Greer Bancshares (GRBS) 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

¨ 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 incorporation or organization)	(I.R.S. Employer 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  ¨    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 11/10/09
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 September 30, 2009 and December 31, 2008		3
Consolidated Statements of Income (Loss) for the Three and Nine months Ended September  30, 2009 and 2008		4
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine months Ended September 30, 2009 and 2008		5
Consolidated Statement of Changes in Stockholders’ Equity for the Nine months Ended September 30, 2009		6
Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2009 and 2008		7
Notes to Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
Item 4T.	Controls and Procedures	25
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		27
Index to Exhibits		28

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GREER BANCSHARES INCORPORATED

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

	September 30, 2009		December 31, 2008*
Assets
Cash and due from banks	$	7,540	$	5,808
Interest-bearing deposits in banks		539		371
Federal funds sold		—		121
Cash and cash equivalents		8,079		6,300
Investment securities:
Held to maturity (fair value of approximately $16,165)		—		15,977
Available for sale		128,165		79,874
Loans, net of allowance for loan losses of $6,114 and $5,127, respectively		302,619		306,287
Premises and equipment, net		6,021		6,295
Accrued interest receivable		1,932		2,094
Restricted stock		5,937		5,690
Other real estate owned		7,108		1,843
Other assets		13,360		12,772
Total assets	$	473,221	$	437,132
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	33,154	$	28,429
Interest bearing		256,841		253,696
Total deposits		289,995		282,125
Short term borrowings		14,471		8,000
Long term borrowings		133,841		125,341
Other liabilities		5,238		3,840
Total Liabilities		443,545		419,306
Stockholders’ Equity:
Preferred stock—no par value 200,000 shares authorized;
Preferred stock, Series 2009-SP, no par value, 9,993 shares issued and outstanding at September 30, 2009 (Note 6)		9,423		—
Preferred stock, Series 2009-WP, no par value, 500 shares issued and outstanding at September 30, 2009 (Note 6)		584		—
Common stock—par value $5 per share, 10,000,000 shares authorized; 2,486,692 shares issued and outstanding at September 30, 2009 and December 31, 2008		12,433		12,433
Additional paid in capital		3,512		3,415
Retained earnings		2,002		1,827
Accumulated other comprehensive income		1,722		151
Total Stockholders’ Equity		29,676		17,826
Total Liabilities and Stockholders’ Equity	$	473,221	$	437,132

* 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 (Loss)

(Unaudited)

(Dollars in thousands, except per share data)

	For Three Months Ended						For Nine Months Ended
	09/30/09			09/30/08			09/30/09			09/30/08
Interest Income:
Loans (including fees)	$	4,278		$	4,682		$	12,434		$	13,911
Investment securities:
Taxable		1,088			1,210			3,225			3,485
Exempt from federal income tax		249			222			724			695
Federal funds sold		2			4			3			36
Other		4			4			7			13
Total interest income		5,621			6,122			16,393			18,140
Interest Expense:
Interest on deposit accounts		1,434			1,854			4,583			5,853
Interest on short term borrowings		8			21			30			65
Interest on long term borrowings		1,172			1,264			3,485			3,725
Total interest expense		2,614			3,139			8,098			9,643
Net interest income		3,007			2,983			8,295			8,497
Provision for loan losses		475			928			2,570			1,469
Net interest income after provision for loan losses		2,532			2,055			5,725			7,028
Non-interest income:
Customer service fees		221			219			669			649
Gain on sale of investment securities		476			—			1,083			200
Impairment loss on restricted stock		—			—			(311	)		—
Impairment loss on investment securities		(93	)		(7,935	)		(93	)		(7,935	)
Other noninterest income		381			433			1,238			1,580
Total noninterest income		985			(7,283	)		2,586			(5,506	)
Non-interest expenses:
Salaries and employee benefits		1,452			1,250			4,298			4,387
Occupancy and equipment		212			245			622			695
Postage and supplies		63			76			192			236
Marketing expenses		9			105			99			301
Directors fees		49			66			154			199
Professional fees		104			95			295			294
FDIC deposit insurance assessments		294			54			701			157
Other noninterest expenses		481			345			1,236			1,363
Total noninterest expenses		2,664			2,236			7,597			7,632
Income (loss) before income taxes		853			(7,464	)		714			(6,110	)
Provision (benefit) for income taxes:		223			(271	)		116			7
Net income (loss)		630			(7,193	)		598			(6,117	)
Preferred stock dividends and net discount accretion		(158	)		—			(423	)		—
Net income (loss) available to common shareholders	$	472		$	(7,193	)	$	175		$	(6,117	)
Basic net income (loss) per share of common stock	$	.19		$	(2.89	)	$	.07		$	(2.46	)
Diluted net income (loss) per share of common stock	$	.19		$	(2.89	)	$	.07		$	(2.46	)

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

4

GREER BANCSHARES INCORPORATED

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Dollars in thousands)

	For Three Months Ended						For Nine Months Ended
	09/30/09			09/30/08			09/30/09			09/30/08
Net Income (Loss)	$	630		$	(7,193	)	$	598		$	(6,117	)
Other comprehensive income (loss), net of tax:
Unrealized holding gains on held to maturity investment securities transferred to available for sale		166			—			166			—
Unrealized holding gains (losses) on available for sale investment securities		1,471			(7,511	)		2,019			(8,679	)
Less reclassification adjustments for (gains) losses included in net income (loss)		(238	)		7,935			(614	)		7,810
Other comprehensive income (loss)		1,399			424			1,571			(869	)
Comprehensive Income (Loss)	$	2,029		$	(6,769	)	$	2,169		$	(6,986	)

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

5

GREER BANCSHARES INCORPORATED

Consolidated Statement of Changes in Stockholders’ Equity

For the Nine months Ended September 30, 2009

(Unaudited)

(Dollars in thousands, except per share data)

	Preferred stock						Common Stock		Additional Paid In capital		Retained Earnings			Accumulated Other Comp. Income		Total Stockholders’ Equity
	Series 2009-SP			Series 2009-WP
Balances at 12/31/2008	$	—		$	—		$	12,433	$	3,415	$	1,827		$	151	$	17,826
Net income		—			—			—		—		598			—		598
Other comprehensive income, net of tax		—			—			—		—		—			1,571		1,571
Issuance of preferred stock		9,993			500			—		—		—			—		10,493
Discount associated with preferred stock Series 2009-SP		(645	)		—			—		—		—			—		(645	)
Premium associated with preferred stock Series 2009-WP		—			101			—		—		—			—		101
Amortization of premium and discount on preferred stock		75			(17	)		—		—		(58	)		—		—
Preferred stock dividends declared												(365	)				(365	)
Stock based compensation		—			—			—		97		—			—		97
Balances at 9/30/2009	$	9,423		$	584		$	12,433	$	3,512	$	2,002		$	1,722	$	29,676

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)

	For the Nine months Ended
	9/30/09			09/30/08
Operating activities
Net income (loss)	$	598		$	(6,117	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		325			358
Gain on sale of interest rate floor		—			(153	)
Gain on sale of securities		(1,083	)		(200	)
Loss on sale of other real estate owned		42			—
Impairment loss on restricted stock		311			—
Impairment loss on investment securities		93			7,935
Provision for loan losses		2,570			1,469
Deferred income tax benefit		(337	)		(711	)
Stock based compensation		97			100
Increase in cash surrender value of life insurance		(212	)		(188	)
Net change in:
Accrued interest receivable		162			544
Other assets		(39	)		184
Accrued interest payable		217			70
Other liabilities		128			(95	)
Net cash provided by operating activities		2,872			3,196
Investing activities
Activity in available-for-sale securities:
Sales		33,151			16,250
Maturities, payment and calls		13,848			6,987
Purchases		(84,950	)		(34,073	)
Activity in held to maturity securities:
Sales		5,922			—
Maturities, payment and calls		3,260			2,877
Purchase of restricted stock		(558	)		(567	)
Net increase in loans		(4,998	)		(37,818	)
Proceeds from sale of other real estate owned		789			—
Purchase of premises and equipment		(51	)		(121	)
Net cash used for investing activities		(33,587	)		(46,465	)
Financing activities
Net increase in deposits		7,870			36,233
Repayment of notes payable to FHLB		(34,000	)		(41,400	)
Proceeds from notes payable to FHLB		42,500			53,300
Net increase (decrease) in short term borrowings		6,471			(4	)
Proceeds from issuance of preferred stock		9,949			—
Proceeds from exercise of stock options		—			47
Cash dividends paid		(296	)		(1,268	)
Net cash provided by financing activities		32,494			46,908
Net increase in cash and cash equivalents		1,779			3,639
Cash and equivalents, beginning of period		6,300			7,475
Cash and equivalents, end of period	$	8,079		$	11,114

7

GREER BANCSHARES INCORPORATED

Consolidated Statements of Cash Flows-Continued

(Unaudited)

(Dollars in thousands)

	For the Nine months Ended
	09/30/09		09/30/08
Cash paid for
Income taxes	$	390	$	791
Interest	$	7,881	$	9,573
Non-cash investing and financing activities
Real estate acquired in satisfaction of loans	$	5,971	$	1,095
Transfer of investment securities from held to maturity to available for sale, due to change of intent to sell investment securities	$	6,795	$	—
Unrealized gains (losses) on available for sale investment securities, net of tax	$	1,405	$	(869	)
Unrealized gains on transfer of held to maturity investment securities to available for sale investment securities, net of tax	$	166	$	—
Dividends payable	$	69	$	—
Loans to facilitate sale of other real estate owned	$	125	$	—
Adoption of new accounting principle charged to retained earnings	$	—	$	(75	)

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 (the “Company”) is a one-bank holding company for Greer State Bank (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 accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. The statements of income (loss) and comprehensive income (loss) 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, 2008, which are included in the 2008 Annual Report on Form 10-K.

Note 2 – Income (Loss) Available per Common Share

Basic income (loss) available per common share is computed by dividing net income (loss) adjusted for cumulative preferred stock dividends by the weighted average number of common shares outstanding during each period presented. Diluted income (loss) available per common share is computed by dividing net income (loss) adjusted for cumulative preferred stock dividends by the weighted average number of common shares outstanding, as adjusted for the assumed exercise of potential common stock options, using the treasury stock method. The weighted average common shares outstanding for the nine months ended September 30, 2009 and September 30, 2008 were 2,486,692 and 2,484,560, respectively (basic) and 2,486,692 and 2,484,560, respectively (diluted). The weighted average common shares outstanding for the three months ended September 30, 2009 and September 30, 2008 were 2,486,692 and 2,486,692, respectively (basic) and 2,486,692 and 2,486,692, respectively (diluted). Anti-dilutive options totaling 355,530 and 318,031 have been excluded from the income (loss) per share calculation for the three and nine months ended September 30, 2009 and September 30, 2008, respectively.

Note 3 – Income Taxes

The Company files a consolidated federal income tax return and separate state income tax returns. Income taxes are allocated to each company 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.

The need for a valuation allowance is considered when it is determined more likely than not that a deferred tax asset will not be realized. In making this determination, management considers all available evidence, including estimates of future taxable income, reversing taxable temporary differences and tax planning strategies.

9

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements—(Continued)

Note 4 – Fair Value

The Fair Value Measurements and Disclosures Topic of the FASB ASC 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. The 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, asset-backed securities 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 certain private equity investments, impaired loans, other real estate owned and certain pooled trust preferred.

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, management measures impairment in accordance with the Receivables Topic of the FASB ASC. 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 and 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. At September 30, 2009, all loans considered to be impaired were evaluated based on the fair value of the collateral. In accordance with the Fair Values and Disclosures Topic of the FASB ASC, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraisal 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—(Continued)

Other Real Estate Owned

Certain assets such as other real estate owned (“OREO”) are measured at fair value less costs to sell. Management believes the fair value component in its valuation follows the provisions of the Fair Value Measurements and Disclosures Topic of the FASB ASC.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value:

			Fair Value Measurements at Reporting Date Using
Description	Fair Value		Level 1		Level 2		Level 3
September 30, 2009
Available for sale securities	$	128,164,542	$	—	$	127,767,771	$	396,771
December 31, 2008
Available for sale securities	$	79,874,179	$	—	$	79,825,009	$	49,170

Changes in Level 3 Fair Value Measurements

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 recorded at fair value on a recurring basis, all of which was an asset-backed security, for the nine months ended September 30, 2009 is as follows:

	Assets
Fair value, December 31, 2008	$	49,170
Total unrealized gain included in other comprehensive income		439,980
Impairment charges during the quarter		(92,379	)
Transfers in and/or out of level 3		—
Fair value September 30, 2009	$	396,771

There were no Level 3 liabilities recorded at fair value on a recurring basis for the nine months ended September 30, 2009.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Corporation may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. 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 period. Assets measured at fair value on a nonrecurring basis are included in the table below.

			Fair Value Measurements at Reporting Date Using
Description	9/30/2009		Level 1		Level 2		Level 3
Impaired loans	$	2,599,644	$	—	$	—	$	2,599,644
OREO	$	7,107,694	$	—	$	—	$	7,107,694

11

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements—(Continued)

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had balances of $4,298,824 and $5,494,950 with a valuation allowance of $1,699,180 and $833,075 at September 30, 2009 and December 31, 2008, respectively. An additional provision for loan losses of approximately $866,000 and $1,480,000 was recorded on these loans for the nine month periods ended September 30, 2009 and 2008, respectively.

There were no subsequent valuation allowances associated with other real estate owned at September 30, 2009 or December 31, 2008.

Although the Company did not elect to adopt the fair value option for any financial instruments under the Financial Instruments Topic of the FASB ASC, disclosures of fair value information, whether or not recognized in the balance sheet, when it is practicable to estimate the fair value are required under the same Topic. The Topic defines a financial instrument 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. Discounted future cash flows are used to determine estimated fair values of securities with no active market.

• Fair value for variable rate loans that re-price frequently and for loans that mature in less than one year 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 a liquidity adjustment related to the current market environment.

• 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 one year are valued at their carrying amount. Certificate of deposit accounts maturing after one year are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

• Fair value for federal funds sold and purchased and repurchase agreements 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 loans of comparable terms and credit quality.

12

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements—(Continued)

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 are as follows:

	September 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and due from banks	$	8,078,365	$	8,078,365	$	6,299,976	$	6,299,976
Investment securities		128,164,542		128,164,542		95,851,430		96,039,077
Loans - net		302,619,136		302,422,877		306,286,728		301,316,494
Restricted stock		5,936,900		5,936,900		5,689,914		5,689,914
Accrued interest receivable		1,931,891		1,931,891		2,094,424		2,094,424
Bank owned life insurance		6,892,055		6,892,055		6,680,245		6,680,245
Financial liabilities
Deposits	$	289,995,086	$	277,627,098	$	282,124,685	$	283,030,178
Federal funds purchased		2,471,257		2,471,257		4,000,000		4,000,000
Repurchase agreements		15,000,000		15,000,000		15,000,000		15,000,000
Notes payable to FHLB and Federal Reserve		119,500,000		122,649,030		103,000,000		107,152,725
Junior subordinated debentures		11,341,000		11,341,000		11,341,000		11,341,000
Accrued interest payable		2,149,985		2,149,985		2,067,550		2,067,550

Restricted stock includes $5,891,500 in Federal Home Loan Bank of Atlanta stock as required for obtaining advances. The stock was evaluated for impairment as of September 30, 2009. No impairment was identified.

Note 5 – Other than Temporary Impairment

The Bank held $311,414 of restricted stock in Silverton Bank, N.A. (“Silverton”) at March 31, 2009. On May 1, 2009 the Office of the Comptroller of the Currency (“OCC”) closed Silverton after which the Federal Deposit Insurance Company (“FDIC”) created a bridge bank, Silverton Bridge Bank, N.A. to take over operations.

Three of the approximate forty-five underlying trust preferred stock issuers in the asset-backed security defaulted under the terms of the indenture in the third quarter of 2009, bringing the total defaults to five. In addition, four issuers have deferred interest payments.

In view of these facts, management concluded the market value declines were other than temporary. The Bank recorded other than temporary impairment (“OTTI”) noncash impairment charges of $311,414 and $92,379 through earnings on March 31, 2009 and September 30, 2009, respectively, as required by the Investments Topic of the FASB ASC with respect to its holdings of the restricted stock and asset-backed security. The OTTI charges were based on the market values of the investments on those dates of approximately $0 and $397,000 for the restricted stock and asset-backed security, respectively. The restricted stock was determined to have no value. The market value of the asset-backed security was determined through cash flow analysis.

Note 6 – Preferred Stock

On January 30, 2009, Greer Bancshares Incorporated issued 9,993 shares of fixed rate cumulative perpetual preferred stock Series 2009-SP (Preferred Stock Series A), no par value having a liquidation amount equal to $1,000 per share, to the U.S. Treasury with an attached warrant to purchase an additional 500.005 shares of fixed rate cumulative perpetual preferred stock, initial price $.01 per share having a liquidation amount equal to $1,000 per share, for an aggregate price of $9,993,000. The warrant was exercised immediately resulting in the issuance of 500 shares of fixed rate cumulative perpetual preferred stock Series 2009-WP (Preferred Stock Series B) to the U.S. Treasury.

13

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements—(Continued)

Preferred Stock Series A is generally non-voting and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum thereafter. The preferred shares are redeemable at par at the option of the Company, subject to the consent of the Board of Governors of the Federal Reserve System.

The terms of Preferred Stock Series B are substantially identical to those of the Preferred Stock Series A. Differences include the payment under Preferred Stock Series B of cumulative dividends at a rate of 9% per year. In addition such stock may not be redeemed while shares of Preferred Stock Series A are outstanding.

The net proceeds were allocated between Preferred Stock Series A and Preferred Stock Series B based on their relative fair values at the time of issuance. The discount on Preferred Stock Series A and the premium on Preferred Stock Series B resulting from the differences between the initial carrying amounts and the liquidation amounts were calculated to be accreted or amortized over the five-year period preceding the 9% perpetual dividend, using the effective yield method.

No dividends may be paid on common stock unless dividends have been paid on the senior preferred stock. Also, benefit plans and certain employment arrangements were modified to comply with the issuance of the fixed rate cumulative perpetual preferred stock as required by the U.S. Treasury.

Note 7 – Investment Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities are as follows:

	September 30, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for sale:
Mortgage-backed securities	$	101,365,492	$	1,912,380	$	37,375	$	103,240,497
Municipal securities		23,102,266		943,658		18,648		24,027,276
Asset-backed security		396,771		—		—		396,771
Corporate bonds		500,585		—		585		500,000
	$	125,365,114	$	2,856,038	$	56,608	$	128,164,544
	December 31, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Held to maturity:
Mortgage backed securities	$	15,977,251	$	190,223	$	2,576	$	16,164,898
Available for sale:
Mortgage-backed securities	$	57,676,654	$	876,366	$	28,024	$	58,524,996
Municipal securities		20,736,533		224,462		371,582		20,589,413
Asset-backed security		444,266		—		395,096		49,170
Equity securities		265,600		—		—		265,600
Corporate bonds		506,440		—		61,440		445,000
	$	79,629,493	$	1,100,828	$	856,142	$	79,874,179

14

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements—(Continued)

In September 2009, the investment portfolio was analyzed for specific securities to sell that would benefit the Company by realizing gains while maintaining yields and slightly extending average lives through new investment purchases. As a result of the analysis, on September 17, 2009, securities with book values totaling $11,714,738 were sold of which $5,922,089 were classified as held to maturity. Management determined the remaining pool of investment securities classified as held to maturity were tainted by this transaction and reclassified the remaining balance to available for sale as required by FASB ASC 320, Investments-Debt and Equity Securities. At September 30, 2009, $166,164 of unrealized gains was included in accumulated other comprehensive income that related to these transferred securities.

The amortized cost and estimated fair value of investment securities at September 30, 2009 by contractual maturity for debt securities are shown below. Mortgage backed securities have not been scheduled since expected maturities will differ from contractual maturities because borrowers may have the right to prepay the obligations.

	Available for Sale
	Amortized Cost		Fair Value
Due in 1 year	$	615,461	$	615,259
Over 1 year through 5 years		1,287,482		1,317,293
After 5 years through 10 years		6,139,773		6,348,755
Over 10 years		15,956,906		16,642,739
		23,999,622		24,924,046
Mortgage backed securities		101,365,492		103,240,498
Total	$	125,365,114	$	128,164,544

The fair value of securities with temporary impairment at September 30, 2009 and December 31, 2008 is shown below:

	Less Than Twelve Months				Over Twelve Months
September 30, 2009	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities:
Mortgage backed securities	$	3,118,246	$	37,375	$	—	$	—
Corporate bonds		—		—		500,000		585
Municipal securities		—		—		461,352		18,648
Total	$	3,118,246	$	37,375	$	961,352	$	19,233

	Less Than Twelve Months				Over Twelve Months
December 31, 2008	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of securities:
Mortgage backed securities	$	5,581,710	$	418,096	$	1,059,007	$	7,600
Corporate bonds		—		—		445,000		61,440
Municipal securities		4,510,585		206,768		3,747,688		164,814
Total	$	10,092,295	$	624,864	$	5,251,695	$	233,854

15

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements—(Continued)

Management believes all of the unrealized losses as of September 30, 2009 and December 31, 2008 are temporary and as a result of temporary changes in the market. The number of securities with unrealized losses was three and twenty-four at September 30, 2009 and December 31, 2008, respectively. One is a mortgage-backed security, one is a municipal security and one is a corporate bond at September 30, 2009. Four are mortgage-backed securities, eighteen are municipal securities, one is a pooled trust preferred security and one is a corporate bond at December 31, 2008. 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 credit concerns of the issuer. The Bank has sufficient cash and investments showing unrealized gains and borrowing sources to provide sufficient liquidity to hold the securities until maturity or a recovery of fair value if necessary.

The Company valued the asset-backed security by projecting estimated cash flows, which were then discounted back to the present value. The security is currently booked at a fair value of $396,771 at September 30, 2009, versus a par value of $1,072,468. As discussed in Note 5, the Company has recognized a write-down of $92,379 through non-interest income representing other-than-temporary impairment on the security. The non-credit portion of the impairment is not considered significant.

Investment securities with an aggregate book value of approximately $112,344,000 and $91,817,000 at September 30, 2009 and December 31, 2008, respectively, were pledged to secure public deposits and Federal Home Loan Bank borrowings.

Gross realized gains, gross realized losses and sale proceeds for available for sale securities for the nine months ended September 30 are summarized as follows. These net gains or losses are shown in noninterest income as gain on sale of available for sale securities.

	2009				2008
	Available for sale		Held to maturity		Available for sale		Held to maturity
Gross realized gains	$	340,558	$	141,760	$	202,249	$	—
Gross realized losses		—		—		2,530		—
Net gain on sale of securities	$	340,558	$	141,760	$	199,719	$	—
Sale proceeds	$	6,411,250	$	6,076,480	$	15,632,879	$	—

Note 8 – Subsequent Events

Management evaluated subsequent events through November 16, 2009, the date the financial statements were available to be issued. There were no material events or transactions occurring after September 30, 2009 but prior to November 16, 2009 that provided additional evidence about conditions that existed at September 30, 2009. Events or transactions that provided evidence about conditions that did not exist at September 30, 2009 but arose before the financial statements were available to be issued have not been recognized in the financial statements for the period ended September 30, 2009.

Note 9 – New Accounting Pronouncements

In April 2009, the FASB issued an accounting standard which provides guidance in determining fair value when the volume and level of activity for the asset or liability has significantly decreased and guidance for identifying transactions that are not orderly. This standard affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. This standard further requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. It also amended previous standards to expand certain disclosure requirements. The standard was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. This standard became effective for the Company on June 15, 2009 and did not have a significant impact on the Company’s financial statements.

16

GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements—(Continued)

In April 2009, two accounting standards were issued regarding the recognition and presentation of other-than-temporary impairments. These standards (i) changed existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaced the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under these standards, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. These standards were effective for interim and annual periods ending after June 15, 2009 and became effective for the Company on June 15, 2009 and did not have a significant impact on the Company’s financial statements.

Also in April 2009, two other standards were issued regarding interim disclosures about fair value of financial instruments. These two standards require an entity to provide disclosures about fair value of financial instruments in interim financial information at interim reporting periods. Under these standards, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The new interim disclosures were included in the Company’s interim financial statements beginning in the second quarter, June 30, 2009.

On May 28, 2009, the FASB issued a standard providing guidance over subsequent events. Under this standard, companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. This standard requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. The standard also requires entities to disclose the date through which subsequent events have been evaluated. This standard was effective for interim and annual reporting periods ending after June 15, 2009. The Company reviewed events for inclusion in the financial statements through November 16, 2009, the date that the accompanying financial statements were issued. The Company adopted the provisions of the standard for the quarter ended June 30, 2009, as required, and this adoption did not have a material impact on the financial statements taken as a whole.

On June 29, 2009, the FASB issued the standard providing guidance over the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This standard establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles. This standard will be effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. The Company adopted this standard for the quarterly period ended September 30, 2009, as required, and adoption is not expected to have a material impact on the financial statements taken as a whole.

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

RESULTS OF OPERATIONS

Overview

The following discussion describes and analyzes our results of operations and financial condition for the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008, as well as results for the nine months ended September 30, 2009 and September 30, 2008. 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.

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Like most 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 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 Federal Home Loan Bank 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. (See “Provision for Loan Losses” for a detailed discussion of this process.)

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 $472,000 available to common shareholders, or $.19 per diluted share, for the quarter ended September 30, 2009, compared to a consolidated net loss of $(7,193,000), or $(2.89) per diluted share, for the quarter ended September 30, 2008. For the nine months ended September 30, 2009, the Company reported consolidated net income of $175,000 available to common shareholders, or $.07 per diluted share, compared to a consolidated net loss of $(6,117,000) or $(2.46) per diluted share for the nine months ended September 30, 2008.

Interest Income, Interest Expense and Net Interest Income

The Company’s total interest income for the quarter ended September 30, 2009 was $5,621,000, compared to $6,122,000 for the quarter ended September 30, 2008, a decrease of $501,000 or 8.2%. Total interest income for the nine months ended September 30, 2009 decreased by $1,747,000 or 9.6%, from $18,140,000 for the nine months ended September 30, 2008. Interest and fees on loans is the largest component of total interest income and decreased $404,000 or 8.6%, to $4,278,000 for the quarter ended September 30, 2009, compared to $4,682,000 for the quarter ended September 30, 2008 and decreased $1,477,000, or 10.6% for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. The decline in interest and fees on loans for the three and nine months ended September 30, 2009 was due primarily to the 175 basis points reduction in the federal funds rate by the Federal Open Market Committee since the third quarter of 2008. This significant rate reduction affected between $155 million and $162 million in loans indexed to the Wall Street Journal Prime Rate during that period, which were immediately repriced. The decline in market interest rates also affected loans that matured and were renewed at lower rates during the last twelve months. The decrease in interest and fees on loans was offset to some extent by interest and fees received from an increase in average loans outstanding of approximately $14,557,000 and $28,282,000 during the three and nine month periods in 2009 compared to the same periods in 2008. The average yields on the Company’s loan portfolio for the nine months ended September 30, 2009 and September 30, 2008 were 5.36% and 6.57%, respectively.

Interest income on investment securities decreased by $95,000 and $231,000 in the three and nine months ended September 30, 2009, respectively, compared to the three and nine months ended September 30, 2008 due primarily to reductions in the tax equivalent yields from 5.59% at September 30, 2008 to 4.68% at September 30, 2009. The yield decline is primarily the result of falling market rates, as securities purchased in 2009 had yields less than the average weighted yield of the portfolio. The decrease in interest income due to the decline in yield was partially offset by an increase in average investment securities balances during the three and nine months ended September 30, 2009 as compared to the same periods in 2008. Average investment securities increased approximately $19,646,000 and $15,693,000 during the three and nine month period ending September 30, 2009, respectively, as the result of net purchases in the first nine months of 2009, which were partially offset by accelerated principal paydowns.

The Company’s total interest expense declined for the three and nine months ended September 30, 2009 by $525,000 and $1,545,000, or 16.7% and 16.0%, respectively, compared to the same periods in 2008. The largest component of the Company’s interest expense is interest expense on deposits. Despite increases in average

18

balances of interest bearing deposits of $22,683,000 and $29,498,000 for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008, interest expense declined. Market interest rate decreases resulted in the weighted average rate on interest bearing deposits declining from 3.37% at September 30, 2008 to 2.35% at September 30, 2009.

Interest on short term borrowings declined slightly as the result of lower market interest rates despite increases in the average short term borrowings outstanding for the three and nine months ended September 30, 2009 of $10,840,000 and $9,734,000, respectively, compared to the same periods in 2008. Management has borrowed at shorter terms to take advantage of low market rates. While management continues to emphasize the need to increase core deposits, short term borrowing rates continue to be much less than the cost of in-market interest rates. Interest on long term borrowings declined $92,000, or 7.3%, and $240,000, or 6.4% for the three and nine month periods ending September 30, 2009 compared to the same periods in 2008. The decline in long term interest expense was the result of declines in market interest rates partially offset by increases in average long term borrowings outstanding of $4,139,000 and $9,096,000 for the three and nine month periods ending September 30, 2009 compared to the same periods in 2008.

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 slightly for the quarter ended September 30, 2009, compared to the same quarter ended September 30, 2008. For the nine months ended September 30, 2009, net interest income before provision for loan losses decreased $202,000, or 2.4%, to $8,295,000 compared to $8,497,000 at September 30, 2008. The Company’s balance sheet is currently slightly liability sensitive in the short term, meaning a greater amount of liabilities reprice than assets in the period being analyzed. This is due primarily to the amount of short term borrowings currently being utilized. The Company utilizes an interest rate risk model that estimates the Company’s exposure to interest rate risk. As of September 30, 2009, the results of the model indicate the exposure to interest rate risk was within the Company’s policy limits. Balance sheets that are liability sensitive typically produce less earnings as interest rates rise and likewise, earnings increase as interest rates fall. However, the results of the Bank’s interest rate risk model indicate the Bank’s balance sheet is positioned so that earnings increase as rates rise, due primarily to the manner in which assets and liabilities reprice as rates change.

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 delinquency, charge-offs and general conditions in the Company’s market area.

The provision for loan losses during the three and nine months ended September 30, 2009 was $475,000, compared to $928,000, and $2,570,000, compared to $1,469,000, for the same periods in 2008, respectively. Additional loans considered to be impaired, updated appraisals obtained during the Bank’s recent impaired loan valuation analysis indicating declines in market values of certain properties held as collateral, and loans charged off resulted in significant increases to the loan loss provision in the three and nine months ended September 30, 2009. In addition, increases in our historical losses and adjustments to certain qualitative factors in the Bank’s loan loss model affected the amount of provision required. The amount of provision is based on the results of the loan loss model. Also see the discussion below under “Allowance for Loan Losses.”

19

Noninterest Income

Noninterest income increased to $985,000 and $2,586,000 for the three and nine months ended September 30, 2009 compared to losses of $7,283,000 and $5,506,000 for the same periods in 2008. The primary reasons for 2008 losses related to impairment losses due to the declines in the value of Fannie Mae preferred stock and an asset-backed security. The 2009 impairment losses for the three and nine months ended September 30, 2009 relate to further impairment in value of the asset-backed security and impairment of Silverton Bank stock, respectively. The impairment losses were partially offset by gains realized on the sale of investment securities in 2008 and 2009 and a gain on the sale of an interest rate floor in 2008.

Noninterest Expenses

Total noninterest expenses increased $428,000, or 19.1% for the three months ended September 30, 2009, to $2,664,000 compared to $2,236,000 for the three months ended September 30, 2008. Total noninterest expenses remained relatively stable for the nine months ending September 30, 2009, totaling $7,597,000 compared to $7,632,000 for the same period in 2008. Salaries and employee benefits, the largest component of noninterest expenses, increased 16.2% for the three months ended September 30, 2009 compared to the same period in 2008 due to a reversal in the third quarter of 2008 of accrued incentive pay as a result of the poor earnings performance. Salaries and benefits declined slightly for the nine months ending September 30, 2009 compared to the same period in 2008. In January 2009, management identified certain expenses that could be reduced in an effort to operate more efficiently in the adverse economic environment being experienced. As a result of management’s actions, the largest expense savings came from eliminating seven staff positions and reducing the 2009 marketing budget by more than 50%. These expense reduction measures were slightly offset by significant increases in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance assessments. FDIC assessment expense increased $240,000 and $544,000 for the three and nine months ended September 30, 2009 compared to the same periods in 2008, respectively. In an effort to replenish the FDIC insurance fund after increased bank failures across the nation, the FDIC re-evaluated the assessment rates in the fourth quarter of 2008. In addition, a special assessment equating to $212,000 for the Bank was imposed on all FDIC-insured banks in the second quarter of 2009 to further boost the FDIC’s deposit insurance reserve. Expenses on foreclosed properties contributed to the $137,000, or 39.8%, increase in other noninterest expenses for the three months ending September 30, 2009 compared to the same quarter in 2008. Included in the 2008 noninterest expense was the second quarter write-off of construction in process charges totaling $247,000, related to the design of an administrative and operations center.

Income Tax Expense

The Company had increases in the tax provisions for the three and nine months ended September 30, 2009 compared to the same periods in 2008 primarily due to the increase in income before taxes. Items that caused the effective tax rates to be less than the statutory tax rate included income earned on BOLI and interest income on municipal investments. Offsetting the impact of these items was an increase in the valuation allowance of deferred tax assets. The Company recorded a valuation allowance on the deferred tax benefit arising from the impairment charge on the restricted stock discussed above since management concluded it was more likely than not that it would not be realized.

BALANCE SHEET REVIEW

Loans

Outstanding loans represent the largest component of earning assets at 70.3% of total earning assets as of September 30, 2009. Gross loans totaled $308,733,000 as of September 30, 2009, a slight decline from gross loans of $311,414,000 as of December 31, 2008. As a result of the adverse economic environment, management has intentionally slowed loan growth and enhanced underwriting requirements. Adjustable rate loans totaled 71.1% of the loan portfolio as of September 30, 2009, 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 and are in the Company’s local market area.

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Allowance for Loan Losses

The allowance for loan losses at September 30, 2009 was $6,114,000, or 1.98% of gross loans outstanding, compared to $5,127,000 or 1.65% of gross loans outstanding at December 31, 2008. The increase of $987,000, or .33% of gross loans outstanding, in the allowance is primarily a result of the increase in the provision for loan losses resulting from the increases in non-performing loans and impaired loans based on valuations completed at September 30, 2009 compared to December 31, 2008, slightly offset by loan charge-offs. The allowance at September 30, 2009 includes an allocation of $1,700,000 for valuation allowances related to impaired loans compared to $833,000 at December 31, 2008.

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. 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 September 30, 2009, the Company had $15,311,000 in non-performing assets, comprised of non-accruing loans of $7,339,000, $864,000 in loans more than 90 days past due and still accruing interest and $7,108,000 in Other Real Estate Owned (“OREO”). This compares to $5,068,000 in non-accruing loans, no loans more than 90 days past due and still accruing interest and $1,842,000 in OREO at December 31, 2008. Non-performing loans consisted of $4,683,000 in real estate loans, $2,231,000 in commercial loans and $425,000 in consumer loans at September 30, 2009.

Net charge-offs for the first nine months of 2009 and 2008 were approximately $1,583,000 and $204,000, respectively. Net loan loss reserves as a percentage of non-performing loans were 72.1% and 101.2% as of September 30, 2009 and December 31, 2008, respectively.

Potential problem loans, which are not included in non-performing loans, amounted to approximately $20,066,000, or 6.5% of total loans outstanding at September 30, 2009. Potential problem loans represent those loans with a well-defined weakness and 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.Five residential construction and land development loans totaling approximately $11,413,000 were considered potential problem loans at September 30, 2009. While these loans are currently performing under the contract terms, due to slowed lot sales, the construction or development projects are not performing as the Bank had originally planned. These loans have current appraisals supporting the loan balances.

Securities

The 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 past years when loan demand has not been 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. 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 September 30, 2009, investment securities totaled $128,165,000 or 29.2% of total earning assets. Investment securities increased $32,314,000 or 33.4% from $95,851,000 as of December 31, 2008, due to the purchase of $82,328,000 in mortgage backed securities and $2,621,000 in municipal securities partially offset by the sale of $32,635,000 in mortgage backed securities and $265,600 in equity securities, the call of one municipal security of $250,000 and cash inflows from principal prepayments on mortgage backed securities. The significant increase in investment securities in 2009 was primarily due to the leveraging of TARP funds. See Note 7 in the accompanying financial statements for a discussion of the transfer of held to maturity investment securities to available for sale investment securities.

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Cash and Cash Equivalents

The Company’s cash and cash equivalents were $8,079,000 at September 30, 2009, compared to $6,300,000 at December 31, 2008, an increase of $1,779,000. Balances in 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. Total deposits increased $7,870,000, or 2.8%, to $289,995,000 as of September 30, 2009 compared to $282,125,000 as of December 31, 2008. The increase in deposits during the nine months ending September 30, 2009 was primarily the result of an increase of approximately $25,859,000 in retail deposits, of which $14,762,000 was in retail certificates of deposit. The increase in retail certificates of deposit was partially offset by a decline of $17,989,000 in brokered deposits. Total core deposits have increased by approximately $20,216,000 in the nine months ended September 30, 2009.

At September 30, 2009 and December 31, 2008, interest-bearing deposits comprised 88.6% and 89.9% of total deposits, respectively. Non interest-bearing deposits increased by $4,725,000 through the first nine months of 2009. Included in the interest-bearing total were brokered deposits of $31,040,000, or 10.7%, and $49,029,000, or 17.4%, of total deposits at September 30, 2009 and December 31, 2008, respectively. The Company takes into consideration liquidity needs, direction and level of interest rates and market conditions when pricing deposits.

Borrowings

The Company’s borrowings are comprised of federal funds purchased, repurchase agreements, both short-term and long-term advances from the Federal Home Loan Bank of Atlanta, short-term advances from the Federal Reserve Bank and junior subordinated debentures. At September 30, 2009, total borrowings were $148,312,000, compared with $133,341,000 as of December 31, 2008. Federal funds purchased were $2,471,000 and $4,000,000 at September 30, 2009 and December 31, 2008, respectively. At September 30, 2009 and December 31, 2008, long term repurchase agreements were $15,000,000. Notes payable to the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank totaled $113,500,000 and $6,000,000, respectively, as of September 30, 2009, compared to $103,000,000 and $0, respectively, as of December 31, 2008. The weighted average rate of interest for the Company’s portfolio of Federal Home Loan Bank of Atlanta advances was 3.38% and 3.60% as of September 30, 2009 and December 31, 2008, respectively. The weighted average remaining maturity for Federal Home Loan Bank of Atlanta advances was 2.33 years and 2.55 years as of September 30, 2009 and December 31, 2008, respectively. The borrowing from the Federal Reserve consisted of one advance for a term of 28 days at a rate of .25%.

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, 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, but include an option to call the debt in October 2009. 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, but include an option to call the debt in December 2011. Interest payments are due quarterly to Greer Capital Trust II at the three-month LIBOR plus 173 basis points.

Liquidity and Capital Resources

Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss, and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring

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sources and uses of funds in order 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 the 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 Company’s ability to provide funds to meet the needs of depositors and borrowers. The Company’s primary goal is to meet these needs at all times. In addition to these basic cash needs, the Company must meet liquidity requirements created by daily operations and regulatory requirements. Liquidity requirements of the Company are met primarily through two categories of funding: core deposits and borrowings.

Core deposits include checking and savings accounts, as well as retail certificates of deposit less than $100,000. These deposits, which are generally the result of stable consumer and commercial banking relationships, are considered to be a relatively stable component of the Company’s mix of liabilities. At September 30, 2009, core deposits totaled approximately $190,642,000, or 65.7%, of the Company’s total deposits, compared to approximately $170,426,000, or 60.4%, of the Company’s total deposits as of December 31, 2008.

Unsecured lines of credit with correspondent banks are also sources of liquidity. Of the total lines of credit of $35,500,000 at September 30, 2009 and $36,600,000 at December 31, 2008, approximately $18,000,000 and $17,600,000 were available for use as of each of those dates, respectively. The Bank also has a collateralized borrowing capacity of 30% of total assets from the FHLB. Outstanding FHLB borrowings totaled $113,500,000 and $103,000,000 at September 30, 2009 and December 31, 2008, respectively. Unused available FHLB borrowings totaled approximately $17,150,000 and $13,339,000 at September 30, 2009 and December 31, 2008, respectively, and were subject to collateral availability. In February 2009, the Bank secured additional borrowing capacity through the Federal Reserve Bank “discount window” by pledging its consumer and commercial loan portfolios. At September 30, 2009, outstanding borrowings from the Federal Reserve totaled $6,000,000 with approximately $25,700,000 in unused available credit.

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 and sales of other classes of assets.

Greer Bancshares Incorporated, the parent holding company, has very limited liquidity needs, generally requiring liquidity only to pay limited operating expenses and dividends. The cash dividends paid to shareholders are funded by dividends from the Company’s banking subsidiary.

Management believes that the Company’s available borrowing capacity and efforts to grow deposits are adequate to provide the necessary funding for its banking operations for the remainder of 2009. However, management is prepared to take other actions, including potential asset sales, if necessary to maintain appropriate liquidity.

Emergency Economic Stabilization Act of 2008. In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was enacted on October 3, 2008. The EESA authorized the Treasury to provide up to $700 billion in funding for the financial services industry. Pursuant to the EESA, the Treasury was initially authorized to use $350 billion for the Troubled Asset Relief Program (“TARP”). Of this amount, Treasury allocated $250 billion to the TARP Capital Purchase Program (see description below). On January 15, 2009, the second $350 billion of TARP monies was released to the Treasury. The Secretary of the Treasury’s authority under TARP expires on December 31, 2009 unless the Secretary of the Treasury certifies to Congress that extension is necessary provided that his authority may not be extended beyond October 3, 2010.

Pursuant to the authority granted under the EESA, the Treasury created the TARP Capital Purchase Program (“CPP”) pursuant to which the Treasury will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of their risk-weighted assets and not more than the lesser of $25 billion or 3% of their risk-weighted assets.

The Company elected to participate in the CPP. Specifically, the Company issued and sold to the Treasury (i) 9,993 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series 2009-SP, having a liquidation preference of $1,000 per share (Preferred Stock Series A) and (ii) a Warrant to purchase 500.005 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series 2009-WP, having a liquidation preference of $1,000 per share (Preferred Stock Series B) at an initial price of $0.01 per share (the “Warrant”), all

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for an aggregate purchase price of $9,993,000 in cash. The Warrant was exercised by the Treasury immediately on January 30, 2009 pursuant to a cashless exercise, and 500 shares of Preferred Stock Series B were issued to the Treasury and the Warrant was cancelled.

Both the Preferred Stock Series A and the Preferred Stock Series B are accounted for as components of Tier 1 capital. As a result, the Bank now exceeds “well-capitalized” minimum regulatory requirements with a total risk-based capital ratio of 12.07%, a Tier 1 leverage ratio of 7.96% and a Tier 1 risk-based capital ratio of 10.81% as of September 30, 2009.

The Preferred Stock Series A pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter, but will be paid only if, as, and when declared by the Company’s Board of Directors. The Preferred Stock Series A has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable upon the liquidation and dissolution and the winding up of the Company. The Preferred Stock Series A is generally non-voting.

The Company may redeem the Preferred Stock Series A at par, subject to the consent of the Board of Governors of the Federal Reserve System.

The terms of the Preferred Stock Series B are substantially identical to those of the Preferred Stock Series A. Differences include the payment under the Preferred Stock Series B of cumulative dividends at a rate of 9% per year, and such stock may not be redeemed while shares of the Preferred Stock Series A are outstanding.

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. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may,” 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;

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• 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;

• 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; and

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

For a description of 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, 2008, 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 4T. 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 September 30, 2009. There have been no changes in our internal control over financial reporting during the fiscal quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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, 2008 (the “Form 10-K”).

There have been no material changes in the risk factors previously disclosed in Part I-Item 1A of our Form 10-K.

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

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

Not applicable

Item 5. Other Information

Not applicable

Item 6. Exhibits

31.1*	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.

* Filed herewith.

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SIGNATURES

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

	GREER BANCSHARES INCORPORATED
Date: November 16, 2009	By:	/S/    KENNETH M. HARPER
		Kenneth M. Harper
		President and Chief Executive Officer
Date: November 16, 2009	By:	/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.

* Filed herewith.

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