
Financing activities
Increase in deposits, net 40,863,260 42,705,581
Increase in federal funds purchased and repurchase agreements 624,400 8,482,600
Proceeds from note payable 2,500,000 -
Proceeds from Federal Home Loan Bank advances 7,000,000 6,000,000
-------------------- ---------------------
Net cash provided by financing activities 50,987,660 57,188,181
-------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 1,488,070 (1,868,416)
Cash and cash equivalents at beginning of the year 2,982,956 4,851,372
-------------------- ---------------------
Cash and cash equivalents at end of the year $ 4,471,026 $ 2,982,956
==================== =====================
Supplemental information
Cash paid for
Interest $ 3,634,202 $ 3,163,044
==================== =====================
Income taxes $ 35,948 $ -
==================== =====================
Supplemental schedule of non-cash transaction
Real estate acquired in settlement of loan $ 362,987 $ -
==================== =====================
Unrealized gain on securities, net of income taxes $ 19,954 $ 103,617
==================== =====================
See notes to consolidated financial statements that are an integral part of
these consolidated statements.
35
GREENVILLE FIRST BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
---------------------------------------------------------
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 under the laws of the United States located in Greenville County,
South Carolina. The Company received approval to begin banking operations from
both the Federal Deposit Insurance Corporation ("FDIC") and the Office of the
Comptroller of the Currency ("OCC") on January 7, 2000. The Bank began
operations on January 10, 2000.
On October 26, 1999, the Company sold 1,100,000 shares of its common stock
at $10 per share and on November 30, 1999 sold 50,000 additional shares for a
total of 1,150,000 shares. The offering raised $10,646,700 net of underwriting
discounts, commissions and offering expenses. The directors and executive
officers of the Company purchased 266,900 shares of common stock at $10 per
share, for a total of $2,669,000. The Company has used $10.4 million of the
proceeds to capitalize the Bank.
The following is a description of the more significant accounting and
reporting policies which the Company follows in preparing and presenting
consolidated financial statements.
Basis of presentation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Greenville First Bank (the "Bank").
In consolidation all significant intercompany transactions have been
eliminated. The accounting and reporting policies conform to generally
accepted accounting principles. The company uses the accrual basis of
accounting.
Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements and the
reported amount of income and expenses during the reporting periods. Actual
results could differ from those estimates.
Risks and uncertainties
In the normal course of its business the Company encounters two significant
types of risks: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or on different bases, than
its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from borrower's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of collateral underlying loans receivable and the
valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions resulting from the
regulators' judgments based on information available to them at the time of
their examination.
The bank makes loans to individuals and businesses in and around "Upstate"
South Carolina for various personal and commercial purposes. The Bank has a
diversified loan portfolio and the borrowers' ability to repay their loans is
not dependent upon any specific economic sector.
36
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
--------------------------------------------------------------------
Investment securities
The Company accounts for investment securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The statement requires investments
in equity and debt securities to be classified into three categories:
1. Available for sale securities: These are securities that are not classified
as either held to maturity or as trading securities. These securities are
reported at fair market value. Unrealized gains and losses are reported,
net of income taxes, as separate components of shareholders' equity
(accumulated other comprehensive income).
2. Held to maturity securities: These are investment securities that the
Company has the ability and intent to hold until maturity. These securities
are stated at cost, adjusted for amortization of premiums and the accretion
of discounts. The Company has no held to maturity securities.
3. Trading securities: These are securities that are bought and held
principally for the purpose of selling in the near future. Trading
securities are reported at fair market value, and related unrealized gains
and losses are recognized in the income statement. The Company has no
trading securities.
Gains or losses on dispositions of investment securities are based on the
differences between the net proceeds and the adjusted carrying amount of the
securities sold, using the specific identification method. Premiums and
discounts are amortized or accrued into interest income by a method that
approximates a level yield.
Other investments
The Bank, as a member institution, is required to own certain stock
investments in the Federal Home Loan Bank of Atlanta and the Federal Reserve
Bank. The stock is generally pledged against any borrowings from these
institutions. No ready market exists for the stock and it has no quoted market
value. However, redemption of these stocks has historically been at par value.
Loans, interest and fee income on loans
Loans are stated at the principal balance outstanding. Unamortized net loan
fees and the allowance for possible loan losses are deducted from total loans
in the balance sheet. Interest income is recognized over the term of the loan
based on the principal amount outstanding. The net of loan origination fees
received and direct costs incurred in the origination of loans is deferred and
amortized to interest income over the contractual life of the loans adjusted
for actual principal prepayments using a method approximating the interest
method.
Loans are generally placed on non-accrual status when principal or interest
becomes ninety days past due, or when payment in full is not anticipated. When
a loan is placed on non-accrual status, interest accrued but not received is
generally reversed against interest income. If collectibility is in doubt,
cash receipts on non-accrual loans are not recorded as interest income, but
are used to reduce principal.
Allowance for loan losses
The provision for loan losses charged to operating expenses reflects the
amount deemed appropriate by management to establish an adequate reserve to
meet the present and foreseeable risk characteristics of the current loan
portfolio. Management's judgement is based on periodic and regular evaluation
of individual loans, the overall risk characteristics of the various portfolio
segments, past experience with losses and prevailing and anticipated economic
conditions. Loans that are determined to be uncollectable are charged against
the allowance. Provisions for possible loan losses and recoveries on loans
previously charged off are added to the allowance.
37
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
--------------------------------------------------------------------
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard requires
that all lenders value loans at the loan's fair value if it is probable that
the lender will be unable to collect all amounts due according to the terms of
the loan agreement. Fair value may be determined based upon the present value
of expected cash flows, market price of the loan, if available, or value of
the underlying collateral. Expected cash flows are required to be discounted
at the loan's effective interest rate. SFAS No. 114 was amended by SFAS No.
118 to allow a lender to use existing methods for recognizing interest income
on an impaired loan and by requiring additional disclosures about how a
creditor recognizes interest income on an impaired loan.
Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or
partially, all cash receipts are applied to principal. Once the reported
principal balance has been reduced to zero, future cash receipts are applied
to interest income, to the extent that any interest has been foregone. Further
cash receipts are recorded as recoveries of any amounts previously charged
off. When this doubt does not exist, cash receipts are applied under the
contractual terms of the loan agreement first to interest income then to
principle.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. For these accruing impaired loans, cash receipts are
typically applied to principal and interest receivable in accordance with the
terms of the restructured loan agreement. Interest income is recognized on
these loans using the accrual method of accounting. As of December 31, 2002
and 2001, the Bank had no impaired loans.
Non-performing assets
Non-performing assets include real estate acquired through foreclosure or deed
taken in lieu of foreclosure, and loans on non-accrual status. Loans are
placed on non-accrual status when, in the opinion of management, the
collection of additional interest is questionable. Thereafter no interest is
taken into income unless received in cash or until such time as the borrower
demonstrates the ability to pay principal and interest.
Real estate acquired in settlement of loans
Real estate acquired through foreclosure is initially recorded at the lower of
cost or estimated fair value. Subsequent to the date of acquisition, it is
carried at the lower of cost or fair value, adjusted for net selling costs.
Fair values of real estate owned are reviewed regularly and writedowns are
recorded when it is determined that the carry value of real estate exceeds the
fair value less estimated costs to sell. Cost relating to the development and
improvement of such property are capitalized, whereas those costs relating to
holding the property are charged to expense.
Property and equipment
Property and equipment are stated at cost. Major repairs are charged to
operations, while major improvements are capitalized. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Upon retirement, sale, or other disposition of property and equipment,
the cost and accumulated depreciation are eliminated from the accounts, and
gain or loss is included in income from operations.
Securities sold under agreements to repurchase
The Bank enters into sales of securities under agreements to repurchase.
Fixed-coupon repurchase agreements are treated as financing, with the
obligation to repurchase securities sold being reflected as a liability and
the securities underlying the agreements remaining as an asset.
38
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
--------------------------------------------------------------------
Income taxes
The financial statements have been prepared on the accrual basis. When income
and expenses are recognized in different periods for financial reporting
purposes versus for purposes of computing income taxes currently payable,
deferred taxes are provided on such temporary differences. The Company
accounts for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the expected future tax consequences of events that have been
recognized in the consolidated financial statements or tax returns. Deferred
tax assets and liabilities are measured using the enacted tax rates expected
to apply to taxable income in the years in which those temporary differences
are expected to be realized or settled.
Advertising and public relations expense
Advertising, promotional and other business development costs are generally
expensed as incurred. External costs incurred in producing media advertising
are expensed the first time the advertising takes place. External costs
relating to direct mailing costs are expensed in the period in which the
direct mailings are sent.
Stock Based Compensation
The Company has a stock-based employee compensation plan that is further
described in Note 17. 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 (loss) and earnings
(loss) 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 years ended December 31,
----------------------------------------
2002 2001
------------------- -----------------
Net income (loss), as reported $ 752,416 $ (119,178)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related tax effects (70,451) (68,726)
------------------- -----------------
Pro forma net income (loss) $ 681,965 $ (187,904)
=================== =================
Earnings (loss) per common share:
Basic - as reported $ .65 $ (.10)
=================== =================
Basic - pro forma $ .59 $ (.16)
=================== =================
Diluted - as reported $ .64 $ (.10)
=================== =================
Diluted - pro-forma $ .58 $ (.16)
=================== =================
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 2002 and 2001, risk-free interest rate
of 3.00% for 2002 and 2001, respectively, and expected lives of the options 10
years and the assumed dividend rate was zero.
39
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
--------------------------------------------------------------------
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents are defined as
those amounts included in the balance sheet captions "Cash and Due From Banks
and Federal Funds Sold." Cash and cash equivalents have an original maturity
of three months or less.
Reclassifications
Certain amounts, previously reported, have been reclassified to state all
periods on a comparable basis that had no effect on shareholders' equity or
net income (loss).
Earnings (loss) per common share
Basic earnings (loss) per common share are computed on the basis of the
weighted average number of common shares outstanding in accordance with SFAS
No. 128, "Earnings per Share". Diluted earnings (loss) per common share is
computed using the treasury stock method to compute the effect of stock
options on the weighted average number of common shares outstanding.
Recently issued accounting standards
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement requires companies to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development and/or normal use
of assets. A corresponding asset (which is depreciated over the life of the
asset) must also be recorded. The provisions of SFAS No. 143 were adopted by
the Company on January 1, 2003 with no impact on financial position and
results of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes prior pronouncements
associated with impairment or disposal of long-lived assets. The statement
establishes methodologies for assessing impairment of long-lived assets,
including assets to be disposed of by sale or by other means. The adoption of
this standard had no impact on the financial position of the Company.
In April 2002, The FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This statement also rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers and amends SFAS No. 13,
Accounting for Leases. This new statement requires gains and losses from
extinguishment of debt to be classified as an extraordinary item only if they
meet the criteria of APB Opinion No. 30, Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
which will distinguish transactions that are part of an entity's recurring
operations from those that are unusual or infrequent or that meet the criteria
for classification as an extraordinary item. The adoption of the provisions of
SFAS No. 145 had no impact on the Company's financial position or results of
operations
40
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
--------------------------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This Statement applies
to costs associated with specific exit activities and requires a liability for
a cost associated with an exit or disposal activity to be recognized and
measured initially at its fair value in the period in which the liability is
incurred. A liability for a cost associated with an exit or disposal activity
is incurred when the definition of a liability is met. The provisions of this
statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company adopted the provisions of this statement
on January 1, 2003 with no impact on financial position or results of
operations.
In October 2002, the FASB issued SFAS No. 147, Acquisition of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and
FASB Interpretation No. 9, which brings all business combinations involving
financial institutions, except mutual financial institutions, into the scope
of SFAS No. 141, Business Combinations. This statement requires that all
acquisitions of financial institutions that meet the definition of a business,
including acquisitions of part of a financial institution that meet the
definition of a business, must be accounted for in accordance with SFAS No.
141 and the related intangibles accounted for in accordance with SFAS No. 142.
SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions. SFAS
No. 147 also amends SFAS No. 144 to include in its scope long-term customer
relationship intangibles of financial institutions. SFAS No. 147 was effective
upon issuance and had no impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Company adopted this standard effective December 31, 2002 and has included
the required disclosures in the footnotes to the financials. The Company has
not elected the fair value treatment of stock-based compensation and the
adoption of this standard had no impact on its financial position.
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.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
---------------------------------------
The Bank is required to maintain average reserve balances, computed by
applying prescribed percentages to its various types of deposits, either at the
bank or on deposit with the Federal Reserve Bank. At December 31, 2002 the bank
had $606,623 on deposit with the Federal Reserve Bank to meet this requirement.
These required reserves for 2001 were met by vault cash.
NOTE 3 - FEDERAL FUNDS SOLD
Bank cash reserves (Note 2) in excess of the required amount may be lent to
other banks on a daily basis. At December 31, 2002 and 2001, federal funds sold
amounted to $41,736 and $100,841, respectively.
41
NOTE 4 - INVESTMENT SECURITIES
--------------------
The amortized costs and fair value of investment securities available for
sale are as follows:
December 31, 2002
----------------------------------------------------------------------
Amortized Gross Unrealized Fair
------------------------------
Cost Gains Losses Value
------------------- -------------- ------------- -----------------
Federal agencies $ 9,640,819 $ 143,781 $ - $ 9,784,600
Mortgage-backed 4,727,533 80,057 - 4,807,590
------------------- -------------- ------------- -----------------
Total investment securities $ 14,368,352 $ 223,838 $ - $ 14,592,190
=================== ============== ============= =================
December 31, 2001
----------------------------------------------------------------------
Amortized Gross Unrealized Fair
------------------------------
Cost Gains Losses Value
------------------- -------------- ------------- -----------------
Federal agencies $ 17,459,968 $ 193,595 $ - $ 17,653,563
Mortgage-backed 259,884 13 - 259,897
------------------- -------------- ------------- -----------------
Total investment securities $ 17,719,852 $ 193,608 $ - $ 17,913,460
=================== ============== ============= =================
Other investments at both December 31, 2002 and 2001, include Federal
Reserve Bank stock with cost of $255,000 and Federal Home Loan Bank stock with
cost of $650,000 at December 31, 2002 and with a cost of $300,000 at December
31, 2001.
The amortized costs and fair values of investment securities at December
31, 2002 and 2001, by contractual maturity, are shown in the following chart.
Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay the obligations. Based on the comparison of
investment securities coupon rates and the market interest rate as of December
31, 2002, the bank anticipates that between $2,610,000 and $8,610,000 will be
called during the 2003 year.
December 31, 2002 December 31, 2001
---------------------------------- ----------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- --------------- ----------------- ----------------
Due in less than one year $ - $ - $ - $ -
Due after one through three years 8,020,819 8,156,500 759,884 785,678
Due after three through five years 1,620,000 1,628,100 12,839,968 2,943,744
Due after five through ten years 4,727,533 4,807,590 4,120,000 4,184,038
---------------- --------------- ----------------- ----------------
Total investment securities $ 14,368,352 $ 14,592,190 $ 17,719,852 $ 17,913,460
================ =============== ================= ================
No investment securities were sold in 2002 or 2001. Accordingly, no gains
or losses were recorded. At December 31, 2002 and 2001 $14,244,440 and
$15,264,968, respectively of securities were pledged as collateral for public
funds or repurchase agreements. At December 31, 2001, $695,000 of the Bank's
investment securities were pledged as collateral for advances from FHLB, as set
forth in Note 9.
42
NOTE 5 - LOANS
-----
The composition of net loans by major loan category is as follows:
December 31,
------------------------------------------
2002 2001
------------------- -------------------
Real estate:
Commercial
Owner occupied $ 22,653,311 $ 16,532,696
Non-owner occupied 43,076,993 22,813,424
Construction 4,007,650 8,292,228
------------------- -------------------
69,737,954 47,638,348
------------------- -------------------
Consumer
Residential 25,499,625 12,898,543
Home equity 18,069,407 8,937,054
Construction 4,199,848 3,972,206
------------------- -------------------
47,768,880 25,807,803
------------------- -------------------
117,506,834 73,446,151
------------------- -------------------
Commercial business 28,192,407 20,529,004
Consumer-other 4,590,552 2,812,703
Deferred origination fees, net (386,632) (255,990)
------------------- -------------------
Gross Loans 149,903,161 96,531,868
Less allowance for loan losses (1,824,149) (1,192,247)
------------------- -------------------
Loans, net $ 148,079,012 $ 95,339,621
=================== ===================
At December 31, 2002, there was $113,105 in non-accruing loans. Foregone
interest income on the non-accrual loans in 2002 was approximately $4,400 and
was approximately $8,000 in 2001. At December 31, 2001 there was one residential
loan totaling $359,987 on non-accrual.
At December 31, certain of the Bank's first mortgage loans were pledged as
collateral for advances from the Federal Home Loan Bank of Atlanta (FHLB), as
set forth in Note 9.
The composition of gross loans by rate type is as follows:
December 31,
--------------------------------
2002 2001
-------------- --------------
Variable rate loans $ 107,554,638 $ 60,864,324
Fixed rate loans 42,348,523 35,667,544
-------------- --------------
$ 149,903,161 $ 96,531,868
============== ==============
The allowance for loan losses is available to absorb future loan
charge-offs. The allowance is increased by provisions charged to operating
expenses and by recoveries of loans that were previously written-off. The
allowance is decreased by the aggregate loan balances, if any, which were deemed
uncollectible during the year.
Activity within the allowance for loan losses account follows:
For the years ended
December 31,
------------------------------------------
2002 2000
-------------------- -------------------
Balance, beginning of year $ 1,192,247 $ 600,000
Recoveries of loans previously charged against the allowance - -
Provision for loan losses 1,050,000 600,000
Loans charged against the allowance (418,098) (7,753)
-------------------- -------------------
Balance, end of year $ 1,824,149 $ 1,192,247
==================== ===================
43
NOTE 6 - PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost less accumulated depreciation.
Components of property and equipment included in the consolidated balance sheets
are as follows:
December 31,
----------------------------------
2002 2001
-------------- --------------
Leasehold improvements $ 352,770 $ 332,528
Furniture and equipment 753,945 698,977
Software 146,543 117,914
-------------- --------------
1,253,258 1,149,419
Accumulated depreciation (467,316) (258,658)
-------------- --------------
Total property and equipment $ 785,942 $ 890,761
============== ==============
Leasehold improvements and furniture and fixtures include items for the
Company's main office. The Company occupied its main office starting on January
16, 2001. The office is leased for twenty years (see note 11).
Depreciation expense for the years ended December 31, 2002 and 2001 was
$209,810 and $192,546, respectively. Depreciation is charged to operations over
the estimated useful lives of the assets. The estimated useful lives and methods
of depreciation for the principal items follow:
Type of Asset Life in Years Depreciation Method
------------- ------------- -------------------
Software 3 Straight-line
Furniture and equipment 5 to 7 Straight-line
Leasehold improvements 5 to 40 Straight-line
NOTE 7 - DEPOSITS
--------
The following is a detail of the deposit accounts:
December 31,
------------------------------------
2002 2001
------------------ ---------------
Non-interest bearing $ 13,809,488 $ 7,729,281
Interest bearing:
NOW accounts 15,377,708 8,295,046
Money market accounts 19,727,133 24,138,876
Savings 1,773,957 255,292
Time, less than $100,000 32,024,488 31,899,925
Time, $100,000 and over 50,850,496 20,381,590
------------------ ---------------
Total deposits $ 133,563,270 $ 92,700,010
================== ===============
Interest expense on time deposits greater than $100,000 was $1,316,693 and
$1,007,304 in the years ended December 31, 2002 and 2001, respectively.
At December 31, 2002 the scheduled maturities of certificates of deposit
are as follows:
2003 $ 56,725,188
2004 10,978,111
2005 4,746,383
2006 and after 10,425,302
--------------
$ 82,874,984
==============
44
NOTE 8 - FEDERAL FUNDS PURCHASED AND REPURCHASE AGREEMENTS
-------------------------------------------------
At December 31, 2002 the bank had $7,892,000 sales of securities under
agreements to repurchase with brokers with a weighted rate of 1.38% that mature
in less than 90 days. These agreements are secured with approximately $8,000,000
of investment securities. The securities under agreement to repurchase averaged
$4,349,076 during 2002, with $8,482,600 being the maximum amount outstanding at
any month-end.
At December 31, 2001 the bank had $7,682,600 sales of securities under
agreements to repurchase with brokers with a weighted rate of 1.96% that mature
in less than 90 days. These agreements are secured with approximately $8,000,000
of investment securities. The securities under agreement to repurchase averaged
$1,335,382 during 2001, with $7,682,600 being the maximum amount outstanding at
any month-end.
At December 31, 2002 the bank had utilized $1,215,000 of its $3,700,000 of
federal funds purchased line of credit. At December 31, 2001 the bank had
utilized $800,000 of its $2,800,000 of federal funds purchased line of credit.
These lines of credit are unsecured and bear interest at the daily rate of
federal funds plus 25 basis points (1.50% at December 31, 2002).
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
-------------------------------
At December 31, 2002 the bank had $13,000,000 of advances from the FHLB.
These advances are secured with approximately $22,400,000 of first mortgage
loans and stock in the FHLB. 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 $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.
At December 31, 2001 the bank had $6,000,000 of advances from the FHLB of
Atlanta. These advances are secured by a combination of approximately $9,000,000
of first mortgage loans, investment securities and stock in the FHLB. The
maturity on $3,000,000 of the advances with a weighted rate of 2.67% is March
27, 2002 and the remaining $3,000,000 with a weighted rate of 4.83% has a
maturity of August 24, 2011. The FHLB has the option to re-price this advance as
of August 24, 2006.
NOTE 10 - NOTE PAYABLE
------------
At December 31, 2002 the Company had a $2,500,000 revolving line of credit
with another bank with a maturity of June 30, 2003. At December 31, 2002, the
company had outstanding $2,500,000. The Company used $2,375,000 of the proceeds
to increase its investment in the Bank. The remaining $125,000 was used to
establish a $125,000 escrow fund to be used to pay interest payments. The line
of credit bears interest at a rate of prime minus 1.25%, which at December 31,
2002 was 3.00%. 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 December 31,
2002, the Company believes it is in compliance with all covenants.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company has entered into an employment agreement with its president and
chief executive officer that includes a three year compensation term, annual
bonus, incentive program, stock option plan and a one-year non-compete agreement
upon termination.
The Company has entered into an agreement with a data processor with a
remaining term of two years to provide ATM services, item processing and general
ledger processing. Components of this contract include monthly charges of
approximately $20,000.
45
NOTE 11 - COMMITMENTS AND CONTINGENCIES, Continued
----------------------------------------
The Bank may become party to litigation and claims in the normal course of
business. As of December 31, 2002, management believes there is no material
litigation pending.
The Bank has a twenty-year lease on its main office building that began in
January 2001. The monthly rent for the year 2003 is $27,659. The lease provides
for annual lease rate escalations based on cost of living adjustments.
Future minimum lease payments under this operating lease are summarized as
follows:
For the year ended December 31,
2003 $ 331,912
2004 341,870
2005 352,126
2006 360,894
2007 369,880
Thereafter* 5,736,040
-------------
$ 7,492,722
=============
*Amount is estimated based on an increase of 2.49 percent per year. Actual
lease will be adjusted annually by the cost of living index as stated in the
Consumer Price Index.
NOTE 12 - INCOME TAXES
------------
The components of income tax expense for the years ended December 31, 2002
and 2001 were as follows:
December 31,
-----------------------
2002 2001
---------- ----------
Current income taxes:
Federal $ 336,914 $ -
State 35,000 -
---------- ---------
Total current tax expense 371,914 -
Deferred income tax benefit and
change in valuation allowance (371,914) (22,000)
---------- ---------
Income tax provision (benefit) $ - $ (22,000)
========== =========
46
NOTE 12 - INCOME TAXES, Continued
-----------------------
The following is a summary of the items that caused recorded income taxes to
differ from taxes computed using the statutory tax rate:
For the years ended
December 31,
----------------------------------
2002 2001
---------------- ---------------
Income tax expense (benefit) at federal statutory rate $ 255,821 $ (48,001)
Effect of state income taxes 35,000 -
Change in valuation allowance (323,697) 24,602
Other 32,876 1,399
---------------- ---------------
Income tax benefit $ - $ (22,000)
================ ===============
The components of the deferred tax assets and liabilities are as follows:
December 31,
----------------------------------
2002 2001
---------------- ---------------
Deferred tax assets:
Allowance for loan losses 424,259 405,364
Net deferred loan fees 131,455 58,333
Premise and equipment 12,497 -
Net deferred loan fees 13,350 -
---------------- ---------------
581,560 463,697
Valuation allowance (80,000) (403,697)
---------------- ---------------
501,560 60,000
Deferred tax liability
Unrealized gain on securities available for sale $ 76,105 $ 65,826
Other 69,646 -
---------------- ---------------
145,751 65,826
---------------- ---------------
Net deferred tax asset (liability) $ 355,809 $ (5,826)
================ ===============
The current taxes payable less the net deferred tax asset is included
accrued expenses for 2002 and included in other assets in 2001.
NOTE 13 - UNUSED LINES OF CREDIT
----------------------
At December 31, 2002, the Bank had an unused line of credit to purchase
federal funds of $2,485,000. The line of credit is available on a one to seven
day basis for general corporate purposes of the Bank. The lender has reserved
the right to withdraw the line at their option. The Bank had a second line of
credit with the Federal Home Loan Bank to borrow funds, subject to a pledge of
qualified collateral. The Bank has collateral that would support approximately
$2,000,000 in borrowings. At December 31, 2002, the Bank had a third agreement
that would allow the bank to borrow funds based on the level of security
eligible to be pledged. At December 31, 2001, the Bank had an available
borrowing base of approximately $2,200,000.
47
NOTE 14- RELATED PARTY TRANSACTIONS
--------------------------
Certain directors, executive officers, and companies with which they are
affiliated, are customers of and have banking transactions with the Bank in the
ordinary course of business. These loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable arms-length transactions.
A summary of loan transactions with directors, including their affiliates
and executive officers is as follows:
For the years ended December 31,
---------------------------------------
2002 2001
----------------- -----------------
Balance, beginning of year $ 778,624 $ 360,181
New loans 5,267,212 813,990
Less loan payments (3,216,878) (395,547)
----------------- -----------------
Balance, end of year $ 2,828,958 $ 778,624
================= =================
Deposits by officers and directors and their related interests at December
31, 2002 and 2001, were $116,656 and $146,735, respectively.
The Bank has a lease on its main office building with a director of the
bank that began in 2001. The lease has a remaining term of eighteen years, with
a $27,659 monthly payment for the next year. The Bank is of the opinion that the
lease payments represent a market cost that could have been obtained in an "arms
length" transaction.
NOTE 15 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
-------------------------------------------------
In the ordinary course of business, and to meet the financing needs of its
customers, the Company is a party to various financial instruments with off
balance sheet risk. These financial instruments, which include commitments to
extend credit and standby letters of credit, involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheets. The contract amount of those instruments reflects the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments.
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 December 31, 2002, unfunded commitments
to extend credit were $34,086,000, of which $2,103,000 is at fixed rates and
$31,983,000 is at variable rates. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, and commercial and
residential real estate.
At December 31, 2002, there was a $877,000 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.
48
NOTE 16 - EMPLOYEE BENEFIT PLAN
---------------------
On January 1, 2000, the Company adopted the Greenville First Bancshares,
Inc. Profit Sharing and 401(k) Plan for the benefit of all eligible employees.
The Company contributes to the Plan annually upon approval by the Board of
Directors. Contributions made to the Plan in 2002 and 2001 amounted to $36,000
and $33,285, respectively.
NOTE 17 - STOCK OPTIONS AND WARRANTS
--------------------------
On March 21, 2001, the Company adopted a stock option plan for the benefit
of the directors, officers and employees. The Board may grant up to 172,500
options at an option price per share not less than the fair market value on the
date of grant. The options granted to officers and employees vest either at 20
percent over five years or 33 percent over three years and expire 10 years from
the grant date.
A summary of the status of the plan and changes for the years ended
December 31, are presented below:
2002 2001
-------------------------------------- -------------------------------------
Weighted Weighted
average average
Shares exercise price Shares exercise price
------------------ ----------------- ---------------- ------------------
Outstanding at beginning of year 112,500 $ 10.00 97,000 $ 10.00
Granted 11,500 11.35 15,500 10.00
Exercised - - - -
Forfeited or expired - - - -
------------------ ----------------- ---------------- ------------------
Outstanding at end of year 124,000 $ 10.13 112,500 $ 10.00
================== ================= ================ ==================
Options exercisable at year-end 54,833 24,833 $ 10.00
================== ================ ==================
Shares available for grant 48,500 60,000
================== ================
Upon completion of the 1999 stock offering, the Company issued warrants to
each of its organizers to purchase up to an additional 129,950 shares of common
stock at $10 per share. These warrants vest over a three-year period and expire
on October 27, 2009.
NOTE 18 - COMMON STOCK AND EARNINGS (LOSS) PER SHARE
------------------------------------------
SFAS No. 128, "Earnings per Share" requires that the Company present basic
and diluted net earnings (loss) per common share. The assumed conversion of
stock options and warrants can create a difference between basic and diluted net
earnings (loss) per common share. The weighted average number of common shares
outstanding for basic earnings in 2002 was 1,150,000, and the weighted average
number of common shares assumed outstanding in 2002 for diluted earnings per
common share was 1,169,251.
During 2001 all stock options and warrants were considered to be
anti-dilutive, the weighted average number of common shares outstanding for both
basic loss per share and diluted loss per common share is the same. Earnings
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding for each year presented. The
weighted average number of common shares outstanding for basic net loss per
common share in 2001 was 1,150,000 shares.
49
NOTE 19 - REGULATORY MATTERS
------------------
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 2002, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification of the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
institution's category. The Bank's actual capital amounts and ratios and minimum
regulatory amounts and ratios are presented as follows:
To be well capitalized
For capital under prompt corrective
adequacy purposes action provisions
-------------------------- ---------------------------
Actual Minimum Minimum
------------------------- -------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ---------- -------------- --------- ------------- ------------
(amounts in $000)
As of December 31, 2002
Total Capital (to risk weighted assets) $ 14,116 10.3 % $ 10,921 8.0 % $ 13,651 10.0 %
Tier 1 Capital (to risk weighted assets) 12,408 9.1 5,460 4.0 8,191 6.0
Tier 1 Capital (to average assets) 12,408 7.5 6,639 4.0 8,298 5.0
As of December 31, 2001
Total Capital (to risk weighted assets) $ 10,139 10.1 % $ 8,071 8.0 % $ 10,089 10.0 %
Tier 1 Capital (to risk weighted assets) 8,947 8.9 4,036 4.0 6,053 6.0
Tier 1 Capital (to average assets) 8,947 7.9 4,528 4.0 5,045 5.0
NOTE 20 - DIVIDENDS
There are no current plans to initiate payment of cash dividends and future
dividend policy will depend on the Bank's and the Company's earnings, capital
requirements, financial condition and other factors considered relevant by the
Company's Board of Directors. The Bank is restricted in its ability to pay
dividends under the national banking laws and regulations of the OCC. Generally,
these restrictions require the Bank to pay dividends derived solely from net
profits. Moreover, OCC prior approval is required if dividends declared in any
calendar year exceed the Bank's net profit for that year combined with its
retained net profits for the preceding two years.
50
NOTE 21 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
----------------------------------------------
Following is a summary of operations by quarter:
---------------------------------------------------------------------------
2002 Quarters ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- ---------------- ------------------ -----------------
Interest income $ 1,790,358 $ 1,936,720 $ 2,168,948 $ 2,256,804
Interest expense 846,180 884,620 883,781 877,602
--------------- ---------------- ------------------ -----------------
Net interest income 944,178 1,052,100 1,285,167 1,379,202
Provision for loan losses 200,000 220,000 300,000 330,000
Noninterest income 102,949 121,815 139,533 155,954
Noninterest expenses 804,314 832,790 865,064 876,314
--------------- ---------------- ------------------ -----------------
Income before provision for
income taxes 42,813 121,125 259,636 328,842
Income tax expense - - - -
--------------- ---------------- ------------------ -----------------
Net income $ 42,813 $ 121,125 $ 259,636 $ 328,842
=============== ================ ================== =================
Earnings per share
Basic $ .04 $ .11 $ .23 $ .29
=============== ================ ================== =================
Diluted $ .04 $ .10 $ .22 $ .28
=============== ================ ================== =================
Weighted average common shares
Basic 1,150,000 1,150,000 1,150,000 1,150,000
=============== ================ ================== =================
Diluted 1,150,000 1,162,398 1,181,711 1,182,404
=============== ================ ================== =================
---------------------------------------------------------------------------
2001 Quarters ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- ---------------- ------------------ -----------------
Interest income $ 1,412,535 $ 1,512,779 $ 1,626,552 $ 1,758,388
Interest expense 800,497 834,746 852,437 865,261
--------------- ---------------- ------------------ -----------------
Net interest income 612,038 678,033 774,115 893,127
Provision for loan losses 122,000 128,000 150,000 200,000
Noninterest income 44,853 60,026 84,187 94,925
Noninterest expenses 613,127 669,521 717,843 781,991
--------------- ---------------- ------------------ -----------------
Income (loss) before provision for
income taxes (78,236) (59,462) (9,541) 6,061
Income tax (benefit) expense - - (17,000) (5,000)
--------------- ---------------- ------------------ -----------------
Net income (loss) $ (78,236) $ (59,462) $ 7,459 $ 11,061
=============== ================ ================== =================
Basic and diluted loss per common share $ (.07) $ (.05) $ .01 $ .01
=============== ================ ================== =================
Weighted average common shares-
basic and diluted 1,150,000 1,150,000 1,150,000 1,150,000
=============== ================ ================== =================
51
NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires disclosure of fair value information, whether or not recognized in the
balance sheets, when it is practical to estimate the fair value. SFAS No. 107
defines a financial instrument as cash, evidence of an ownership interest in an
entity or contractual obligations which require the exchange of cash or other
financial instruments. Certain items are specifically excluded from the
disclosure requirements, including the Company's common stock, premises and
equipment and other assets and liabilities.
Fair value approximates carrying value for the following financial
instruments due to the short-term nature of the instrument: cash and due from
banks, federal funds sold, federal funds purchased, note payable, securities
sold under agreement to repurchase and official checks.
Securities are valued using quoted fair market prices. Fair value for the
Company's off-balance sheet financial instruments is based on the discounted
present value of the estimated future cash flows.
Fair value for variable rate loans that reprice frequently and for loans
that mature in less than one year is based on the carrying value. Fair value for
fixed rate mortgage loans, personal loans and all other loans (primarily
commercial) maturing after one year is based on the discounted present value of
the estimated future cash flows. Discount rates used in these computations
approximate the rates currently offered for similar loans of comparable terms
and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts with
no fixed maturity date is equal to the carrying value. Certificate of deposit
accounts and FHLB advances with a maturity within one year are valued at their
carrying value. The fair value of certificate of deposit accounts and FHLB
advances with a maturity after one year are estimated by discounting cash flows
from expected maturities using current interest rates on similar instruments.
The Company has used management's best estimate of fair value based on the
above assumptions. Thus, the fair values presented may not be the amounts that
could be realized in an immediate sale or settlement of the instrument. In
addition, any income taxes or other expenses, which would be incurred in an
actual sale or settlement, are not taken into consideration in the fair value
presented.
The estimated fair values of the Company's financial instruments are as
follows:
December 31,
------------------------------------------------------------------
2002 2001
------------------------------ ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ----------------- --------------
Financial Assets:
Cash and due from banks $ 4,429,290 $ 4,429,290 $ 2,882,115 $ 2,882,115
Federal funds sold 41,736 41,736 100,841 100,841
Investment securities 14,592,190 14,592,190 17,913,460 17,913,460
Other investments 905,000 905,000 555,000 555,000
Loans, net 148,079,012 151,400,000 95,339,621 97,500,000
Financial Liabilities:
Deposits 133,563,270 134,400,000 92,700,010 93,100,000
Official checks outstanding 889,270 889,270 891,129 891,129
Federal funds purchased and repurchase agreements 9,107,000 9,107,000 8,482,600
8,482,600
Note payable 2,500,000 2,500,000 - -
Federal Home Loan Bank advances 13,000,000 13,548,000 6,000,000 6,050,000
Financial Instruments with Off Balance Sheet Risks
Commitments to extend credit 34,086,000 34,086,000 28,229,000 28,229,000
Standby letter of credit 877,000 877,000 452,000 452,000
52
NOTE 23 - PARENT COMPANY FINANCIAL INFORMATION
------------------------------------
Following is condensed financial information of Greenville First
Bancshares, Inc. (parent company only):
Condensed Balance Sheets
December 31,
----------------------------------------
2002 2001
------------------ -------------------
Assets
Cash and cash equivalents $ 177,052 $ 385,388
Investment in Bank subsidiary 12,556,107 9,075,193
------------------ -------------------
Total assets $ 12,733,159 $ 9,460,581
================== ===================
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 1,370 $ 1,162
Note payable 2,500,000 -
Shareholders' equity 10,231,789 9,459,419
------------------ -------------------
Total liabilities and shareholders' equity $ 12,733,159 $ 9,460,581
================== ===================
Condensed Statements of Operations
For the years ended
December 31,
----------------------------------------
2002 2001
------------------ -------------------
Revenues
Interest income $ 3,772 $ 49,655
Expenses
Interest expense 23,715
Other expense - 1,162
------------------ -------------------
Total expenses 23,715 1,162
------------------ -------------------
Income (loss) before equity in undistributed
net income (loss) of Bank subsidiary (19,943) 48,493
Equity in undistributed net income (loss) of Bank subsidiary 772,359 (167,671)
------------------ -------------------
Net income (loss) $ 752,416 $ (119,178)
================== ===================
53
NOTE 23 - PARENT COMPANY FINANCIAL INFORMATION, Continued
-----------------------------------------------
Condensed Statements of Cash Flows
For the years ended
December 31,
--------------------------------------
2002 2001
------------------ -----------------
Operating Activities
Net income (loss) $ 752,416 $ (119,178)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities Equity in undistributed net (income) loss of
Bank subsidiary (772,359) 167,671
Increase in other liabilities 208 1,162
------------------ -----------------
Net cash provided by (used in) operating activities (19,735) 49,665
------------------ -----------------
Financing Activities
Proceeds from note payable 2,500,000
------------------ -----------------
Investment in Bank subsidiary (2,688,601) (900,000)
------------------ -----------------
Net cash used in financing activities (188,601) (900,000)
------------------ -----------------
Net decrease in cash and cash equivalents (208,336) (850,345)
Cash and cash equivalents, beginning of year 385,388 1,235,733
------------------ -----------------
Cash and cash equivalents, end of year $ 177,052 $ 385,388
================== =================
54
Item 8. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
In response to this Item, this information is contained in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 15, 2002 and
is incorporated herein by reference.
Item 10. Executive Compensation
----------------------
In response to this Item, this information is contained in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 15, 2002 and
is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
In response to this Item, this information is contained in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 15, 2002 and
is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
In response to this Item, the information required by Item 201(d) is
contained in Item 5 of this report. The information is contained in our Proxy
Statement for the Annual Meeting of Shareholders to be held on May 15, 2002 is
incorporated herein by reference.
Item 13. Exhibits, List and Reports on Form 8-K
--------------------------------------
(a) The following documents are filed as part of this report:
3.1. Articles of Incorporation, as amended (incorporated by reference to Exhibit
3.1 of the Registration Statement on Form SB-2, File No. 333-83851).
3.2. Bylaws (incorporated by reference to Exhibit 3.2 of the Registration
Statement on Form SB-2, File No. 333-83851).
4.1. See Exhibits 3.1 and 3.2 for provisions in Greenville First Bancshares's
Articles of Incorporation and Bylaws defining the rights of holders of the
common stock (incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form SB-2, File No. 333-83851).
4.2. Form of certificate of common stock (incorporated by reference to Exhibit
4.2 of the Registration Statement on Form SB-2, File No. 333-83851).
10.1.Employment Agreement dated July 27, 1999 between Greenville First
Bancshares and Art Seaver (incorporated by reference to Exhibit 10.1 of the
Registration Statement on Form SB-2, File No. 333-83851).
10.2.Lease Agreement incorporated by reference between Greenville First Bank
and Halton Properties, LLC, formerly Cothran Properties, LLC (incorporated
by reference to Exhibit 10.2 of Form 10-k filed on March 28, 2000).
55
10.3 Data Processing Services Agreement dated June 28, 1999 between Greenville
First Bancshares and the Intercept Group (incorporated by reference to
Exhibit 10.3 of the Registration Statement on Form SB-2, File No.
333-83851).
10.4 Form of Stock Warrant Agreement (incorporated by reference to Exhibit 10.4
of the Registration Statement on Form SB-2, File No. 333-83851).
10.5 Promissory Note dated February 22, 1999 from Greenville First Bancshares,
Inc. in favor of John J. Meindl, Jr. (incorporated by reference to Exhibit
10.5 of the Registration Statement on Form SB-2, File No. 333-83851).
10.6 Standard Form of Agreement between Greenville First Bancshares, Inc. and
AMI Architects (incorporated by reference to Exhibit 10.2 of Form 10-k
filed on March 28, 2000).
21 Subsidiaries of our company
24 Power of Attorney (contained herein as part of the signature pages).
-------------------------
(b) Reports on Form 8-K
The following reports were filed on Form 8-K during the fourth quarter
ended December 31, 2002.
99.1 The Company filed a Form 8-K on November 12, 2002 to disclose that the
Chief Executive Officer, R. Arthur Seaver, Jr. and the Chief Financial
Officer, James M. Austin, III, each furnished to the SEC the certification
required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Item 14. Controls and Procedures
------------------------
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
.................................................................................
56
SIGNATURES
.................................................................................
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934 (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: March 26, 2003 By: /s/ R. Arthur Seaver, Jr.
---------------- --------------------------------
R. Arthur Seaver, Jr.
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints R. Arthur Seaver, Jr., his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-KSB, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ James M. Austin
-----------------------------
James M. Austin, III Chief Financial Officer, March 26, 2003
Principal Financial and
Accounting Officer
/s/ Andrew B. Cajka
-----------------------------
Andrew B. Cajka Director March 26, 2003
/s/ Mark A. Cothran
-----------------------------
Mark A. Cothran Director March 26, 2003
-----------------------------
Leighton M. Cubbage Director March 26, 2003
/s/ David G. Ellison
-----------------------------
David G. Ellison Director March 26, 2003
/s/ Anne S. Ellefson
-----------------------------
Anne S. Ellefson Director March 26, 2003
57
-----------------------------
Tecumseh Hooper, Jr. Director March 26, 2003
/s/ Rudolph G. Johnstone, III, M.D.
-----------------------------
Rudolph G. Johnstone, III, M.D. Director March 26, 2003
/s/ Keith J. Marrero
-----------------------------
Keith J. Marrero Director March 26, 2003
/s/ James B. Orders
-----------------------------
James B. Orders, III Director, Chairman March 26, 2003
/s/ William B. Sturgis
-----------------------------
William B. Sturgis Director March 26, 2003
/s/ R. Arthur Seaver, Jr.
-----------------------------
R. Arthur Seaver, Jr. Director, Chief Executive March 26, 2003
Officer and President
(principal executive officer)
/s/ Fred Gilmer
-----------------------------
Fred Gilmer, Jr. Director, Senior Vice- March 26, 2003
President
58
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
3.1. Articles of Incorporation, as amended (incorporated by reference to Exhibit
3.1 of the Registration Statement on Form SB-2, File No. 333-83851).
3.2. Bylaws (incorporated by reference to Exhibit 3.2 of the Registration
Statement on Form SB-2, File No. 333-83851).
4.1. See Exhibits 3.1 and 3.2 for provisions in Greenville First Bancshares's
Articles of Incorporation and Bylaws defining the rights of holders of the
common stock (incorporated by reference to Exhibit 4.1 of the Registration
Statement on Form SB-2, File No. 333-83851).
4.2. Form of certificate of common stock (incorporated by reference to Exhibit
4.2 of the Registration Statement on Form SB-2, File No. 333-83851).
10.1.Employment Agreement dated July 27, 1999 between Greenville First
Bancshares and Art Seaver (incorporated by reference to Exhibit 10.1 of the
Registration Statement on Form SB-2, File No. 333-83851).
10.2.Lease Agreement between Greenville First Bank and Halton Properties, LLC,
formerly Cothran Properties, LLC (incorporated by reference to Exhibit 10.2
of Form 10-k filed on March 28, 2000).
10.3 Data Processing Services Agreement dated June 28, 1999 between Greenville
First Bancshares and the Intercept Group (incorporated by reference to
Exhibit 10.3 of the Registration Statement on Form SB-2, File No.
333-83851).
10.4 Form of Stock Warrant Agreement (incorporated by reference to Exhibit 10.4
of the Registration Statement on Form SB-2, File No. 333-83851).
10.5 Promissory Note dated February 22, 1999 from Greenville First Bancshares,
Inc. in favor of John J. Meindl, Jr. (incorporated by reference to Exhibit
10.5 of the Registration Statement on Form SB-2, File No. 333-83851).
10.7 Standard Form of Agreement between Greenville First Bancshares, Inc. and
AMI Architects (incorporated by reference to Exhibit 10.2 of Form 10-k
filed on March 28, 2000).
21 Subsidiaries of our company
24 Power of Attorney (contained herein as part of the signature pages).
59