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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2003

Commission file number 000-33021

GREER BANCSHARES INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)

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

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

The number of outstanding shares of the issuer's $5.00 par value common stock as of August 12, 2003 was 1,610,817.

GREER BANCSHARES INCORPORATED

Index

PART 1

FINANCIAL INFORMATION

Item 1
Consolidated Financial Statements (Unaudited)

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GREER BANCSHARES INCORPORATED
Consolidated Balance Sheets
(Unaudited)

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

3

GREER BANCSHARES INCORPORATED
Consolidated Statements of Income
(Unaudited)

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

4

GREER BANCSHARES INCORPORATED
Consolidated Statements of Comprehensive Income
(Unaudited)

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

5

GREER BANCSHARES INCORPORATED
Consolidated Statements of Changes in Stockholders’ Equity
For the Six Months Ended June 30, 2003 and Twelve Months Ended December 31, 2002
(Unaudited)

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

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GREER BANCSHARES INCORPORATED
Consolidated Statements of Cash Flows
(Unaudited)

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

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GREER BANCSHARES INCORPORATED
Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

Greer Bancshares Incorporated is a one-bank holding company for Greer State Bank (the “Bank”). The only current activity of the holding company is to hold its investment in the Bank. The accompanying financial statements include the accounts of the holding company and its subsidiary.

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of stockholders’ equity, and consolidated statements of cash flows in conformity with generally accepted accounting principles. All adjustments, however, which are in the opinion of management necessary for the fair presentation of the interim financial statements have been included. All such adjustments are of a normal recurring nature. The statements of income and comprehensive income for the interim periods are not necessarily indicative of the results that may be expected for the entire year or any other future interim period.

It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto for the Company for the year ended December 31, 2002 which are included in the Form 10-K.

Note 2 – Net Income Per Common Share

Basic net income per common share is computed by dividing net income by the weighted average number of shares outstanding during each period. Diluted net income per common share is computed by dividing net income by the weighted average number of shares outstanding, as adjusted for the assumed exercise of potential common stock options, using the treasury stock method. All share amounts have been restated for the effect of a 2.5% stock dividend declared in 2002.

Note 3 – Accounting Policy

Stock-Based Compensation- On December 31, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial statements. We intend to continue to account for stock-based compensation based on the provisions of APB Opinion No. 25.

For the periods ending June 30, 2003 and June 30, 2002, stock based compensation expense, net of tax, is deemed immaterial to pro-forma income. Therefore, tables are not included with this current filing period.

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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:

RESULTS OF OPERATIONS

Overview
The Company reported consolidated net income of $541,000, or $0.33 per diluted share, for the quarter ended June 30, 2003, compared to $570,000, or $0.36 per diluted share, for the quarter ended June 30, 2002, a decrease of 5.1%.

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Interest Income, Interest Expense and Net Interest Income
The Company’s total interest income for the quarter ended June 30, 2003 was $2,491,000, compared to $2,655,000 for the quarter ended June 30, 2002, a decrease of $164,000, or 6.2%. Total interest income for the six months ended June 30, 2003 was $5,042,000, compared to $5,416,000 for the six months ended June 30, 2002, a decrease of $374,000, or 6.9%. Interest and fees on loans is the largest component of total interest income and decreased $170,000, or 8.7%, to $1,789,000 for the quarter ended June 30, 2003, compared to $1,959,000 for the quarter ended June 30, 2002. For the six months ended June 30, 2003, interest and fees on loans decreased $446,000, or 11.0%, to $3,607,000, compared to $4,053,000 for the six months ended June 30, 2002. The decrease in interest and fees on loans is the result of the continued low interest rate environment, as well as, a reduction in net loans outstanding from June 30, 2002 to June 30, 2003. The reduction in net loans reflects a reduction in new loan demand, due primarily to the current economic environment. The average yield on the Company’s loan portfolio for the three and six months ended June 30, 2003 was 6.13% and 6.26%, respectively, compared to 6.96% and 7.03%, respectively, for the three and six months ended June 30, 2002.

The Company’s total interest expense for the second quarter ended June 30, 2003 was $939,000, compared to $1,012,000 for the second quarter ended June 30, 2002, a decrease of $73,000, or 7.2%. Total interest expense for the six months ended June 30, 2003 was $1,895,000, compared to $2,090,000 for the six months ended June 30, 2002, a decrease of $195,000, or 9.3%. The largest component of the Company’s total interest expense category is interest expense on deposits. For the second quarter ended June 30, 2003, interest expense on deposits was $493,000, compared to $613,000 for the quarter ended June 30, 2002, a decrease of $120,000, or 19.6%. For the six months ended June 30, 2003, interest expense on deposits was $1,020,000, compared to $1,298,000 for the six months ended June 30, 2002, a decrease of $278,000, or 21.4%. Interest expense on other borrowings is composed primarily of borrowings from the Federal Home Loan Bank of Atlanta and federal funds purchased. For the quarter ended June 30, 2003, interest expense on other borrowings was $446,000, compared to $399,000 for the quarter ended June 30, 2002, a difference of $47,000, or 11.8%. For the six months ended June 30, 2003, interest expense on other borrowings was $875,000, compared to $792,000 for the six months ended June 30, 2002, a difference of $83,000, or 10.5%. The decrease in interest expense on deposits is attributable to lower market interest rates paid on deposits at the Company. The cost of funds on interest-bearing deposits was 2.39% for the six months ended June 30, 2003, compared to 2.81% for June 30, 2002. The increase in interest expense on other borrowings is a direct result of additional interest expense generated by increased borrowings from the Federal Home Loan Bank of Atlanta.

Net interest income, which is the difference between interest earned on assets and the interest paid for the liabilities used to fund those assets, measures the gross profit from lending and investing activities and is the primary contributor to the Company’s earnings. Net interest income before provision for loan losses decreased $91,000, or 5.5%, to $1,552,000 for the quarter ended June 30, 2003, compared to $1,643,000 for the quarter ended June 30, 2002. For the six months ended June 30, 2003, net interest income before provision for loan losses decreased $179,000, or 5.4%, to $3,147,000, compared to $3,326,000 for the six months ended June 30, 2002. The Company’s net interest margin for the three and six months ended June 30, 2003 was 3.84% and 3.83%, respectively, compared to 4.33% and 4.29%, respectively, for the three and six months ended June 30, 2002. The decrease in net interest income and in the net interest margin was a result of the Company’s yield on average earning assets declining faster than the Company’s cost of funds. The yield on average earning assets continued to decline as interest rates remained at fifty-year lows and prepayments and maturities in the loan and investment portfolios continued to reprice to lower yields. Lack of growth in the Company’s loan portfolio also played a role in the decline of net interest income as growth in the balance sheet occurred in the investment portfolio, causing investments as a percentage of assets to increase while loans as a percentage of assets declined. Since average yields on investment securities are lower than average yields on loans, the type growth experienced contributed to the decline in the overall yield on average earning assets. The Company’s balance sheet is asset sensitive

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(which means assets reprice faster than liabilities), largely due to the amount of variable rate loans in the loan portfolio. Balance sheets that are asset sensitive typically produce more earnings as interest rates rise.

Provision for Loan Losses
The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem credits. On a quarterly basis, the Bank’s Loan Committee of the Board of Directors reviews and approves the appropriate level for the Bank’s allowance for loan losses based upon management’s recommendations, the results of the internal monitoring and reporting system, and a review of historical statistical data for both the Bank and other financial institutions.

The Bank’s allowance for loan losses is based upon judgments and assumptions of risk elements in the portfolio, future economic conditions, and other factors affecting borrowers. The process includes identification and analysis of loss potential in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits. In addition, management monitors the overall portfolio quality through observable trends in delinquency, charge-offs, and general conditions in the service area. The adequacy of the allowance for loan losses and the effectiveness of our monitoring and analysis system are also reviewed periodically by the banking regulators and our independent auditors.

The Bank made no provision for loan losses during the three months ended June 30, 2003, and charged $10,000 to the provision for loan loss account for the six months ended June 30, 2003, compared to $113,000 and $158,000, respectively, for the three and six months ended June 30, 2002. The provision for loan losses was significantly lower in the first six months of 2003 due to the Company’s loan loss reserve model indicating that no additional loan loss reserve was needed. This determination was a result of several factors, including the lack of growth in the loan portfolio during this period and the recovery, during the three and six month periods ended June 30, 2003, of a previously charged-off loan of approximately $165,000. The Company’s loan portfolio has grown by only $118,000 during the first six months of 2003. See the discussion below under “Allowance for Loan Losses.

Non-Interest Income
Non-interest income increased $83,000, or 16.9%, to $574,000 for the quarter ended June 30, 2003, compared to $491,000 for the quarter ended June 30, 2002. For the six months ended June 30, 2003, non-interest income increased $25,000, or 2.5%, to $1,034,000, compared to $1,009,000 for the six months ended June 30, 2002. Service charges for deposit accounts is the largest component of non-interest income and increased $81,000, or 15.2%, to $615,000 for the six months ended June 30, 2003, compared to $534,000 for the six months ended June 30, 2002. This increase is attributable the continued increase in fees relating to an overdraft privilege product implemented by the Company in August 2000. Gains on sale of securities were $41,000 for the six months ended June 30, 2003 compared to $20,000 for the six months ended June 30, 2002.

Non-Interest Expense
Total non-interest expense for the three months ended June 30, 2003 increased $84,000, or 6.1%, to $1,466,000, compared to $1,382,000 for the three months ended June 30, 2002. Total non-interest expense for the six months ended June 30, 2003 increased $113,000, or 4.1%, to $2,851,000, compared to $2,738,000 for the six months ended June 30, 2002. The largest component of non-interest expense, salaries and employee benefits, increased $61,000, or 8.7%, to $763,000 for the three months ended June 30, 2003, compared to $702,000 for the three months ended June 30, 2002. For the six months ended June 30, 2003, salaries and employee benefits increased $102,000, or 7.2%, to $1,520,000, compared to

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$1,418,000 for the six months ended June 30, 2002. The increase in salaries and benefits is attributable to annual salary adjustments and the addition of personnel.

BALANCE SHEET REVIEW

Loans
Outstanding loans represent the largest component of earning assets at 59.5% of total earning assets as of June 30, 2003. Gross loans totaled $107.7 million as of June 30, 2003, which is virtually unchanged from the balance as of December 31, 2002. New loan production was offset by the principal cash flow on the Bank’s loan portfolio, which averaged $5.2 million per month in the first six months of 2003.

On June 20, 2003 non-performing loans totaled 0.59% of total average assets, compared with 0.37% at December 31, 2002. Adjustable rate loans totaled 63.0% of the loan portfolio as of June 30, 2003, compared to 56.4% as of December 31, 2002. The growth in adjustable rate loans allows the Company to be in a favorable position when interest rates begin to rise; however, the significant percentage of variable rate loans in the portfolio has lowered the average weighted rate of the portfolio in the present low interest rate environment.

The Company’s loan portfolio consists primarily of residential mortgage loans, commercial loans and consumer loans. Substantially all of these loans are to borrowers located in South Carolina and are concentrated in the Company’s local market area.

The residential mortgage loan portfolio is predominantly comprised of loans extended for owner-occupied residential properties and are typically secured by first mortgages on the properties financed, and generally do not exceed fifteen years. These loans generally have a maximum loan-to-value ratio of 85% and the majority has a fixed rate of interest.

The commercial portion of the loan portfolio is diversified and includes loans secured by non-real estate collateral and commercial real estate. The non-real estate portion of the portfolio emphasizes loan collateralization with, but not limited to, inventory, equipment, vehicles and accounts receivable. The commercial real-estate portion of the portfolio consists largely of mortgage loans secured by commercial properties located in the communities served by the Company. A significant portion of these loans are made to fund the acquisition of real estate and/or buildings for commercial, industrial, office and retail use.

The consumer portion of the loan portfolio consists of both secured and unsecured loans to individuals for household, family and other personal expenditures such as automobile financing, home improvements, recreational and educational purposes. Consumer loans are typically structured with fixed rates of interest and full amortization of principal and interest within three to five years.

Allowance for Loan Losses
The allowance for loan losses at June 30, 2003 was $1,208,000, or 1.12%, of gross loans outstanding, compared to $1,081,000, or 1.0%, of gross loans outstanding at December 31, 2002. The allowance for loan losses is based upon a board-approved loan loss modeling system, which includes the prior loss experience of the Company. In addition, there are internal reviews and evaluations of the Company’s loan portfolio for the purpose of identifying potential problem loans, external review by the Company’s auditors and federal/state banking examiners, management’s consideration of current economic conditions, and other relevant risk factors in evaluating the adequacy of the allowance for loan losses.

At June 30, 2003 the Company had $1,120,000 in non-accruing loans, no restructured loans, no loans more than ninety days past due and still accruing interest and $79,000 in Other Real Estate Owned. This

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compares to $391,000 in non-accruing loans, no restructured loans, $291,000 in loans more than ninety days past due and still accruing interest and no Other Real Estate Owned at December 31, 2002. Non-performing loans consisted of $959,000 in mortgage loans, $180,000 in commercial loans and $31,000 in consumer loans at June 30, 2003. Non-performing assets and other real estate owned as a percentage of loans were 1.11% and 0.63% at June 30, 2003 and December 31, 2002, respectively.

Net charge-offs(recoveries) for the first six months of 2003 were $(127,000), compared to $952,000 at December 31, 2002. A significant recovery of a loan charged off in 2002 was received in the first six months of 2003, thus causing a net recovery in charge-offs. A significant portion of the total charge-offs for 2002 was attributable to the diminishment of the credit quality of one commercial borrower. As a percentage of non-performing loans, the allowance for loan losses was 101% and 159% as of June 30, 2003 and December 31, 2002, respectively.

Securities
The investment portfolio is an important contributor to the earnings of the Company. While liquidity needs are important, the Company strives to maintain a portfolio that provides the necessary liquidity needs of the Company yet maximizes income consistent with the ability of the Company’s capital structure to accept nominal amounts of investment risk. As of June 30, 2003 investment securities totaled $70,967,000, or 39.7%, of total earning assets. Investment securities increased $4,197,000 or 6.3% from $66,770,000 as of December 31, 2002. The increase in investment securities is attributable to the investment of borrowings from the Federal Home Loan Bank of Atlanta when market interest rates allowed an acceptable spread on such transactions.

At June 30, 2003 the Company’s investment securities classified as Available For Sale had an amortized cost of $47,550,000 and a market value of $50,183,000 for an unrealized gain of $2,633,000. Investment securities classified as Held To Maturity had an amortized cost of $20,784,000. This compares to an amortized cost of $50,875,000 and a market value of $52,163,000 for an unrealized gain of $1,288,000 as of December 31, 2002 for those investment securities classified as Available For Sale. Investment securities classified as Held To Maturity had an amortized cost of $14,607,000 as of December 31, 2002.

Cash and Due From Banks
The Company’s cash and due from banks increased $2,085,000, or 28.3%, to $9,453,000 at June 30, 2003, compared to $7,368,000 at December 31, 2002. This increase is the result of securities purchases that had not settled at that date.

Deposits
The Company receives its primary source of funding for loans and investments from its deposits. Total deposits declined $3,681,000 or 2.7% to $133,882,000 as of June 30, 2003 compared to $137,563,000 as of December 31, 2002. The primary reason for the decrease was the lack of significant loan demand, which allowed management to be less aggressive on deposit pricing.

The Company did not have any brokered deposits as of June 30, 2003 and December 31, 2002.

At June 30, 2003 and December 31, 2002, interest-bearing deposits comprised 86.4% of total deposits. The Company takes into consideration liquidity needs, direction and level of interest rates and market conditions when pricing deposits.

Borrowings
The Company’s borrowings are comprised of federal funds purchased and both short-term and long-term advances from the Federal Home Loan Bank of Atlanta. At June 30, 2003 and December 31, 2002 the Company did not have any federal funds purchased. Notes payable to the Federal Home Loan Bank of Atlanta increased $5,860,000, or 16.8%, to $40,697,000 as of June 30, 2003 compared to $34,837,000 as

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of December 31, 2002. The weighted rate of interest for Federal Home Loan Bank of Atlanta advances was 4.37% and 4.77% as of June 30, 2003 and December 31, 2002, respectively. The weighted maturity for Federal Home Loan Bank of Atlanta advances was 5.81 years and 6.51 years as of June 30, 2003 and December 31, 2002, respectively.

Liquidity and Capital Resources
Liquidity is a measure of the Company’s ability to provide funds to meet the needs of depositors and borrowers. The Company’s primary goal is to meet these needs at all times. In addition to these basic cash needs, the Company must meet liquidity requirements created by daily operations and regulatory requirements. Liquidity requirements of the Company are met primarily through two categories of funding, core deposits and borrowings. Core deposits include checking and savings accounts, as well as retail certificates of deposit less than $100,000. These are considered to be a relatively stable component of the Company’s mix of liabilities since they are generally the result of stable consumer and commercial banking relationships. At June 30, 2003 core deposits totaled $111.2 million, or 83.1%, of the Company’s total deposits, compared to $108.7 million, or 79.0%, of the Company’s total deposits as of December 31, 2002.

Greer Bancshares Incorporated, the parent holding company, has very limited liquidity needs and requires liquidity to pay limited operating expenses and dividends. For the six month period ending June 30, 2003, the Company had received $400,000 in dividends from its banking subsidiary and management believes its liquidity sources are adequate at this time. In addition, management does not know of any trends that may result in the Company’s liquidity increasing or decreasing materially. The Company exceeded all of its capital requirements as of June 30, 2003.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and interest rates. The Company’s market risk arises principally from interest rate risk inherent in its lending, deposit, and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages certain other risks, such as credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be its most significant market risk and the risk that could potentially have the largest material effect on the Company’s financial condition and results of operations. Other types of market risks, such as foreign currency risk and commodity price risk, do not arise in the normal course of the Company’s business activities.

The primary objective of asset and liability management at the Company is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive interest-bearing liabilities. The relationship of rate-sensitive earning assets to rate-sensitive interest-bearing liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and liabilities are those that can be re-priced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the first year. At June 30, 2003, on a cumulative basis through 12 months, rate-sensitive assets exceeded rate-sensitive liabilities by $20.6 million. This asset-sensitive position is primarily attributable to the portion of the Company’s loan portfolio that re-prices with changes in the prime lending rate and the increase in mortgage-backed securities, which have significant cash flow in the next twelve months.

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Item 4. CONTROLS AND PROCEDURES

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

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

PART II-OTHER INFORMATION

Item 1. Legal Proceedings
The Company is involved in various claims and legal actions arising in the normal course of business. Management believes that these proceedings will not result in a material loss to the Company.

Item 2. Changes in Securities

None

Item 3. Defaults Upon Senior Securities

None

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

The Annual Meeting of Stockholders of Greer Bancshares Incorporated was held on April 24, 2003. One item was presented to stockholders for consideration. The item of business presented was to elect three directors to hold office until the 2006 Annual Meeting of Stockholders. The following chart details the number of votes cast for and withheld for each nominee. There were no abstentions or broker non-votes cast.

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits

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(b)  Current Reports on Form 8-K

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SIGNATURES

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

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INDEX TO EXHIBITS

Exhibit Number and Description

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