Greer Bancshares (GRBS) 10-Q 2014 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2014
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                       to

Commission file number:  000-33021

GREER BANCSHARES INCORPORATED

(Exact name of registrant as specified in its charter)

South Carolina	57-1126200
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1111 W. Poinsett Street, Greer, South Carolina	29650
(Address of principal executive offices)	(Zip Code)

(864) 877-2000

(Registrant’s telephone number, including area code)

[None]

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  

Large accelerated filer [   ]	Accelerated filer [   ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at May 14, 2014
Common Stock, $5.00 par value per share	2,486,692 shares

GREER BANCSHARES INCORPORATED

Index

PART I – Financial Information
Item 1.	Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013		3
Consolidated Statements of Income for the Three Months Ended March 31, 2014 and 2013		4
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2014 and 2013		5
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2014 and 2013		6
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013		7
Notes to Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	(Intentionally deleted)
Item 5.	Other Information	36
Item 6.	Exhibits	37
Signatures		38
Index to Exhibits		39

2

GREER BANCSHARES INCORPORATED

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

Assets		March 31, 2014			December 31, 2013*
Cash and due from banks		$	5,286		$	5,203
Interest bearing deposits in banks			6,397			368
Federal funds sold			875			358
Cash and cash equivalents			12,558			5,929
Investment securities:
Available for sale	��		144,054			142,952
Loans, net of allowance for loan losses of $2,942 and $3,260, respectively			181,248			183,899
Loans held for sale			—			236
Premises and equipment, net			4,418			4,444
Accrued interest receivable			1,435			1,383
Restricted stock			2,246			2,637
Deferred tax asset			5,145			6,628
Other real estate owned			2,239			2,275
Bank owned Life Insurance			7,858			7,797
Other assets			1,227			715
Total Assets		$	362,428		$	358,895
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest bearing		$	40,342		$	38,631
Interest bearing			225,983			214,757
Total deposits			266,325			253,388
Short term borrowings			—			2,000
Long term borrowings			68,091			72,341
Other liabilities			3,870			4,833
Total Liabilities			338,286			332,562
Stockholders’ Equity:
Preferred stock-no par value 200,000 shares authorized;
Preferred stock, Series 2009-SP, no par value, 6,843 and 9,993 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively			6,843			9,980
Preferred stock, Series 2009-WP, no par value, 500 shares issued and outstanding at March 31, 2014 and December 31, 2013			500			502
Common stock-par value $5 per share, 10,000,000 shares authorized; 2,486,692 shares issued and outstanding at March 31, 2014 and December 31, 2013			12,433			12,433
Additional paid in capital			3,780			3,779
Retained earnings			3,551			4,169
Accumulated other comprehensive income/(loss)			(2,965	)		(4,530	)
Total Stockholders’ Equity			24,142			26,333
Total Liabilities and Stockholders’ Equity		$	362,428		$	358,895

*This information is derived from Audited Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated financial statements.

3

GREER BANCSHARES INCORPORATED

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended
	3/31/14			3/31/13
Interest Income:
Loans	$	2,263		$	2,549
Investment securities:
Taxable		846			641
Exempt from federal income tax		112			79
Federal funds sold		1			1
Other		1			3
Total interest income		3,223			3,273
Interest Expense:
Interest on deposit accounts		215			319
Interest on long term borrowings		431			424
Total interest expense		646			743
Net interest income		2,577			2,530
Provision/(reversal) for loan losses		(700	)		—
Net interest income after provision for loan losses		3,277			2,530
Non-interest income:
Customer service fees		144			160
Gain on sale of investment securities		579			120
Other noninterest income		346			446
Total noninterest income		1,069			726
Non-interest expenses:
Salaries and employee benefits		1,320			1,299
Occupancy and equipment		186			162
Postage and supplies		47			44
Professional fees		68			72
FDIC deposit insurance assessments		117			133
Other real estate owned and foreclosure		58			233
Other		497			442
Total noninterest expenses		2,293			2,385
Income before income taxes		2,053			871
Provision for income taxes:		693			46
Net income		1,360			825
Preferred stock dividends and net discount accretion		(207	)		(184	)
Net income available to common shareholders	$	$1,153		$	641
Basic net income per share of common stock	$	$0.46		$	0.26
Diluted net income per share of common stock	$	$0.46		$	0.26

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

4

GREER BANCSHARES INCORPORATED

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	3/31/14			3/31/13
Net income	$	1,360		$	825
Other comprehensive income, net of tax:
Unrealized holding gain/(loss) on available for sale investment securities arising during the period, net of tax expense/(benefit) of $1,003 and $(101),  respectively for the three month periods ended March 31, 2014 and March 31, 2013.		1,947			(196	)
Less reclassification adjustments for gains included in net income, net of tax expense of $197 and $40, respectively for the three month periods ended March 31, 2014 and March 31, 2013.		(382	)		(80	)
Other comprehensive income/(loss)		1,565			(276	)
Comprehensive income	$	2,925		$	549

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 Three Months Ended March 31, 2014 and March 31, 2013

(Unaudited)

(Dollars in thousands)

															Accumulated
	Preferred stock									Additional		Retained			Other			Total
		Series			Series			Common		Paid		Earnings/			Comprehensive			Stockholders’
		2009-SP			2009-WP			Stock		In capital		(Deficit)			Income/(Loss)			Equity
Balances at December 31, 2013	$	9,980		$	502		$	12,433	$	3,779	$	4,169		$	(4,530	)	$	26,333
Net income		—			—			—		—		1,360			—			1,360
Other comprehensive income, net of tax		—			—			—		—		—			1,565			1,565
Amortization of premium and discount on preferred stock		13			(2	)		—		—		(11	)		—			—
Preferred stock dividends paid		—			—			—		—		(1,967	)		—			(1,967	)
Preferred stock repurchased		(3,150	)		—			—		—		—			—			(3,150	)
Stock based compensation		—			—			—		1		—			—			1
Balances at March 31, 2014	$	6,843		$	500		$	12,433	$	3,780	$	3,551		$	(2,965	)	$	24,142

														Accumulated
	Preferred stock								Additional					Other			Total
		Series		Series			Common		Paid		Accumulated			Comprehensive			Stockholders’
		2009-SP		2009-WP			Stock		In capital		Deficit			Income			Equity
Balances at December 31, 2012	$	9,835	$	517		$	12,433	$	3,768	$	(4,662	)	$	1,049		$	22,940
Net income		—		—			—		—		825			—			825
Other comprehensive loss, net of tax		—		—			—		—		—			(276	)		(276	)
Amortization of premium and discount on preferred stock		35		(4	)		—		—		(31	)		—			—
Stock based compensation		—		—			—		3		—			—			3
Balances at March 31, 2013	$	9,870	$	513		$	12,433	$	3,771	$	(3,868	)	$	773		$	23,492

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

6

GREER BANCSHARES INCORPORATED

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	3/31/14			3/31/13
Operating activities
Net income	$	1,360		$	825
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		89			83
Amortization of premiums on mortgage-backed securities		320			479
Gain on sale/call of investment securities		(579	)		(120	)
Loss on sale of other real estate owned		—			31
Impairment loss on other real estate owned		21			191
Origination of loans held for sale		(2,656	)		(3,440	)
Proceeds from sales of loans held for sale		2,907			3,403
Loan loss provision/(reversal)		(700	)		—
Decrease in deferred tax asset		1,483			—
Gain on sale of loans held for sale		(15	)		(25	)
Stock based compensation		1			3
Increase in cash surrender value of life insurance		(61	)		(63	)
Net change in:
Accrued interest receivable		(52	)		19
Other assets		(512	)		(21	)
Accrued interest payable		47			79
Other liabilities		(1,010	)		(157	)
Net cash provided by operating activities		643			1,287
Investing activities
Activity in available-for-sale securities:
Sales		17,974			9,439
Maturities, payments and calls		1,995			16,525
Purchases		(19,247	)		(28,009	)
Net decrease in loans		3,351			4,984
Proceeds from redemption of FHLB stock		391			754
Proceeds from sale of other real estate owned		15			446
Purchase of premises and equipment		(63	)		(108	)
Net cash provided by investing activities		4,416			4,031

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

7

GREER BANCSHARES INCORPORATED

Consolidated Statements of Cash Flows (continued)

(Unaudited)

(Dollars in thousands)

	Three Months Ended
	3/31/14			3/31/13
Financing activities
Net increase in deposits	$	12,937		$	10,673
Repayment of notes payable to FHLB		(33,025	)		(29,600	)
Proceeds from notes payable to FHLB		28,775			16,000
Repurchase of Preferred Stock		(3,150	)		—
Preferred dividends paid		(1,967	)		—
Net decrease in short term borrowings		(2,000	)		—
Net cash provided by (used for) financing activities		1,570			(2,927	)
Net increase in cash and cash equivalents		6,629			2,391
Cash and equivalents, beginning of period		5,929			10,251
Cash and equivalents, end of period	$	12,558		$	12,642
Cash paid for:
Income taxes	$	9		$	26
Interest	$	599		$	665
Non-cash investing and financing activities
Real estate acquired in satisfaction of loans	$	—		$	350
Unrealized gains/(losses) on available for sale investment securities, net of tax	$	1,565		$	(276	)

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

8

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

Greer Bancshares Incorporated, a South Carolina corporation (the “Company”), is a one-bank holding company for Greer State Bank, a South Carolina corporation (the “Bank”).  The Company currently engages primarily in owning and managing the Bank.

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements.  In the opinion of our management, all adjustments considered necessary for a fair presentation have been included.  All such adjustments are of a normal recurring nature.  The consolidated 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.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the Company for the year ended December 31, 2013, which are included in the Company’s 2013 Annual Report on Form 10-K.

Certain captions and amounts in the prior financial statements were reclassified to conform to this financial statement presentation.  Such reclassifications had no effect on previously reported net income or stockholders’ equity. All dollars are rounded to the nearest thousand.

Note 2 –Net Income per Common Share

Basic and diluted net income per common share is computed by dividing net income adjusted for cumulative preferred stock dividends by the weighted average number of common shares outstanding during each period presented.  The weighted average common shares outstanding were 2,486,692 (basic and diluted) for the three months ended March 31, 2014 and March 31, 2013.  Anti-dilutive options totaling 219,045 and 233,894 have been excluded from the income per share calculation for the three months ended March 31, 2014 and March 31, 2013, respectively.   

Note 3 – Income Taxes

The Company files a consolidated federal income tax return and separate state income tax returns for the Company and the Bank.  Income taxes are allocated to each of the Company and the Bank as if filed separately for federal purposes and based on the separate returns filed for state purposes.

Certain items of income and expense for financial reporting are recognized differently for income tax purposes (principally the provision for loan losses, deferred compensation and depreciation).  Provisions for deferred taxes are made in recognition of such temporary differences as required by the Income Taxes Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”).  Current income taxes are recorded based on amounts due with the current income tax returns.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences (principally the provision for loan losses, deferred compensation and depreciation) between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. In considering whether a valuation allowance on deferred tax assets is needed, management considers all available evidence, including the length of time tax net operating loss carryforwards are available, the existence of available reversing temporary differences, the ability to generate future taxable income and available tax planning strategies. The Company does not believe a valuation allowance is required. The Company is three years cumulatively profitable and has been profitable for the last ten quarters. The Company anticipates that it will generate income before income taxes at a sufficient level in the future to fully utilize all of its net operating loss carry forwards; however, there can be no assurance to this effect.

9

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Note 4 – Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  GAAP also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  This GAAP standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.  Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.  This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.  This category generally includes collateralized debt obligations, impaired loans and other real estate owned (“OREO”).

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted prices of like or similar securities, if available.  If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

Impaired Loans

The Company does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired and an allowance for loan losses is established.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, our management measures impairment in accordance with GAAP.  The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value or discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with GAAP, impaired loans where an allowance is established or a charge-off is made require classification in the fair value hierarchy.  When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2.  When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

10

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Other Real Estate Owned

OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at net realizable value, determined on the basis of current appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs.  At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.  Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of foreclosed real estate expense.  OREO is included in Level 3 of the valuation hierarchy.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013:

(Dollars in thousands)

			Fair Value Measurements at Reporting Date Using
	Fair Value		Level 1		Level 2		Level 3
March 31, 2014
Available for sale securities:
US government and other agency obligations	$	38,060	$	—	$	38,060	$	—
Mortgage-backed securities		61,280		—		61,280		—
Municipal securities		44,714		—		44,714		—
Total available for sale securities	$	144,054	$	—	$	144,054	$	—
December 31, 2013
Available for sale securities:
US government and other agency obligations	$	24,452	$	—	$	24,452	$	—
Mortgage-backed securities		76,725		—		76,725		—
Municipal securities		41,179		—		41,179		—
Collateralized debt obligation		596		—		—		596
Total available for sale securities	$	142,952	$	—	$	142,356	$	596

There were no liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013.

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement.  However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.

A reconciliation of the beginning and ending balances of Level 3 assets, which consisted of one collateralized debt obligation, recorded at fair value on a recurring basis for the three months ended March 31, 2014 is as follows:

(Dollars in thousands)

	Assets
Fair value, December 31, 2013	$	596
Total unrealized income/(loss) included in other comprehensive income		—
Transfers out of Level 3, due to sale of security		(596	)
Fair value, March 31, 2014	$	—

There were no Level 3 liabilities recorded at fair value on a recurring basis during the three months ended March 31, 2014 or March 31, 2013.

11

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP.  These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the relevant period.  Market values are based on appraisals of collateral by independent appraisers for collateral dependent loans or discounted cash flow for non-collateral dependent loans. Assets measured at fair value on a nonrecurring basis as of March 31, 2014 and December 31, 2013 are included in the table below.

(Dollars in thousands)

		Fair Value Measurements at Reporting Date Using
Description	3/31/14	Level 1	Level 2	Level 3
Impaired loans	$  1,838	$      —	$     —	$  1,838
OREO	2,239	—	—	2,239
		Fair Value Measurements at Reporting Date Using
Description	12/31/13	Level 1	Level 2	Level 3
Impaired loans	$  1,875	$     —	$     —	$  1,875
OREO	2,275	—	—	2,275

Although the Company did not elect to adopt the fair value option for any financial instruments, accounting standards require disclosure of fair value information, whether or not recognized in the balance sheet, when it is practicable to estimate the fair value.  A financial instrument is defined as cash, evidence of an ownership interest in an entity, or contractual obligations that require the exchange of cash or other financial instruments.  Certain items are specifically excluded from the disclosure requirements, including common stock, premises and equipment, real estate held for sale and other assets and liabilities.  The following methods and assumptions were used in estimating fair values of financial instruments:

·

Fair value approximates carrying amount for cash and due from banks due to the short-term nature of the instruments.

·

Investment securities are valued using quoted fair market prices for actively traded securities, pricing models for investment securities traded in less active markets and discounted future cash flows for securities with no active market.

·

Fair value for variable rate loans that re-price frequently and for loans that mature in less than 90 days is based on the carrying amount.  Fair value for mortgage loans, personal loans and all other loans (primarily commercial) 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, credit quality and adjustments for liquidity related to the current market environment.

·

Fair value for loans for sale is based on the historical premium values obtained on such loans.

·

Due to the redemptive provisions of the restricted stock, fair value equals cost.  The carrying amount is adjusted for any other than temporary declines in value.

·

The carrying amount for the cash surrender value of life insurance is a reasonable estimate of fair value.

·

The carrying value for accrued interest receivable and payable is a reasonable estimate of fair value.

·

Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying amount.  Certificate of deposit accounts maturing within thirty days are valued at their carrying amount.  Certificate of deposit accounts maturing after thirty days are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

·

Fair value for federal funds sold and purchased is based on the carrying amount since these instruments typically mature within three days from the transaction date.

·

Fair value for variable rate long-term debt that re-prices frequently is based on the carrying amount.  Fair value for fixed rate debt is based on the discounted present value of the estimated future cash flows.  Discount rates used in these computations approximate rates currently offered for similar borrowings of comparable terms and credit quality.

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Management uses its best judgment in estimating 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 that would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented.  The estimated fair values of the Company’s financial instruments as of March 31, 2014 and December 31, 2013 were as follows:

(Dollars in thousands)

	March 31, 2014		Estimated Fair Value
		Carrying Amount		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	12,558	$	12,558	$	—	$	—
Investment securities		144,054		—		144,054		—
Loans - net		181,248		—		175,234		1,838
Restricted stock		2,246		—		2,246		—
Accrued interest receivable		1,435		—		1,435		—
Bank owned life insurance		7,858		—		7,858		—
Financial liabilities
Deposits	$	266,325	$	—	$	264,527	$	—
Repurchase agreements		15,000		—		16,218		—
Notes payable to FHLB		41,750		—		42,679		—
Junior subordinated debentures		11,341		—		11,340		—
Accrued interest payable		324		—		324		—

	December 31, 2013		Estimated Fair Value
		Carrying Amount		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	5,929	$	5,929	$	—	$	—
Investment securities		142,952		—		142,356		596
Loans - net		183,899		—		178,049		1,875
Loans held for sale		236		—		236		—
Restricted stock		2,637		—		2,637		—
Accrued interest receivable		1,383		—		1,383		—
Bank owned life insurance		7,797		—		7,797		—
Financial liabilities
Deposits	$	253,388	$	—	$	253,388	$	—
Fed Funds Purchased		2,000		—		2,000		—
Repurchase agreements		15,000		—		16,377		—
Notes payable to FHLB		46,000		—		47,125		—
Junior subordinated debentures		11,341		—		11,341		—
Accrued interest payable		1,161		—		1,161		—

13

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Note 5 – Investment Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities, as of March 31, 2014 and December 31, 2013, were as follows:

(Dollars in thousands)

	March 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
US government and other agency obligations	$	39,942	$	62	$	1,944	$	38,060
Mortgage-backed securities		63,096		45		1,861		61,280
Municipal securities		45,510		289		1,085		44,714
	$	148,548	$	396	$	4,890	$	144,054

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
US government and other agency obligations	$	26,972	$	—	$	2,520	$	24,452
Mortgage-backed securities		79,418		99		2,792		76,725
Municipal securities		43,116		133		2,070		41,179
Collateralized debt obligation		310		286		—		596
	$	149,816	$	518	$	7,382	$	142,952

The amortized cost and estimated fair value of investment securities at March 31, 2014 by contractual maturity for debt securities are shown below.  Mortgage-backed securities have not been scheduled since expected and actual maturities will differ from contractual maturities because borrowers may have the right to prepay the obligations. All mortgage-backed securities owned by the Company are issued by government sponsored enterprises.

(Dollars in thousands)

	Amortized Cost		Fair Value
Due in 1 year	$	—	$	—
Over 1 year through 5 years		2,001		1,993
After 5 years through 10 years		17,337		17,137
Over 10 years		66,114		63,644
		85,452		82,774
Mortgage backed securities		63,096		61,280
Total	$	148,548	$	144,054

Investment securities with an aggregate book value of $73,524,000 and $68,853,000 at March 31, 2014 and December 31, 2013, respectively, were pledged to secure public deposits, FHLB borrowings and repurchase agreements.

14

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

The fair value of securities with temporary impairment at March 31, 2014 and December 31, 2013 is shown below:

(Dollars in thousands)

	Impairment Less Than Twelve Months				Impairment Over Twelve Months
March 31, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities:
US government and other agency obligations	$	23,903	$	1,270	$	8,063	$	674
Mortgage backed securities		47,731		1,284		12,112		577
Municipal securities		22,412		705		7,073		380
Total	$	94,046	$	3,259	$	27,248	$	1,631
	Impairment Less Than Twelve Months				Impairment Over Twelve Months
December 31, 2013		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities:
US government and other agency obligations	$	20,959	$	2,099	$	3,493	$	421
Mortgage backed securities		57,739		2,166		11,596		626
Municipal securities		27,664		1,666		4,492		404
Total	$	106,362	$	5,931	$	19,581	$	1,451

Management believes all of the Company’s unrealized losses as of March 31, 2014 and December 31, 2013 are temporary and as a result of temporary changes in the market.  Fifteen U.S. government and other agency obligation securities, thirty mortgage-backed securities and fifty-three municipal securities had unrealized losses at March 31, 2014. Eleven U.S. government and other agency obligation securities, thirty-three mortgage-backed securities and fifty-six municipal securities had unrealized losses at December 31, 2013. The temporary impairment is due primarily to changes in the short and long term interest rate environment since the purchase of the securities and is not related to the issuer’s credit.  We believe that the Bank has sufficient cash, investments showing unrealized gains and borrowing sources to provide sufficient liquidity to hold the securities with unrealized losses until maturity or a recovery of fair value, if necessary.

The Company reviews its investment portfolio on a quarterly basis, judging each investment for other than temporary impairment (“OTTI”).  For securities for which there is no expectation to sell or it is more likely than not that management will decide that the Company is not required to sell, the OTTI is separated into credit and noncredit components.  The credit-related OTTI, represented by the expected loss in principal, is recognized in noninterest income, while the noncredit-related OTTI is recognized in the other comprehensive income (loss).  Noncredit-related OTTI results from other factors, including increased liquidity spreads and extension of the security.  For securities for which there is an expectation to sell, all OTTI is recognized in earnings.

Gross realized gains, gross realized losses, and sale and call proceeds of available for sale securities for the three months ended March 31, 2014 and March 31, 2013 are summarized as follows. These net gains or losses are shown in noninterest income as gain on sale of available for sale securities.

(Dollars in thousands)

	Three Months Ended			Three Months Ended
	3/31/14			3/31/13
Gross realized gains	$	595		$	120
Gross realized losses		(16	)		—
Net gain on sale of securities	$	579		$	120
Call/Sale proceeds	$	17,974		$	20,334

15

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Changes in accumulated other comprehensive income/(loss) by component for the period ended March 31, 2014 are shown in the table below. All amounts are net of tax.

(Dollars in thousands)

		Unrealized Gains/(Losses) on Available-for-Sale Securities
Beginning balance	$	(4,530	)
Other comprehensive income before reclassifications		1,947
Amounts reclassified from accumulated other comprehensive income/(loss)		(382	)
Net current-period other comprehensive income		1,565
Ending balance	$	(2,965	)

Note 6 –Loans

A summary of loans outstanding by major classification as of March 31, 2014 and December 31, 2013 follows:

(Dollars in thousands)

	March 31, 2014			December 31, 2013
Commercial and industrial:
Commercial	$	23,551		$	26,842
Leases & other		2,938			3,174
Total commercial and industrial:		26,489			30,016
Commercial real estate:
Construction/land		24,983			24,286
Commercial mortgages - owner  occupied		33,502			30,908
Other commercial mortgages		47,294			49,297
Total commercial real estate		105,779			104,491
Consumer real estate:
1-4 residential		33,397			33,644
Home equity loans and lines of credit		15,765			16,085
Total consumer real estate		49,162			49,729
Consumer installment:		2,760			2,923
Total loans		184,190			187,159
Allowance for loan losses		(2,942	)		(3,260	)
Net loans	$	181,248		$	183,899

The table above includes net deferred loan fees/(costs) that totaled $39,000 and $22,000 at March 31, 2014 and December 31, 2013, respectively. Loans totaling $79,116,000 were pledged as collateral for borrowings from the FHLB and Federal Reserve at March 31, 2014.

Loan Origination/Risk Management.  The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.  Management reviews and approves these policies and procedures on a regular basis.  A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.  Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

16

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.  Underwriting standards are designed to promote relationship banking rather than transactional banking.  Management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed.  Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.  

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans.  These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy compared with non-commercial real estate loans, generally.  Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria.  

With respect to loans to developers and builders that are secured by non-owner occupied properties that may be originated from time to time, our management generally requires the borrower to have had an existing relationship with the Bank and have a proven record of success.  Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners.  Construction loans are generally based upon estimates of costs and value associated with the complete project.  These estimates may be inaccurate.  Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained.  These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing.

Consumer loans are originated and underwritten based upon policies and procedures developed and modified by Bank management.  Our consumer loans generally consist of relatively small loan amounts that are spread across many individual borrowers, which we believe minimizes risk.  Underwriting standards for 1-4 residential and home equity loans include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

The Bank engages an independent loan review company to review and validate its credit risk program on a periodic basis.  Results of these reviews are presented to our management.  The loan review process complements and reinforces the risk identification and assessment decisions made by the Bank’s lenders and credit personnel, as well as the Bank’s lending policies and procedures.

Non-Accrual and Past Due Loans.  Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due.  Loans that are 90 days past due are placed on non-accrual status or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due.  Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due.  When interest accrual is discontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

17

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Non-accrual loans, segregated by class of loans, as of March 31, 2014 and December 31, 2013 were as follows:
 
(Dollars in thousands)

	March 31, 2014		December 31, 2013
Commercial and industrial:
Commercial	$	—	$	20
Leases & Other		—		—
Commercial real estate:
Construction/land		—		—
Commercial mortgages - owner occupied		276		283
Other commercial mortgages		804		1,411
Consumer real estate:
1-4 residential		331		764
Home equity loans and lines of credit		75		74
Consumer installment:
Consumer installment		—		—
Total	$	1,486	$	2,552

The gross interest income that would have been recorded under the original terms of the non-accrual loans amounted to $25,000 and $67,000 for the three months ended March 31, 2014 and March 31, 2013, respectively.

Past due loans, segregated by class of loans, as of March 31, 2014 and December 31, 2013 were as follows:

(Dollars in thousands)

March 31, 2014	Loans 30-89 days		Loans 90 or more days		Total past due		Current loans		Total loans		>90 days and still accruing
Commercial and industrial:
Commercial	$	150	$	—	$	150	$	23,401	$	23,551	$	—
Leases & other		—		—		—		2,938		2,938		—
Commercial real estate:
Construction/land		—		—		—		24,983		24,983		—
Commercial mortgages -  owner occupied		2		79		81		33,421		33,502		—
Other commercial mortgages		—		—		—		47,294		47,294		—
Consumer real estate:
1-4 residential		486		267		753		32,644		33,397		—
Home equity loans and lines of  credit		—		75		75		15,690		15,765		—
Consumer installment:
Consumer installment		29		—		29		2,731		2,760		—
Total	$	667	$	421	$	1,088	$	183,102	$	184,190	$	—

December 31, 2013	Loans 30-89 days		Loans 90 or more days		Total past due		Current loans		Total loans		>90 days and still accruing
Commercial and industrial:
Commercial	$	—	$	20	$	20	$	26,822	$	26,842	$	—
Leases & other		—		—		—		3,174		3,174		—
Commercial real estate:
Construction/land		—		—		—		24,286		24,286		—
Commercial mortgages - owner occupied		103		78		181		30,727		30,908		—
Other commercial mortgages		—		—		—		49,297		49,297		—
Consumer real estate:
1-4 residential		556		675		1,231		32,413		33,644		—
Home equity loans and  lines of  credit		88		75		163		15,922		16,085		—
Consumer installment:
Consumer installment		42		—		42		2,881		2,923		—
Total	$	789	$	848	$	1,637	$	185,522	$	187,159	$	—

18

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Impaired Loans.  Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.  Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans.  If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.  Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Impaired loans, segregated by class of loans, as of March 31, 2014 and December 31, 2013, were as follows:

(Dollars in thousands)

March 31, 2014	Unpaid contractual principal balance		Recorded investment with no allowance		Recorded investment with allowance		Total recorded investment		Related allowance
Commercial and industrial:
Commercial	$	806	$	806	$	—	$	806	$	—
Leases & other		—		—		—		—		—
Commercial real estate:
Construction/land		100		100		—		100		—
Commercial mortgages – owner occupied		423		276		116		392		55
Other commercial mortgages		2,332		1,680		29		1,709		5
Consumer real estate:
1-4 residential		558		354		204		558		30
Home equity loans and lines of credit		—		—		—		—		—
Consumer installment		—		—		—		—		—
Total	$	4,219	$	3,216	$	349	$	3,565	$	90

December 31, 2013	Unpaid contractual principal balance		Recorded investment with no allowance		Recorded investment with allowance		Total recorded investment		Related allowance
Commercial and industrial:
Commercial	$	845	$	825	$	20	$	845	$	20
Leases & other		—		—		—		—		—
Commercial real estate:
Construction/land		100		100		—		100		—
Commercial mortgages – owner occupied		431		283		117		400		56
Other commercial mortgages		2,372		1,720		29		1,749		5
Consumer real estate:
1-4 residential		244		38		206		244		32
Home equity loans and lines of credit		—		—		—		—		—
Consumer installment		—		—		—		—		—
Total	$	3,992	$	2,966	$	372	$	3,338	$	113

As noted above, the Bank had impaired loans with outstanding balances of $3,565,000 and $3,338,000 at March 31, 2014 and December 31, 2013, respectively. Impaired loans with either charge-offs or specific reserves totaled $2,582,000 (gross of charge-off) at March 31, 2014. Of this amount $654,000 has been charged-off and $90,000 has been specifically reserved. Impaired loans with either charge-offs or specific reserves totaled $2,641,000 (gross of charge-off) at December 31, 2013. Of this amount $654,000 had been charged-off and $113,000 had been specifically reserved. 

19

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Interest income and average recorded investment in impaired loans for and as of the time periods listed below is summarized as follows:

(Dollars in thousands)

	Average Recorded Investment for three months ended 3-31-14		Gross Interest Income for three months ended 3-31-14
Commercial and industrial:
Commercial	$	812	$	20
Commercial real estate:
Construction/land		100		2
Commercial mortgages owner occupied		396		3
Commercial mortgages - other		1,723		30
Consumer  real estate:
1-4 residential		348		4
Consumer Installment		—		—
Total	$	3,379	$	59
	Average Recorded Investment for three months ended 3-31-13		Gross Interest Income for three months ended 3-31-13
Commercial and industrial:
Commercial	$	1,046	$	16
Commercial real estate:
Construction/land		336		4
Commercial mortgages owner occupied		1,555		33
Commercial mortgages - other		2,144		21
Consumer  real estate:
1-4 residential		302		2
Consumer Installment		—		—
Total	$	5,383	$	76

Credit Quality Indicators.  As part of the on-going monitoring of credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to 1) the weighted-average risk rate of loan pools, 2) the level of classified loans, 3) non-performing loans and 4) general local economic conditions.

Our management utilizes a risk rating matrix to assign a risk rating to each of the Bank’s loans.  Loans are rated on a scale of 1-7.  A description of the general characteristics of the 7 risk ratings is as follows:

·

Risk ratings 1-3 (Pass) - These risk ratings include loans to high credit quality borrowers with satisfactory credit and repayment history, stable trends in industry and company performance, management that exhibits average strength in comparison to others in the industry, sound repayment sources and average to above average individual or guarantor support.

·

Risk rating 4 (Monitor) - This risk rating includes loans to borrowers with satisfactory credit, some slow repayment history, stable trends in their industry and positive operating trends. Financial conditions are achieving performance expectations at a slower pace than anticipated.  Management changes, interim losses and repayment sources are somewhat strained but there is satisfactory individual or guarantor support.

·

Risk rating 5 (Watch) - This risk rating includes loans to borrowers with increasing delinquency history, stable to decreasing or adverse trends in their industry and company performance,  adverse trends in operations, marginal primary repayment sources with secondary repayment sources available, marginal debt service coverage, some identifiable risk of collection and limited individual or guarantor support.

·

Risk rating 6 (Substandard) - This risk rating includes loans to borrowers with demonstration of inability to perform in a timely manner, decreasing or adverse trends in their industry and company performance,  well-defined weakness in management, profitability or liquidity, limited repayment sources and declining individual or guarantor support.  There is a distinct possibility the Bank will sustain losses related to this risk rating if deficiencies are not corrected.

·

Risk rating 7 (Doubtful) - This risk rating includes loans to borrowers with demonstration of inability to perform in a timely manner and no customer response, decreasing or adverse trends in industry, high possibility the Bank will sustain losses unless pending factors are successful, full collection or liquidation is highly questionable and improbable, repayment sources are severely impaired or nonexistent and no individual or guarantor support exists.  

20

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

The following table represents risk rating loan totals, segregated by class of loans, as of March 31, 2014 and December 31, 2013.

(Dollars in thousands)

March 31, 2014

	Risk rating 1-3		Risk rating 4		Risk rating 5		Risk rating 6		Total
Commercial and industrial:
Commercial	$	6,844	$	10,761	$	5,073	$	873	$	23,551
Leases & other		2,938		—		—		—		2,938
Commercial real estate:
Construction/land		10,233		8,497		625		5,628		24,983
Commercial mortgages - owner occupied		14,055		16,247		1,331		1,869		33,502
Other commercial mortgages		7,910		34,674		2,141		2,569		47,294
Consumer real estate:
1-4 residential		24,162		4,844		1,889		2,502		33,397
Home equity loans and lines of credit		13,991		1,078		208		488		15,765
Consumer installment:
Consumer installment		2,516		95		131		18		2,760
Total	$	82,649	$	76,196	$	11,398	$	13,947	$	184,190

December 31, 2013

	Risk rating 1-3		Risk rating 4		Risk rating 5		Risk rating 6		Total
Commercial and industrial:
Commercial	$	7,556	$	12,239	$	6,133	$	914	$	26,842
Leases & other		3,174		—		—		—		3,174
Commercial real estate:
Construction/land		10,915		7,403		300		5,668		24,286
Commercial mortgages - owner occupied		12,823		15,504		700		1,881		30,908
Other commercial mortgages		10,848		33,069		2,691		2,689		49,297
Consumer real estate:
1-4 residential		23,997		4,805		1,906		2,936		33,644
Home equity loans and lines of credit		14,261		1,150		205		469		16,085
Consumer installment:
Consumer installment		2,667		106		130		20		2,923
Total	$	86,241	$	74,276	$	12,065	$	14,577	$	187,159

There were no loans with a risk rating of 7 as of March 31, 2014 or as of December 31, 2013.

Allowance for Loan Losses.  The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans.  The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio.  The Company’s allowance for loan losses methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.”  Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions.  The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs.  The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors.  The provision for loan losses also reflects the totality of actions taken on all loans for a particular period.  In other words,theamount of the provision reflects not only the necessary increases in theallowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.  

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off.  While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond management’s and the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.  

21

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

The Company’s allowance for loan losses consists of two elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific impaired loans; and (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for groups of loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions.  

The allowances established for losses on specific loans are based on a regular analysis and evaluation of problem loans.  Loans are classified based  on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates.  When a loan has a calculated grade of 6 or higher, an analysis is performed on the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan.  Specific valuation allowances are determined by analyzing, among other things, the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry.  

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off, adjusted for various qualitative factors.  The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on an average twelve quarter history of actual charge-offs experienced within the loan pools.  An adjusted historical valuation allowance is established for each pool of similar loans based upon the product of the adjusted historical loss ratio and the total dollar amount of the loans in the pool.  The Company’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.

Loans identified as losses by management are charged off.  

The change in the allowance for loan losses for the three months ended March 31, 2014 is summarized as follows:

(Dollars in thousands)

	Dec 31, 2013		Re-Allocation			Provision/(Reversal)			Charge-offs		Recoveries		Mar 31, 2014
Commercial and industrial:	$	167	$	183		$	—		$	32	$	21	$	339
Commercial real estate:		2,668		(192	)		(700	)		—		406		2,182
Consumer real estate:		399		(4	)		—			14		—		381
Consumer installment:		26		13			—			1		2		40
Total	$	3,260	$	—		$	(700	)	$	47	$	429	$	2,942

The change in the allowance for loan losses for the three months ended March 31, 2013 is summarized as follows:

(Dollars in thousands)

	Dec 31, 2012		Re-Allocation			Provision/(Reversal)		Charge-offs		Recoveries		Mar 31, 2013
Commercial and industrial:	$	665	$	(177	)	$	—	$	—	$	21	$	509
Commercial real estate:		3,205		267			—		18		16		3,470
Consumer real estate:		516		(86	)		—		—		49		479
Consumer installment:		43		(4	)		—		1		2		40
Total	$	4,429	$	—		$	—	$	19	$	88	$	4,498

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

The following is the recorded investment in loans related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the impairment methodology and the corresponding period-end amount of allowance for loan losses.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

(Dollars in thousands)

March 31, 2014	Commercial and Industrial		Commercial Real Estate		Consumer Real Estate		Consumer Installment		Total
Loans individually evaluated for impairment	$	806	$	2,201	$	558	$	—	$	3,565
Loans collectively evaluated for impairment		25,683		103,578		48,604		2,760		180,625
Balance March 31, 2014	$	26,489	$	105,779	$	49,162	$	2,760	$	184,190
Period-end allowance for loan loss amounts allocated to:
Loans individually evaluated for impairment	$	—	$	60	$	30	$	—	$	90
Loans collectively evaluated for impairment		339		2,122		351		40		2,852
Balance March 31, 2014	$	339	$	2,182	$	381	$	40	$	2,942

December 31, 2013	Commercial and Industrial		Commercial Real Estate		Consumer Real Estate		Consumer Installment		Total
Loans individually evaluated for impairment	$	845	$	2,249	$	244	$	—	$	3,338
Loans collectively evaluated for impairment		29,171		102,242		49,485		2,923		183,821
Balance December 31, 2013	$	30,016	$	104,491	$	49,729	$	2,923	$	187,159
Period-end allowance for loan loss amounts allocated to:
Loans individually evaluated for impairment	$	20	$	61	$	32	$	—	$	113
Loans collectively evaluated for impairment		147		2,608		367		25		3,147
Balance December 31, 2013	$	167	$	2,669	$	399	$	25	$	3,260

Troubled debt restructured loans (“TDRs”), which are included in the impaired loan totals, were $2,850,000 and $2,937,000 at March 31, 2014 and December 31, 2013, respectively. TDRs on non-accrual were $1,001,000 and $1,635,000 at March 31, 2014 and December 31, 2013, respectively. The decrease in TDRs from December 31, 2013 to March 31, 2014 was primarily the result of principal reductions through payments.         

There were no loans that were modified into TDRs for the three month period ended March 31, 2014. There were no TDRs in default within twelve months of their modification date during the three month period ended March 31, 2014.

Note 7 – New Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2013-11,  "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists."   The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. The Company adopted the provisions of ASU No. 2013-11 effective January 1, 2014. The adoption of ASU No. 2013-11 had no impact on the Company's Consolidated Financial Statements.

In January 2014, the FASB issued ASU No. 2014-04, "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure."  The objective of this guidance is to clarify when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. ASU No. 2014-04 states that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2)

23

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, ASU No. 2014-04 requires interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU No. 2014-04 is effective for interim and annual reporting periods beginning after December 15, 2014. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company's Consolidated Financial Statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

Note 8 – Other Items

In October 2004 and December 2006, the Company issued two different series of “Trust Preferred” securities to raise capital.  In these offerings, the Company issued $6,186,000 and $5,155,000, respectively, of junior subordinated debentures to its wholly-owned capital Trusts, Greer Capital Trust I and Greer Capital Trust II (collectively, the “Trusts”), respectively, and fully and unconditionally guaranteed corresponding principal amounts of the trust preferred securities issued by the Trusts.  On January 3, 2011, the Company elected to defer interest payments on the two junior subordinated debentures beginning with the January 2011 payments.  On February 14, 2014, after receiving regulatory approval, the Company gave notice to the trustees that it was ending its deferral of interest and paid $970,422, which included both deferred interest and interest due through the April 2014 due dates. The funds for this payment were provided by dividends from the Bank.

On January 30, 2009, the Company issued 9,993 shares of its Series 2009-SP cumulative perpetual preferred stock and warrants to purchase an additional 500 shares of cumulative perpetual preferred stock (which warrants were immediately exercised) to the U.S. Treasury under the Troubled Asset Relief Program (“TARP”) for aggregate consideration of $9,993,000.  On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company was suspending the payment of regular quarterly cash dividends on the TARP cumulative perpetual preferred stock, beginning with the February 15, 2011 dividend.  The decision to elect the deferral of interest payments and to suspend the dividends payments was made in consultation with the Federal Reserve Bank of Richmond (the “FRB”). The terms of the TARP cumulative perpetual preferred stock prohibited the Company from paying any dividends on its common stock while payments on the TARP Preferred were in arrears. On March 4, 2014, after receiving regulatory approval, the Company resumed the payment of regular quarterly cash dividends on its preferred stock issued to the U.S. Treasury and paid all $1,928,247 of deferred dividend amounts due. The funds for this payment were provided by dividends from the Bank.

On May 3, 2012, the U.S. Treasury announced additional details on its strategy for winding down the remaining bank and bank holding company investments made through TARP, and one such strategy is utilizing an auction to sell pools of several recipient companies’ TARP securities to third parties.  The U.S. Treasury had indicated that it expects a single winning bidder to purchase all of the TARP securities included in a pool.  By letter dated as of June 19, 2012, the U.S. Treasury informed the Company that the U.S. Treasury was considering including the Company’s TARP preferred stock as part of a series of pooled auctions. The U.S.  Treasury had also indicated that a TARP recipient may, with regulatory approval, opt-out of the pool auction process and either make its own bid to repurchase all of its remaining TARP securities or designate a single outside investor (or single group of investors) to make such a bid.  TARP recipients that received an extension of the original August 6, 2012 deadline (as the Company did) had until October 9, 2012 to submit a bid. The Company did not submit a bid at that time. By letter dated as of January 18, 2013, the U.S. Treasury informed the Company that it was extending the opt-out process and that the Company had until April 30, 2013 to submit a bid. The Company submitted its own bid to repurchase all its outstanding TARP securities on April 18, 2013, but subsequently withdrew its bid. On March 19, 2014, after receiving regulatory approval, the Company repurchased $3,150,000 of principal of the TARP preferred stock. As of March 31, 2014 the Company had not received any additional information from the U.S. Treasury with respect to the status of it divesting the remaining $7,343,000 of the TARP preferred stock.

On March 1, 2011, the Bank entered into a Consent Order (the “Consent Order”)  with the Federal Deposit Insurance Corporation “FDIC”)  and the South Carolina Board of Financial Institutions (“S.C. Bank Board”). The Consent Order required the Bank to take specific steps regarding, among other things, its management, capital levels, asset quality, lending practices, liquidity and profitability in order to improve the safety and soundness of the Bank’s operations, each as described and set forth in the Consent Order.

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Effective March 20, 2013, as a result of the steps the Bank took in complying with the Consent Order and the Bank’s improvement with regard to such matters, the FDIC and S.C. Bank Board terminated the Consent Order and replaced it with a Memorandum of Understanding (“MOU”), which became effective on January 31, 2013. The MOU is based on the findings of the FDIC during their on-site examination of the Bank as of October 15, 2012.  The MOU is a step down in corrective action requirements as compared to the Consent Order. The MOU requires the Bank, among other things, to (i) prepare and submit annual, comprehensive budgets; (ii) maintain a minimum 8% Tier one leverage capital ratio and a minimum 10% Total Risk based capital ratio; (iii) take various specified actions to continue to reduce classified assets; (iv) obtain the written consent of its supervisory authorities prior to paying any cash dividends; and (v) submit periodic reports to the FDIC regarding various aspects of the foregoing actions.  The minimum capital ratios established by the FDIC in the MOU are higher than the minimum and well-capitalized ratios generally applicable to all banks.  However, the Bank will be deemed “well-capitalized” as long as it maintains its capital over the above noted required capital levels.  As of March 31, 2014, the Bank’s capital exceeded the levels required by the MOU and the Bank was in compliance with all of the MOU requirements. On April 21, 2014, the Company received notice that effective April 17, 2014, the MOU was terminated entirely.

On July 7, 2011, the Company entered into a Written Agreement (the “Written Agreement”) with the FRB. The Written Agreement was intended to enhance the ability of the Company to serve as a source of strength to the Bank. The Written Agreement’s requirements were in addition to those of the Bank’s Consent Order (which, as discussed above, has been terminated) and required the Company to take specific steps regarding, among other things, compliance with the supervisory actions of its regulators, appointment of directors and senior executive officers, indemnification and severance payments to executive officers and employees, payment of debt or dividends and quarterly reporting.

Effective May 3, 2013, as a result of the steps the Company took in complying with the Written Agreement and improvement in the overall condition of the Company, the FRB terminated the Written Agreement and replaced it with a Memorandum of Understanding (the “FRB MOU”), which became effective May 29, 2013. The FRB MOU is a step down in corrective action requirements as compared to the Written Agreement and reflects an improvement in the overall condition of the Company from “troubled” to “less than satisfactory”. The FRB MOU requires the Company, among other things, to (i) preserve its cash; (ii) obtain the written consent of its supervisory authorities prior to paying any dividends with respect to its common or preferred stock or trust preferred securities, purchasing or redeeming any shares of its stock or incurring, increasing or guaranteeing any debt; and (iii) submit quarterly reports to the FRB regarding the Company’s actions to comply with the requirements of the FRB MOU. As of March 31, 2014, the Company was in compliance with all of the FRB MOU requirements.

Note 9 - Securities Sold Under Agreements to Repurchase

The Company has previously entered into an agreement under which it sells U.S. Agency pass thru securities or better, subject to an obligation to repurchase the same or similar securities. Under this arrangement, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, this repurchase agreement is accounted for as a collateralized financing arrangement (i.e., secured borrowing) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Company's consolidated statements of condition, while the securities underlying the repurchase agreement remain in the respective investment securities asset accounts. There is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Company be in default. The Company had $15,000,000 in a repurchase agreement as of March 31, 2014 and December 31, 2013.

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

CRITICAL ACCOUNTING POLICIES

General -The financial condition and results of operations presented in the consolidated financial statements, the accompanying notes to the consolidated financial statements and this section are, to a large degree, dependent upon the Company’s accounting policies.  The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change.  Those accounting policies that are believed to be the most important to the portrayal and understanding of the Company’s financial condition and results of operations are discussed below.  These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain.  In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition or results of operations is a reasonable likelihood.

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Income Taxes – The calculation of the provision for federal income taxes is complex and requires the use of estimates and judgments.  There are two accruals for income taxes: 1) The income tax receivable (or payable) represents the estimated amount currently due from (or due to) the federal government and is reported (as appropriate) as a component of “other assets” or “other liabilities” in the consolidated balance sheet; 2) the deferred federal income tax asset or liability represents the estimated impact of temporary differences between how assets and liabilities are recognized under GAAP, and how such assets and liabilities are recognized under the federal tax code.  The effective tax rate is based in part on interpretation of the relevant current tax laws.  The Company has reviewed all transactions for appropriate tax treatment taking into consideration statutory, judicial and regulatory guidance in the context of our tax positions.  In addition, reliance is placed on various tax positions, recent tax audits and historical experience.

Deferred Tax Asset –In considering whether a valuation allowance on deferred tax assets is needed, management considers all available evidence, including the length of time tax net operating loss carryforwards are available, the existence of available reversing temporary differences, the ability to generate future taxable income and available tax planning strategies.. The Company anticipates that it will generate income before income taxes at a sufficient level in the future to fully utilize all of its net operating loss carry forwards and therefore does not believe a valuation allowance is required; however, there can be no assurance to this effect, because of the risks described in Part I, Item 1A in the Company’s Annual Report on Form 10-K for the 2013 calendar year, under the heading “Forward Looking and Cautionary Statements” in this report below and possibly other risks of which the Company is currently unaware.

Allowance for Loan Losses - The allowance for loan losses is based on management’s ongoing evaluation of the loan portfolio and reflects an amount that, based on management’s judgment, is adequate to absorb inherent probable losses in the existing portfolio.  Additions to the allowance for loan losses are provided by charges to earnings.  Loan losses are charged against the allowance when the ultimate uncollectability of the loan balance is determined.  Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a monthly basis by management.  The evaluation includes the periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and related impairment and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision.Due to improved bank credit quality metrics, net recoveries during the period, and a reduction in the loan portfolio size, the Bank determined that the loan loss allowance was overstated and reversed $700,000 of previous provisions during the first quarter of 2014. Management did not change the methodology used in determining the loan loss allowance.Management believes that the allowance for loan losses as of March 31, 2014 is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.  In addition, regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses.  Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and/or insignificant payment shortfalls generally are not classified as impaired.  Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, individual consumer and residential loans are not separately identified for impairment.

Other Real Estate Owned - The Company values OREO that is acquired in settlement of loans at the net realizable value at the time of foreclosure.  Management obtains updated appraisals on such properties as necessary, and reduces those values for estimated selling costs.  While management uses the best information available at the time of the preparation of the financial statements in valuing the OREO, it is possible that in future periods the Company will be required to recognize reductions in estimated fair values of these properties.

RESULTS OF OPERATIONS

Overview

The following discussion describes and analyzes our results of operations and financial condition for the quarter ended March 31, 2014 as compared to the quarter ended March 31, 2013. You are encouraged to read this discussion and analysis in conjunction with the financial statements and the related notes included in this report.  Throughout this discussion, amounts are rounded to the nearest thousand, except per share data or percentages.

Like many community banks, most of our income is derived from interest received on loans and investments.  The primary source of funds for making these loans and investments is deposits, most of which are interest-bearing.  Consequently, one of

26

the key measures of our success is net interest income, or the difference between the income on interest-earning assets, such as loans and investments, and the expense on interest-bearing liabilities, such as deposits and FHLB advances. Another key measure is the spread between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities.  

Of course, there are risks inherent in all loans, so an allowance for loan losses is maintained to absorb probable losses inherent in the loan portfolio.  This allowance is established and maintained by charging a provision for loan losses against current operating earnings.There was no provision for loan losses during the quarters ended March 31, 2014 or March 31, 2013. (See “Provision for Loan Losses” for a detailed discussion of this process.) Due to improved credit quality bank metrics, a net recovery of previously charged off amounts, and a reduction in the loan portfolio size, the Bank determined that the loan loss allowance was overstated and reversed $700,000 of previous provisions during the first quarter of 2014.

In addition to earning interest on loans and investments, income is also earned through fees and other charges to the Bank’s customers.  The various components of this noninterest income, as well as noninterest expense, are described in the following discussion.

The Company reported consolidated net income of $1,153,000 available to common shareholders, or $.46 per diluted common share, for the quarter ended March 31, 2014, compared to consolidated net income of $641,000 available to common shareholders, or $.26 per diluted common share, for the quarter ended March 31, 2013.  The results for the first three months of 2014 were positively impacted by the non-cash reversal of $700,000 in loan loss provision as well as $579,000 in securities gains.

Interest Income, Interest Expense and Net Interest Income

The Company’s total interest income for the quarter ended March 31, 2014 was $3,223,000, compared to $3,273,000 for the quarter ended March 31, 2013, a decrease of $50,000, or 1.5%. Interest and fees on loans is the largest component of total interest income and decreased $286,000, or 11.2% to $2,263,000 for the quarter ended March 31, 2014, compared to $2,549,000 for the quarter ended March 31, 2013.The decrease in interest and fees on loans was the result of reductions of $8,014,000 in average loan balances for the three months ended March 31, 2014, compared to the same period in 2013 and reductions in average yields on the Company’s loan portfolio from 5.29% for the quarter ended March 31, 2013 to 4.90% for the quarter ended March 31, 2014. The decrease in loan volume and loan yield is attributed to an overall market decrease in loan demand.

Interest income on investment securities increased by $238,000 in the three month period ended March 31, 2014, compared to the three month period ended March 31, 2013.  The increase was due to an increase in the tax equivalent investment yields from 2.20% to 2.80% as well as an  increase in the average balance of investments from $138,321,000 to $145,328,000 for the three month periods ended March 31, 2013 and March 31, 2014, respectively.

The Company’s total interest expense declined for the three months ended March 31, 2014 by $97,000 or 13.1% compared to the same period in 2013.  The largest component of the Company’s interest expense is interest expense on deposits.  Deposit interest expense declined due to decreases in average interest rates from 0.57% to 0.40% for the three month periods ended March 31, 2013 and March 31, 2014, respectively, and a reduction due to normal fluctuations of average interest bearing deposits of $5,186,000 during the three month period ended March 31, 2014, compared to the three month period ended March 31, 2013.

Interest on long term borrowings increased $7,000, or 1.7% for the three month period ended March 31, 2014 compared to the same period in 2013.  The increase in long term interest expense for the three months ended March 31, 2014 compared to the same period in 2013 was the result of a decrease in average yields on long term borrowings combined with an increase in average long term borrowings outstanding. Average long term borrowings outstanding increased by $2,806,000 for the quarter ended March 31, 2014 compared to the same period in 2013. Average rates on long term borrowings decreased to 2.49% from 2.55% for the three months ended March 31, 2014 compared to the same period in 2013. The long term borrowing rate decrease for the three month period ended March 31, 2014 compared to the three month period ended March 31, 2013 was the result of market repricing upon the maturity of FHLB borrowings.

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 spread earned on lending and investing activities and is the primary contributor to the Company’s earnings.  Net interest income before provision for loan losses increased $47,000, or 1.9%, for the quarter ended March 31, 2014, compared to the same period in 2013.

The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income and economic value of equity.  The principal monitoring technique employed by the Company is the use of an interest rate risk management model which measures the

27

effect that movements in interest rates will have on net interest income and the present value of equity. Scenarios are prepared to analyze market interest rate changes from a 400 basis point decline to a 400 basis point increase. The Company’s interest rate risk model currently projects an increase in net interest income in all rising rate scenarios. The Company’s present value of equity model shows a decline in the net present value of equity in all rising rate scenarios, primarily caused by market declines in investments. Interest rate sensitivity can be managed by repricing assets or liabilities, 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 the same time interval helps to hedge the risk and minimize the impact of rising or falling interest rates on net interest income.

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 Board of Directors reviews and approves the appropriate level for the allowance for loan losses based upon management’s recommendations and the results of the internal monitoring and reporting system.  Management also monitors historical statistical data for both the Bank and other financial institutions.  The adequacy of the allowance for loan losses and the effectiveness of the monitoring and analysis system are also reviewed by the Bank’s regulators and the Company’s internal auditor.

The Bank’s allowance for loan losses is based upon judgments and assumptions of risk elements in the portfolio, economic conditions and other factors affecting borrowers.  The process includes identification and analysis of loss inherent 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 delinquencies, charge-offs and general conditions in the Company’s market area.

There was no provision for loan losses during the quarters ended March 31, 2014 or March 31, 2013. The amount of provision is based on the results of the loan loss model. Due to improved bank credit quality metrics (historical loss calculations in particular), net recovery of previously charged-off amounts, and a reduction in our loan portfolio size, the Bank determined that the loan loss allowance was overstated and made a non-cash reversal of $700,000 of previous provisions. Non-performing assets have decreased from $7,712,000 for the quarter ended March 31, 2013 to $3,725,000 for the quarter ended March 31, 2014.  Also, the Bank experienced net recoveries during the three month period ended March 31, 2014 of $382,000. See the discussion below under “Allowance for Loan Losses.”  

Noninterest Income

Noninterest income increased $343,000 for the quarter ended March 31, 2014 compared to the quarter ended March 31, 2013.  The increase was primarily due to an increase of $459,000 in securities gains.

Noninterest Expenses

Total noninterest expenses decreased $92,000, or 3.9%, for the quarter ended March 31, 2014, to $2,293,000 compared to $2,385,000 for the quarter ended March 31, 2013.  The primary cause of decreased noninterest expense for the three months ended March 31, 2014 related to a decrease in OREO and foreclosure expenses. Salaries and employee benefits, the largest component of noninterest expenses, increased $21,000 for the three months ended March 31, 2014 compared to the same period in 2013.  This increase was due to normal wage increases. Professional expenses have declined as the result of continued budget control. OREO and foreclosure expenses decreased $175,000 primarily as a result of decreased valuation adjustments on properties held for sale. The three months ended March 31, 2013 had $191,000 in OREO valuation adjustments on properties compared to $21,000 in the three months ended March 31, 2014. FDIC premiums have declined $16,000 due to the Bank’s decrease in asset size.

Income Tax Expense

The Company has a net operating loss carry-forward for federal tax purposes for the three months ended March 31, 2014 and March 31, 2013. Also, the Bank had state tax expense in the three months ended March 31, 2014 and March 31, 2013 due to net income at the Bank level. See “Critical Accounting Policies – Income Taxes” and “Critical Accounting Policies – Deferred Tax Asset” above. In evaluating whether the full benefit of the net deferred tax asset will be realized, management considered both positive and negative evidence including recent earnings trends, projected earnings and asset quality.  As of March 31, 2014, management concluded that the positive evidence outweighed the negative evidence in determining realization of any deferred tax temporary differences. The Company is three years cumulatively profitable and has been profitable for the last ten quarters. The Bank is deemed to be “well capitalized” with Tier one leverage and Total risk based capital ratios of 9.69% and 16.76%, respectively. The Company will continue to monitor deferred tax assets closely to evaluate future realization of the full benefit of the net deferred tax asset and the potential need to establish a valuation allowance.

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BALANCE SHEET REVIEW

Loans

The Company’s outstanding loans represented the largest component of earning assets at 54.0% of total earning assets as of March 31, 2014.  The Company’s gross loans totaled $184,190,000 as of March 31, 2014, a decline of $2,969,000, or 1.6%, from gross loans of $187,159,000 as of December 31, 2013. The decrease in loan volume is attributed to an overall market decrease in loan demand.Adjustable rate loans totaled 48.5% of the Company’s loan portfolio as of March 31, 2014, which allows the Company to be in a favorable position as interest rates rise.  The Company’s loan portfolio consists primarily of real estate mortgage loans, commercial loans and consumer loans with concentrations in commercial real estate, including construction and land development loans.  Substantially all of these loans are to borrowers located in South Carolina, with the majority located in the Company’s local market area.

Although our asset and credit quality trends continue to improve, management continues to work aggressively to identify and quantify potential losses and execute plans to reduce problem assets.  The Company uses internal and external loan review analysis performed by loan officers, credit administration and an external loan review firm that require detailed, written summaries of the loans reviewed to determine risk rating, accrual status and collateral valuation.

Allowance for Loan Losses

The Company’s allowance for loan losses at March 31, 2014 was $2,942,000, or 1.60% of gross loans outstanding, compared to $3,260,000 or 1.74% of gross loans outstanding at December 31, 2013.  The net decrease of 0.14% in the allowance ratio was a result of a reduced loan portfolio size and improved loan credit quality metrics, in particular, historical loan loss experience and net recoveries during 2014 that warranted a non-cash provision reversal of $700,000 during the first quarter of 2014. The allowance at March 31, 2014 included an allocation of $90,000 related to specifically identified impaired loans compared to an allocation of $113,000 related to specifically identified impaired loans at December 31, 2013.  

Internal reviews and evaluations of the Company’s loan portfolio for the purpose of identifying potential problem loans, external reviews by federal and state banking examiners, management’s consideration of current economic conditions, historical loan losses and other relevant risk factors are used in evaluating the adequacy of the allowance for loan losses.  The level of loan loss reserves is monitored on an on-going basis.  The evaluation is inherently subjective as it requires estimates that are susceptible to significant change.  Despite the Company’s efforts to provide accurate estimates, actual losses will undoubtedly vary from the estimates.  Also, there is a possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time.  If delinquencies and defaults increase, additional loan loss provisions may be required which would adversely affect the Company’s results of operations and financial condition.

At March 31, 2014, the Company had $3,725,000 in non-performing assets, comprised of non-accruing loans of $1,486,000 and $2,239,000 in OREO.  This compares to $4,827,000 in non-performing assets, comprised of $2,552,000 in non-accruing loans and $2,275,000 in OREO at December 31, 2013.  All of the non-performing loans were real estate loans at March 31, 2014.  All nonperforming real estate loans have annual appraisals to support the loan balances.

The Company had a net recovery of charge-offs of $382,000 and $69,000 for the first three months of 2014 and 2013, respectively.The allowance for loan losses as a percentage of non-performing loans was 198.0% and 127.7% as of March 31, 2014 and December 31, 2013, respectively.

Troubled debt restructured loans (“TDRs”), which are included in the impaired loan totals, were $2,850,000 and $2,937,000 at March 31, 2014 and December 31, 2013, respectively. TDRs on non-accrual were $1,001,000 and $1,635,000 at March 31, 2014 and December 31, 2013, respectively. This decrease in TDRs was a result of principal reductions through payments, charge-offs and transfers to OREO.         

The Company’s potential problem loans, which are not included in non-performing or impaired loans, amounted to $12,461,000, or 6.8%  of total loans outstanding at March 31, 2014 compared to $12,025,000, or 6.4% of totals loans outstanding at December 31, 2013.   Potential problem loans represent those loans with a well-defined weakness and those loans where information about possible credit problems of borrowers or the performance of construction or development projects has caused management to have concerns about the borrower’s ability to comply with present repayment terms.

Securities

The Company’s investment portfolio is an important contributor to the earnings of the Company.  The Company strives to maintain a portfolio that provides necessary liquidity for the Company while maximizing income consistent with the ability of the Company’s capital structure to accept nominal amounts of investment risk.  During years when loan demand has not been

29

strong, the Company has utilized the investment portfolio as a means for investing “excess” funds for higher yields, instead of accepting low overnight investment rates.  The investment portfolio also provides securities that can be pledged against borrowings as a source of funding for loans.  However, it is management’s intent to maintain a significant percentage of the Company’s earning assets in the loan portfolio as loan demand allows.

As of March 31, 2014, investment securities totaled $144,054,000 or 42.9% of total earning assets.  Investment securities as of March 31, 2014 increased $1,102,000, or 0.8%, from $142,952,000 as of December 31, 2013, due to the purchase of $4,998,000 in municipal securities and $14,249,000 in U.S. government and other agency obligations, offset by the call or maturity of two securities totaling $1,250,000, the sale, net of gains and losses, of thirteen securities totaling $17,395,000, cash inflows from principal payments on mortgage backed securities of $745,000, premium amortization on securities of $320,000, and a decrease in unrealized losses of $1,565,000.

Cash and Cash Equivalents

The Company’s cash and cash equivalents were $12,558,000 at March 31, 2014, compared to $5,929,000 at December 31, 2013, an increase of $6,629,000.  This is a normal fluctuation. Balances due from bank accounts vary depending on the settlement of cash letters and other transactions.

Deposits

The Company receives its primary source of funding for loans and investments from its deposit accounts. The Company takes into consideration liquidity needs, direction and level of interest rates and market conditions when pricing deposits.  At March 31, 2014 and December 31, 2013, interest bearing deposits comprised 84.9% and 84.8% of total deposits, respectively. Total deposits increased to $266,325,000 as of March 31, 2014 compared to $253,388,000 as of December 31, 2013.  An increase of $1,711,000 in demand deposits and $14,170,000 in savings and negotiable order of withdrawal accounts was offset by a decrease of $2,944,000 in retail certificates of deposit. Total core deposits, defined as all deposits excluding time deposits of $100,000 or more and brokered deposits have increased by $14,591,000 in the three months ended March 31, 2014. The increase in core deposits as well as total deposits is seasonal due to several public agency accounts that increase due to tax revenue in the first quarter and then subsequently decline in the second through the fourth quarters.

Borrowings  

The Company’s borrowings are comprised of federal funds purchased, repurchase agreements, long-term advances from the FHLB of Atlanta, and junior subordinated debentures.  At March 31, 2014, total borrowings were $68,091,000, compared with $74,341,000 as of December 31, 2013.  At March 31, 2014 and December 31, 2013, long term repurchase agreements were $15,000,000.  Notes payable to the FHLB of Atlanta totaled $41,750,000 and $48,000,000 as of March 31, 2014 and December 31, 2013, respectively.  The weighted average rate of interest for the Company’s portfolio of FHLB of Atlanta advances was 2.17% and 1.91% as of March 31, 2014 and December 31, 2013, respectively. The weighted average remaining maturity for FHLB of Atlanta advances was 1.23 years as of March 31, 2014 and 1.26 years as of December 31, 2013.

In October 2004 and December 2006, the Company issued $6,186,000 and $5,155,000 of junior subordinated debentures to its wholly-owned capital trusts, Greer Capital Trust I and Greer Capital Trust II (collectively, the “Trusts”), respectively, to fully and unconditionally guarantee the trust preferred securities issued by the capital trusts.

The junior subordinated debentures issued in October 2004 mature in October 2034.  Interest payments are due quarterly to Greer Capital Trust I at the three-month LIBOR plus 220 basis points. 

The junior subordinated debentures issued in December 2006 mature in December 2036.  Interest payments are due quarterly to Greer Capital Trust II at the three-month LIBOR plus 173 basis points.

On January 3, 2011, the Company elected to defer interest payments on the two junior subordinated debentures beginning with the January 2011 payments.  On February 14, 2014, after receiving regulatory approval, the Company gave notice to the trustees that it was ending its deferral of interest and paid all $970,422 of deferred interest amounts due.

In accordance with relevant accounting guidance, the Trusts are not consolidated with the Company.  Accordingly, the Company does not report the securities issued by the Trusts as liabilities, and instead reports as liabilities the junior subordinated debentures issued by the Company and held by each Trust.  However, the Company has fully and unconditionally guaranteed the repayment of the variable rate trust preferred securities.  These trust preferred securities currently qualify as Tier 1 capital for the regulatory capital requirements of the Company.

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Off-Balance Sheet Financial Instruments

The Company has certain off-balance-sheet instruments in the form of contractual commitments to extend credit to customers and standby letters of credit. The commitments to extend credit are legally binding and have set expiration dates and are at predetermined interest rates. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party, which are issued primarily to support public and private borrowing arrangements. The underwriting criteria for these commitments are the same as for loans in the loan portfolio. Collateral is also obtained, if necessary, based on the credit evaluation of each borrower. Although many of the commitments will expire unused, management believes there are adequate resources to fund these commitments. Contractual commitments to extend credit to customers and standby letters of credit are commonly needed by commercial banking customers and are offered by the Bank to serve its commercial customer base. At March 31, 2014 and December 31, 2013, the Company’s commitments to extend credit totaled $34,655,000 and $31,324,000, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity - Bank

Liquidity represents the ability of a company to quickly convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities.  Liquidity management involves monitoring sources and uses of funds to meet day-to-day cash flow requirements while maximizing profits.  Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control.  For example, the timing of maturities in our investment portfolio is fairly predictable and subject to a high degree of control at the time investment decisions are made.  However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control.  Liquidity is also a measure of the Bank’s ability to provide funds to meet the needs of depositors and borrowers.  The Bank’s primary goal is to meet these needs at all times.  In addition to these basic cash needs, the Bank must meet liquidity requirements created by daily operations and regulatory requirements.  Liquidity requirements of the Bank are met primarily through two categories of funding: core deposits and borrowings.  In the first three months of 2014, liquidity needs were met through maintaining core deposits and borrowings.

Core deposits, which are generally the result of stable consumer and commercial banking relationships, are considered to be a relatively stable component of the Bank’s mix of liabilities.  At March 31, 2014, core deposits totaled $220,447,000, or 82.7%, of the Bank’s total deposits, compared to $205,856,000, or 81.2%, of the Bank’s total deposits as of December 31, 2013.

Unsecured lines of credit with correspondent banks are also sources of liquidity.  At March 31, 2014, the Bank had unsecured federal funds lines of credit with correspondent banks totaling $19,500,000.  Federal funds lines of $19,500,000 and $16,000,000 were available for use as of March 31, 2014 and December 31, 2013, respectively. The Bank also has a collateralized borrowing capacity of 25% of total assets from the FHLB.  Outstanding FHLB borrowings totaled $41,750,000 and $48,000,000 at March 31, 2014 and December 31, 2013, respectively.  Unused available FHLB borrowings totaled $47,720,000 and $43,020,000 at March 31, 2014 and December 31, 2013, respectively, and were subject to collateral availability.  The Bank has additional borrowing capacity through the Federal Reserve Bank “discount window” and has pledged a portion of its consumer and commercial loan portfolio as collateral for $14,911,000 in unused available credit as of March 31, 2014.  

The Bank’s liquidity ratio (cash, federal funds and unpledged securities available for sale divided by total deposits) has decreased from 35.6% to 33.2% from December 31, 2013 to March 31, 2014 primarily as a result of the Bank’s increased pledging of securities for certain deposits.

In addition to the primary funding sources discussed above, secondary sources of liquidity include sales of investment securities which are not held for pledging purposes.

Management believes that the Bank’s available borrowing capacity and efforts to grow deposits are adequate to provide the necessary funding for its banking operations for the remainder of 2014 and for the foreseeable future thereafter.  However, management is prepared to take other actions, including potential asset sales, if necessary to maintain appropriate liquidity.

Liquidity - Parent Holding Company

Greer Bancshares Incorporated, the Bank’s parent holding company (the “Company”) generally has liquidity needs to pay limited operating expenses and dividends. These liquidity needs include interest on junior subordinated debt and dividends on preferred stock issued as a part of the Troubled Asset Relief Program.  Any cash dividends paid to shareholders, as well as the

31

Company’s other liquidity needs, are typically funded by dividends from the Bank and rental income of land leased to the Bank. The Company had $200,000 in cash as of March 31, 2014 to meet short term liquidity needs. This amount is considered adequate to meet the short term liquidity needs of the Company.

In October 2004 and December 2006, the Company issued two different series of “Trust Preferred” securities to raise capital.  In these offerings, the Company issued $6,186,000 and $5,155,000, respectively, of junior subordinated debentures to its wholly-owned capital Trusts, Greer Capital Trust I and Greer Capital Trust II (collectively, the “Trusts”), respectively, and fully and unconditionally guaranteed corresponding principal amounts of the trust preferred securities issued by the Trusts. On January 3, 2011, the Company elected to defer interest payments on the two junior subordinated debentures beginning with the January 2011 payments.  On February 14, 2014, after receiving regulatory approval, the Company gave notice to the trustees that it was ending its deferral of interest and paid $970,422, which included both deferred interest and interest due through the April 2014 due dates. The funds for this payment were provided by dividends from the Bank.

On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company was suspending the payment of regular quarterly cash dividends on the TARP cumulative perpetual preferred stock, beginning with the February 15, 2011 dividend.  The decision to elect the deferral of interest payments and to suspend the dividend payments was made in consultation with the FRB. The terms of the TARP cumulative perpetual preferred stock prohibited the Company from paying any dividends on its common stock while payments on the TARP Preferred were in arrears. On March 4, 2014, after receiving regulatory approval, the Company resumed the payment of regular quarterly cash dividends on its preferred stock issued to the U.S. Treasury and paid all $1,928,247 of deferred dividend amounts due. The funds for this payment were provided by dividends from the Bank.

On May 3, 2012, the U.S. Treasury announced additional details on its strategy for winding down the remaining bank and bank holding company investments made through TARP, and one such strategy is utilizing an auction to sell pools of several recipient companies’ TARP securities to third parties.  The U.S. Treasury had indicated that it expects a single winning bidder to purchase all of the TARP securities included in a pool.  By letter dated as of June 19, 2012, the U.S. Treasury informed the Company that the U.S. Treasury was considering including the Company’s TARP preferred stock as part of a series of pooled auctions. The U.S.  Treasury had also indicated that a TARP recipient may, with regulatory approval, opt-out of the pool auction process and either make its own bid to repurchase all of its remaining TARP securities or designate a single outside investor (or single group of investors) to make such a bid.  TARP recipients that received an extension of the original August 6, 2012 deadline (as the Company did) had until October 9, 2012 to submit a bid. The Company did not submit a bid at that time. By letter dated as of January 18, 2013, the U.S. Treasury informed the Company that it was extending the opt-out process and that the Company had until April 30, 2013 to submit a bid. The Company submitted its own bid to repurchase all its outstanding TARP securities on April 18, 2013, but subsequently withdrew its bid. On March 19, 2014, after receiving regulatory approval, the Company repurchased $3,150,000 of principal of the TARP preferred stock. As of March 31, 2014 the Company had not received any additional information from the U.S. Treasury with respect to the status of it divesting the remaining $7,343,000 of the TARP preferred stock.

Memorandum of Understanding - Bank

On March 1, 2011, the Bank entered into the Consent Order with the FDIC and the S.C. Bank Board. The Consent Order required the Bank to take specific steps regarding, among other things, its management, capital levels, asset quality, lending practices, liquidity and profitability in order to improve the safety and soundness of the Bank’s operations, each as described and set forth in the Consent Order.

Effective March 20, 2013, the FDIC and S.C. Bank Board terminated the Consent Order and replaced it with the MOU, which became effective on January 31, 2013. The MOU is based on the findings of the FDIC during their on-site examination of the Bank as of October 15, 2012.  The MOU is a step down in corrective action requirements as compared to the Consent Order. The MOU requires the Bank, among other things, to (i) prepare and submit annual, comprehensive budgets; (ii) maintain a minimum 8% Tier one leverage capital ratio and a minimum 10% Total Risk based capital ratio; (iii) take various specified actions to continue to reduce classified assets; (iv) obtain the written consent of its supervisory authorities prior to paying any cash dividends; and (v) submit periodic reports to the FDIC regarding various aspects of the foregoing actions.  The minimum capital ratios established by the FDIC in the MOU are higher than the minimum and well-capitalized ratios generally applicable to all banks.  However, the Bank will be deemed “well-capitalized” as long as it maintains its capital over the above noted required capital levels.  As of March 31, 2014, the Bank’s Tier One Capital Ratio was 9.69% and Total Risk Based Capital Ratio was 16.76%, exceeding the levels required by the MOU and the Bank was in compliance with all of the MOU requirements. On April 21, 2014, the Company received notice that effective April 17, 2014, the MOU was terminated entirely.

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Memorandum of Understanding with Federal Reserve – Company

On July 7, 2011, the Company entered into the Written Agreement with the FRB. The Written Agreement was intended to enhance the ability of the Company to serve as a source of strength to the Bank. The Written Agreement’s requirements were in addition to those of the Bank’s Consent Order (which, as discussed above, has been terminated) and required the Company to take specific steps regarding, among other things, compliance with the supervisory actions of its regulators, appointment of directors and senior executive officers, indemnification and severance payments to executive officers and employees, payment of debt or dividends and quarterly reporting.

Effective May 3, 2013, as a result of the steps the Company took in complying with the Written Agreement and improvement in the overall condition of the Company, the FRB terminated the Written Agreement and replaced it with the FRB MOU, which became effective May 29, 2013, after approval by the Company’s Board of Directors and upon final execution by the FRB. The FRB MOU is a step down in corrective action requirements as compared to the Written Agreement and reflects an improvement in the overall condition of the Company from “troubled” to “less than satisfactory”. The FRB MOU requires the Company, among other things, to (i) preserve its cash; (ii) obtain the written consent of its supervisory authorities prior to paying any dividends with respect to its common or preferred stock or trust preferred securities, purchasing or redeeming any shares of its stock or incurring, increasing or guaranteeing any debt; and (iii) submit quarterly reports to the FRB regarding the Company’s actions to comply with the requirements of the FRB MOU. As of March 31, 2014 the Company was in compliance with all of the FRB MOU requirements.

Dividends - Bank

Under South Carolina banking law, the Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the S.C. Bank Board provided that the Bank received a composite rating of one or two at the last federal or state regulatory examination.  Otherwise, the Bank must obtain approval from the S.C. Bank Board prior to the payment of any cash dividends.  In addition, under the FDIC Improvement Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized.  

The Bank’s ability to pay dividends is also restricted by the MOU entered into by the Bank with the FDIC and the S.C. Bank Board on January 31, 2013. The MOU is discussed under “Memorandum of Understanding - Bank” above. Pursuant to the MOU, the Bank may not pay any dividends to the Company without the prior written approval of the FDIC and the S.C. Bank Board.

Dividends – Company

The Company’s ability to pay dividends and interest on trust preferred subordinated debt is restricted by the FRB MOU discussed under “Memorandum of Understanding with the Federal Reserve – Company” above. Pursuant to the FRB MOU, the Company may not pay any dividends or interest on trust preferred subordinated debt without the prior written approval of the FRB.

On February 14, 2014, after receiving regulatory approval, the Company gave notice to the trustees of the trust preferred subordinated debt that it was ending its deferral of interest and paid $970,422, which included both deferred interest and interest due through the April 2014 due dates. The funds for this payment were provided by dividends from the Bank.  In addition, on March 4, 2014, after receiving regulatory approval, the Company resumed the payment of regular quarterly cash dividends on its preferred stock issued to the U.S. Treasury and paid all $1,928,247 of deferred dividend amounts due. The funds for this payment were provided by dividends from the Bank.

Regulatory Capital – Bank and Company

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%.  Under the risk-based standard, capital is classified into two tiers.  Tier 1 capital of the Company consists of equity minus unrealized gains plus unrealized losses on securities available for sale and less a disallowed portion of our deferred tax assets.  In addition to Tier 1 capital requirements, Tier 2 capital consists of the allowance for loan losses subject to certain limitations.  A bank holding company’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital.  The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.  The Company and the Bank are also required to maintain capital at a minimum level based on average assets, which is known as the leverage ratio.  Only the strongest bank holding companies and banks are allowed to maintain capital at the minimum requirement, which is 4%.  All others are subject to maintaining ratios 100 to 200 basis points above the minimum requirement.

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The Bank exceeded minimum regulatory capital and MOU requirements at March 31, 2014 as set forth in the following table:

(Dollars in thousands)

					For Capital Adequacy Purposes				To meet the requirements of the MOU
Bank:		Actual				Minimum				Minimum
		Amount	Ratio			Amount	Ratio			Amount	Ratio
As of March 31, 2014
Total risk-based capital
(to risk-weighted assets)	$	37,455	16.76	%	$	17,881	8.0	%	$	22,351	10.0	%
Tier 1 capital
(to risk-weighted assets)	$	34,660	15.51	%	$	8,940	4.0	%		N/A	N/A
Tier 1 capital (leverage)
(to average assets)	$	34,660	9.69	%	$	14,312	4.0	%	$	28,623	8.0	%
As of December 31, 2013
Total risk-based capital
(to risk-weighted assets)	$	41,446	17.61	%	$	18,831	8.0	%	$	23,539	10.0	%
Tier 1 capital
(to risk-weighted assets)	$	38,500	16.36	%	$	9.416	4.0	%		N/A	N/A
Tier 1 capital (leverage)
(to average assets)	$	38,500	10.78	%	$	14.418	4.0	%	$	28,837	8.0	%

The Company is also subject to certain capital requirements as noted above.  At March 31, 2014, the Company’s Tier 1 risk-based capital ratio, Tier 1 capital (leverage) ratio and the total risk-based capital ratio were 14.87%, 9.31% and 17.18%, respectively.  At December 31, 2013, the Company’s Tier 1 risk-based capital ratio, Tier 1 capital ratio and the total risk-based capital ratio were 15.72%, 10.28% and 17.66%, respectively.

Board Involvement

The Company’s Board of Directors (the “Board”) continues to be very active in providing oversight and supervision to the management of the Bank.  In addition to the regular monthly Board meetings, the Board committees are active with the Corporate Governance and Loan Committee meeting monthly, Audit Committee meeting quarterly, and Human Resources meeting as needed but usually quarterly.   

Forward-looking and Cautionary Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Such statements relate to, among other things, 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. Words such as  “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may,” “appear,” and “intend,” as well as other similar words and expressions, are intended to identify forward-looking statements.  Actual results may differ materially from the results discussed in the forward-looking statements.  The Company’s operating performance is subject to various risks and uncertainties including, without limitation:

·

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

·

reduced earnings due to higher credit losses owing to economic factors, including declining home values, increasing interest rates, increasing unemployment, or changes in payment behavior or other causes;

·

the concentration of our portfolio in real estate based loans and the weakness in the commercial real estate market;

·

increased funding costs due to market illiquidity, increased competition for funding or other regulatory requirements;

·

market risk and inflation;

·

level, composition and re-pricing characteristics of our securities portfolios;

·

availability of wholesale funding;

·

adequacy of capital and future capital needs;

·

our reliance on secondary sources of liquidity such as FHLB advances, federal funds lines of credit from correspondent banks and brokered time deposits, to meet our liquidity needs;

·

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

·

changes in political conditions or the legislative or regulatory environment, including recently enacted and proposed legislation;

34

·

adequacy of the level of our allowance for loan losses;

·

the rate of delinquencies and amounts of charge-offs;

·

the rates of loan growth;

·

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

·

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

·

changes occurring in business conditions and inflation;

·

changes in technology;

·

changes in monetary and tax policies;

·

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

·

changes in the securities markets;

·

ability to generate future taxable income to realize deferred tax assets;

·

ability to have sufficient liquidity at the parent holding company level to pay preferred stock dividends and interest expense on junior subordinated debt; and

·

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

For a description of risk factors which may cause actual results to differ materially from such forward-looking statements, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, and other reports from time to time filed with or furnished to the Securities and Exchange Commission.  Investors are cautioned not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made.  The Company undertakes no obligation to update any forward-looking statements made in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out, under the supervision of 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 Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the current disclosure controls and procedures are effective as of March 31, 2014.   There have been no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

PART II-OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is involved in various 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 1A.  Risk Factors

Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-looking and Cautionary Statements,” in Part I-Item 2 of this Form 10-Q.  More detailed information concerning our risk factors may be found in Part I-Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “Form 10-K”).

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

As disclosed elsewhere in this report, on March 19, 2014, after receiving regulatory approval, the Company repurchased $3,150,000 in principal amount of the TARP preferred stock.  

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Volume) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 1, 2014 to January 31, 2014	-	-	-	-
February 1, 2014 to February  28, 2014	-	-	-	-
March 1, 2014 to March 31, 2014	3,150	$1,000	-	-
Total	3,150	$1,000	-	-

Item 3.

 Defaults Upon Senior Securities

On February 14, 2014, after receiving regulatory approval, the Company gave notice to the trustees of the trust preferred subordinated debt that it was ending its deferral of interest and paid $970,422, which included both deferred interest and interest due through the April 2014 due dates. The funds for this payment were provided by dividends from the Bank.  In addition, on March 4, 2014, after receiving regulatory approval, the Company resumed the payment of regular quarterly cash dividends on its preferred stock issued to the U.S. Treasury and paid all $1,928,247 of deferred dividend amounts due. The funds for this payment were provided by dividends from the Bank.  As a result of the aforementioned payments, there were no defaults upon senior securities as of March 31, 2014.

Item 5.

Other Information

None

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Item 6	Exhibits
31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC §1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Schema
101.CAL**	XBRL Taxonomy Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Label Linkbase Document
101.PRE**	XBRL Taxonomy Presentation Linkbase Document

*	Filed herewith.
**	Pursuant to Rule 406T of Regulation S-T, exhibits marked with two asterisks (**) are interactive data files and are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

37

SIGNATURES

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

	GREER BANCSHARES INCORPORATED
Dated: May 14, 2014	/s/ George W. Burdette
	George W. Burdette
	President and Chief Executive Officer
Dated: May 14, 2014	/s/ J. Richard Medlock, Jr.
	J. Richard Medlock, Jr.
	Chief Financial Officer

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INDEX TO EXHIBITS

31.1*	Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC § 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document
101.SCH**	XBRL Taxonomy Schema
101.CAL**	XBRL Taxonomy Calculation Linkbase Document
101.LAB**	XBRL Taxonomy Label Linkbase Document
101.PRE**	XBRL Taxonomy Presentation Linkbase Document

*	Filed herewith.
**	Pursuant to Rule 406T of Regulation S-T, exhibits marked with two asterisks (**) are interactive data files and are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability

39