SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000 File Number 000-31937
GRANDSOUTH BANCORPORATION
(Name of Small Business Issuer in its Charter)
South Carolina 57-1104394
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
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Issuer's Telephone Number, Including Area Code: (864) 962-8833
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $7,796,847.
The aggregate market value of the Common Stock held by non-affiliates on February 28, 2001, was approximately $10,391,582. As of February 28, 2001, there were 1,875,329 shares of the Registrant's Common Stock, no par value, outstanding. For purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of Shareholders - Part III
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
PART I
Forward-Looking Statements
This Report on Form 10-KSB may contain forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with terms of the safe harbor, GrandSouth Bancorporation (the "Company") notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performances, development and results of the Company's business include, but are not limited to, the following: risks from changes in economic and industry conditions; changes in interest rates; risks inherent in making loans including repayment risks and value of collateral; dependence on senior management ; and recently-enacted or proposed legislation. Statements contained in this filing regarding the demand for GrandSouth Bank's products and services, changing economic conditions, interest rates, consumer spending and numerous other factors may be forward-looking statements and are subject to uncertainties and risks.
Item 1. Description of Business.
General
The Company is a South Carolina corporation organized in 2000 under the laws of South Carolina for the purpose of being a holding company for GrandSouth Bank (the "Bank"). On October 2, 2000, pursuant to a Plan of Exchange approved by the shareholders, all of the outstanding shares of capital stock of the Bank were exchanged for shares of common stock of the Company and the Company became the owner of all of the outstanding capital stock of the Bank. The Company presently engages in no business other than that of owning the Bank and has no employees.
The Bank is a South Carolina state bank which was incorporated and commenced operations as a commercial bank in 1998. The Bank operates from its offices in Fountain Inn and Simpsonville, South Carolina. The main office is located at 325 South Main Street, in Fountain Inn, South Carolina, and a branch office is located at 327 Fairview Road, Simpsonville, South Carolina. The Bank has received permission to open an office at 357 Halton Road, Greenville, South Carolina.
The Bank offers a full array of commercial bank services. Deposit services include business and personal checking accounts, NOW accounts, savings accounts, money market accounts, various term certificates of deposit, IRA accounts, and other deposit services. Most of the Bank's deposits are attracted from individuals and small businesses. The Bank does not offer trust services.
The Bank offers secured and unsecured, short-to-intermediate term loans, with floating and fixed interest rates for commercial, consumer and residential purposes. Consumer loans include: car loans, home equity improvement loans (secured by first and second mortgages), personal expenditure loans, education loans, overdraft lines of credit, and the like. Commercial loans include short term unsecured loans, short and intermediate term real estate mortgage loans, loans secured by listed stocks, loans secured by equipment inventory, accounts receivable, and the like. Management believes that the credit staff possesses knowledge of the community and lending skills sufficient to enable the Bank to maintain a sufficient volume of high quality loans.
Management of the Bank believes that the loan portfolio is adequately diversified. There are no significant concentrations of loans in any particular individuals, industries or groups of related individuals or industries and the Bank has no foreign loans. The loan portfolio consists primarily of mortgage loans and extensions of credit to businesses and individuals in its service area within Greenville County, South Carolina. The economy of this area is diversified and does not depend on any one industry or group of related industries. Management has established loan policies and practices that include set limitations on loan-to-collateral value for different types of collateral, requirements for appraisals, obtaining and maintaining current credit and financial information on borrowers, and credit approvals.
Other services offered by the Bank include residential mortgage loan origination services, safe deposit boxes, night depository service, VISA(R) and MasterCard(R) charge cards, tax deposits, traveler's checks, and twenty-four hour automated teller service is planned. The ATM will be part of the Intercept network.
At February 28, 2001, the Bank employed 28 persons full-time. Management of the Bank believes that its employee relations are excellent.
Competition
Competition between commercial banks and thrift institutions (savings and loan associations) and credit unions has intensified significantly as a result of the elimination of many previous distinctions between the various
types of financial institutions, and the expanded powers and increased activity of thrift institutions in areas of banking that previously had been the sole domain of commercial banks. Recent legislation, together with other regulatory changes by the primary regulators of the various financial institutions, has resulted in the elimination of many distinctions between a commercial bank and thrift institution. Consequently, competition among financial institutions of all types is virtually unlimited with respect to legal authority to provide most financial services.
The Bank competes in the South Carolina county of Greenville, for which the most recent market share data available is as of June 30, 2000. At that time, 22 banks, savings and loans, and savings banks with 143 branch locations competed in Greenville County for aggregate deposits of approximately $5.7 billion.
Banks generally compete with other financial institutions through the savings products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and personal concern with which services are offered. In the conduct of certain areas of its business, the Bank competes with commercial banks, credit unions, consumer finance companies, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation and restriction imposed upon the Bank. Many of these competitors have substantially greater resources and lending limits than the Bank and offer certain services, such as international banking services and trust services, that the Bank does not provide. Moreover, most of these competitors have more numerous branch offices located throughout their market areas, a competitive advantage that the Bank does not have to the same degree.
The banking industry is significantly affected by prevailing economic conditions as well as by government policies and regulations concerning, among other things, monetary and fiscal affairs, the housing industry and financial institutions. Deposits at banks are influenced by a number of economic factors, including interest rates, competing instruments, levels of personal income and savings, and the extent to which interest on retirement savings accounts is tax deferred. Lending activities are also influenced by a number of economic factors, including demand for and supply of housing, conditions in the construction industry, and availability of funds. Primary sources of funds for lending activities include savings deposits, income from investments, loan principal repayments, and proceeds from sales of loans to conventional participating lenders.
Effect of Government Regulation
Bank holding companies and banks are extensively regulated under federal and state law. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to such statutes and regulations. Any change in applicable law or regulation may have a material effect on the business of the Company and the Bank.
General
As a bank holding company under the Bank Holding Company Act ("BHCA"), the Company obtained the approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the regulations of the Federal Reserve. Under the BHCA, the Company's activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company may engage in a broader range of activities if it becomes a "financial holding company" pursuant to the Gramm-Leach-Bliley Act, which is described below under the caption "Recent Legislation." The BHCA prohibits the Company from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or from merging or consolidating with another bank holding company without prior approval of the Federal Reserve. Additionally, the BHCA prohibits the Company from engaging in or from acquiring ownership or control of more than 5% of the outstanding voting stock of any company engaged in a non-banking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be properly incident thereto. The BHCA generally does not place territorial restrictions on the activities of such non-banking related activities.
The Company is subject to regulation and supervision by the South Carolina State Board of Financial Institutions (the "State Board"). A South Carolina bank holding company must provide the State Board with information with respect to the financial condition, operations, management and inter-company relationships of the holding company and its subsidiaries. The State Board also may require such other information as is necessary to keep itself informed about whether the provisions of South Carolina law and the regulations and orders issued thereunder by the State Board have been complied with, and the State Board may examine any bank holding company and its subsidiaries.
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is in danger of becoming insolvent or is insolvent. For example, under the policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended ("FDIA"), require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") of the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's claim for damages is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision would give depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of the Bank.
Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and State Banks
The various federal bank regulators, including the Federal Reserve and the FDIC have adopted risk-based and leverage capital adequacy guidelines for assessing bank holding company and bank capital adequacy. These standards define what qualifies as capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks.
Failure to meet capital guidelines could subject the Bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC and a prohibition on the taking of brokered deposits.
The risk-based capital standards of both the Federal Reserve Board and the FDIC explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by the agencies in assessing an institution's overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agencies as a factor in evaluating a bank's capital adequacy. The Federal Reserve Board also has recently issued additional capital guidelines for bank holding companies that engage in certain trading activities.
The Company and the Bank exceeded all applicable capital requirements by a wide margin at December 31, 2000.
Payment of Dividends
The Company is a legal entity separate and distinct from its bank subsidiary. Most of the revenues of the Company are expected to result from dividends paid to the Company by the Bank. There are statutory and regulatory requirements applicable to the payment of dividends by subsidiary banks as well as by the Company to its shareholders. It is not anticipated that the Company will pay cash dividends in the near future.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions among the Company and its affiliates, including the amount of the Bank's loans to or investments in nonbank affiliates and the amount of advances to third parties collateralized by securities of an affiliate. Further, a bank holding company and its affiliates are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because the Bank's deposits are insured by the BIF, the Bank is subject to insurance assessments imposed by the FDIC. Currently, the assessments imposed on all FDIC deposits for deposit insurance have an effective rate ranging from 0 to 27 basis points per $100 of insured deposits, depending on the institution's capital position and other supervisory factors. However, because legislation enacted in 1996 requires that both SAIF-insured and BIF-insured deposits pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation ("FICO"), the FDIC is currently assessing BIF-insured deposits an additional 1.26 basis points per $100 of deposits, and SAIF-insured deposits an additional 6.30 basis points per $100 of deposits, to cover those obligations. The FICO assessment will continue to be adjusted quarterly to reflect changes in the assessment bases of the respective funds based on quarterly Call Report and Thrift Financial Report submissions.
Regulation of the Bank
The Bank is subject to examination by the State Board. In addition, the Bank is subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and laws relating to branch banking. The Bank's loan operations are also subject to certain federal consumer credit laws and regulations promulgated thereunder, including, but not limited to: the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to provide certain information concerning their mortgage lending; the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting discrimination on the basis of certain prohibited factors in extending credit; the Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; the Bank Secrecy Act, dealing with, among other things, the reporting of certain currency transactions; and the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies. The deposit operations of the Bank are also subject to the Truth in Savings Act, requiring certain disclosures about rates paid on savings accounts; the Expedited Funds Availability Act, which deals with disclosure of the availability of funds deposited in accounts and the collection and return of checks by banks; the Right to Financial Privacy Act, which imposes a duty to maintain certain confidentiality of consumer financial records and the Electronic Funds Transfer Act and regulations promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services.
The Bank is also subject to the requirements of the Community Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's actual performance in meeting community credit needs is evaluated as part of the examination process, and also is considered in evaluating mergers, acquisitions and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the FDIA: restricting payment of capital distributions and management fees; requiring the FDIC to monitor the condition of the bank; requiring submission by the bank of a capital restoration plan; restricting the growth of the bank's assets and requiring prior approval of certain expansion proposals. A bank that is "significantly undercapitalized" is also subject to restrictions on compensation paid to senior management of the bank, and a bank that is "critically undercapitalized" is further subject to restrictions on the activities of the bank and restrictions on payments of subordinated debt of the bank. The purpose of these provisions is to require banks with less than adequate capital to act quickly to restore their capital and to have the FDIC move promptly to take over banks that are unwilling or unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized" banks may accept brokered deposits without restriction, "adequately capitalized" banks may accept brokered deposits with a waiver from the FDIC (subject to certain restrictions on payment of rates), while "undercapitalized" banks may not accept brokered deposits. The regulations provide that the definitions of "well capitalized", "adequately capitalized" and "undercapitalized" are the same as the definitions adopted by the agencies to implement the prompt corrective action provisions described in the previous paragraph. Management does not believe that these regulations will have a material adverse effect on the operations of the Bank.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 the Company and any other adequately capitalized bank holding company located in South Carolina can acquire a bank located in any other state, and a bank holding company located outside South Carolina can acquire any South Carolina-based bank, in either case subject to certain deposit percentage and other restrictions. Unless prohibited by state law, adequately capitalized and managed bank holding companies are permitted to consolidate their multistate bank operations into a single bank subsidiary and to branch interstate through acquisitions. De novo branching by an out-of-state bank is permitted only if the laws of the host state expressly permit it. The authority of a bank to establish and operate branches within a state continue to be subject to applicable state branching laws. South Carolina law was amended, effective July 1, 1996, to permit such interstate branching but not de novo branching by an out-of-state bank.
Recent Legislation
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act, which makes it easier for affiliations between banks, securities firms and insurance companies to take place. The Act removes Depression-era barriers that had separated banks and securities firms, and seeks to protect the privacy of consumers' financial information. Most of the provisions of the Act require the applicable regulators to adopt regulations in order to implement these provisions and a significant number of regulations have already been adopted.
Under provisions of the new legislation, which were effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation creates a new type of bank holding company called a
"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) incidental to activities that are financial in nature; or (3) complementary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another new type of entity called a "financial subsidiary." A financial subsidiary may be used by a national bank or a group of national banks to engage in many of the same activities permitted for a financial holding company, though several of these activities, including real estate development or investment, insurance or annuity underwriting, insurance portfolio investing and merchant banking, are reserved for financial holding companies. A bank's investment in a financial subsidiary affects the way in which the bank calculates its regulatory capital, and the assets and liabilities of financial subsidiaries may not be consolidated with those of the bank. The bank must also be certain that its risk management procedures are adequate to protect it from financial and operational risks created both by itself and by any financial subsidiary. Further, the bank must establish policies to maintain the separate corporate identities of the bank and its financial subsidiary and to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision," meaning that similar activities should be regulated by the same regulator. Accordingly, the Act spells out the regulatory authority of the bank regulatory agencies, the Securities and Exchange Commission and state insurance regulators so that each type of activity is supervised by a regulator with corresponding expertise. The Federal Reserve Board is intended to be an umbrella supervisor with the authority to require a bank holding company or financial holding company or any subsidiary of either to file reports as to its financial condition, risk management systems, transactions with depository institution subsidiaries and affiliates, and compliance with any federal law that it has authority to enforce.
Although the Act reaffirms that states are the regulators for insurance activities of all persons, including federally-chartered banks, the Act prohibits states from preventing depository institutions and their affiliates from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to protect the confidentiality of a consumer's personal financial information and gives the consumer the power to choose how personal financial information may be used by financial institutions.
The Company anticipates that the Act and the regulations adopted pursuant to the Act will be likely to create new opportunities for it to offer expanded services to customers in the future, though the Company has not yet determined what the nature of the expanded services might be or when the Company might find it feasible to offer them. The Company further expects that the Act
will increase competition from larger financial institutions that are currently more capable than the Company of taking advantage of the opportunity to provide a broader range of services. However, the Company continues to believe that its commitment to providing high quality, personalized service to customers will permit it to remain competitive in its market area.
Legislative Proposals
New proposed legislation which could significantly affect the business of banking has been introduced or may be introduced in Congress from time to time. Management of the Bank cannot predict the future course of such legislative proposals or their impact on the Company and the Bank should they be adopted.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank's earnings. Thus, the earnings and growth of the Company and the Bank are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve, and the reserve requirements on deposits. The nature and timing of any changes in such policies and their impact on the Company and the Bank cannot be predicted.
Item 2. Description of Property.
The Bank leases a lot at the corner of South Main Street and East Knight Street in Fountain Inn. The lot is leased for 20 years for $9,000 a year from Blake P. Garrett, Jr., Trustee, with four five year renewal options. Lease payments are subject to increase to reflect increases in the Consumer Price Index. Blake P. Garrett, Jr., is the brother of Mason Y. Garrett, Chairman of the Board of Directors of the Bank. Blake P. Garrett, Jr., is trustee for a partnership which owns the property. Mason Y. Garrett is a 10.3% partner in the partnership. The Bank completed construction in December, 1998 of a 3,000 square foot one story office building on the lot at the cost of approximately $500,000.
Since its opening the Bank has operated in a building formerly operated as a branch office by NationsBank in Simpsonville, South Carolina. That office is leased from Blake P. Garrett, Jr., as Trustee, for $3,000 per month for 5 years with two five year renewal options. The Bank also leases a store front office in the adjoining shopping center.
The Bank also owns a lot in Greenville, South Carolina and is constructing an office on the site.
Item 3. Legal Proceedings.
The Bank is from time to time a party to various legal proceedings arising in the ordinary course of business, but management of the Bank is not aware of any pending or threatened litigation or unasserted claims or assessments that are expected to result in losses, if any, that would be material to the Bank's business and operations.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders in the fourth quarter of 2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Although the common stock of the Bank is traded from time to time on an individual basis, no established trading market has developed and none is expected to develop in the foreseeable future. The common stock is not traded on the NASDAQ National Market System, nor are there any market makers known to management. In the summer of 1998, the Bank sold 1,702,847 shares of its common stock to the public for $5.00 per share. During the remainder of 1998, to December 31, 1999, management is aware of a few transactions in which the Bank's common stock has been transferred for prices ranging from $5.00 per share to $7.50. During 2000, management is aware of one transaction at $6.50 per share. However, management has not ascertained that these transactions are the result of arm's length negotiations between the parties, and because of the limited number of shares involved, such prices may not be indicative of the market value of the common stock.
As of February 28, 2001, there were approximately 646 holders of record of the Bank's common stock, excluding individual participants in security position listings.
The Bank has never paid any cash dividends, and to support its
continued capital growth, does not expect to pay cash dividends in the near future. The dividend policy of the Bank is subject to the discretion of the Board of Directors and depends upon a number of factors, including earnings, financial conditions, cash needs and general business conditions, as well as applicable regulatory considerations. South Carolina banking regulations restrict the amount of cash dividends that can be paid to shareholders, and all of the Bank's cash dividends to shareholders are subject to the prior approval of the South Carolina Commissioner of Banking.
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
This discussion is intended to assist in understanding the financial condition and results of operations of the Company, and should be read in conjunction with the Company's consolidated financial statements and related notes contained elsewhere herein. Because the Bank is responsible for all of the Company's operations, the discussion will refer to the results of operations of the Bank.
Financial Condition
At December 31, 2000 the Bank had total assets of $88.4 million composed primarily of loans of $69.7 million, securities, investments and Federal Funds sold of $13.4 million and cash and due from banks of $2.3 million. Liabilities were $80.2 million at December 31, 2000, composed primarily of deposits of $78.2 million. Shareholders' equity was $8.2 million at December 31, 2000.
The Bank's loan portfolio at December 31, 2000 consisted primarily of $27.8 million of commercial loans, $31.1 million of real estate mortgages, $5.9 million of real estate construction loans and $5.9 million of consumer loans. The allowance for loan losses totaled $958,000 at December 31, 2000. Management believes that the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio as of December 31, 2000.
Earnings Performance
The Bank had net income from operations for the year ended December 31, 2000 of $297,270, or $0.16 basic and $0.15 diluted earnings per share, compared to $87,080 or $0.05 earnings per share (basic and diluted) for the year ended December 31, 1999. The Bank had net interest income (the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities, excluding the provision for loan losses) of $3,378,388 for 2000 as compared to $2,554,460 for 1999. The Bank also had other operating income (principally service charges, fees and commissions) of $114,219 in 2000 and $158,413 in 1999. The Bank provided $865,000 and $740,000 to its reserve for loan losses in 2000 and 1999 respectively, and had other operating expenses (principally salaries and benefits and occupancy and equipment expenses) of $2,154,084 in 2000 and $1,840,793 in 1999.
Net Interest Income
Net interest income is the amount of interest earned on interest earning assets (loans, investment securities, time deposits in other banks and federal funds sold), less the interest expenses incurred on interest bearing liabilities (interest bearing deposits and borrowed money), and is the principal source of the Bank's earnings. Net interest income is affected by the level of interest rates, volume and mix of interest earning assets and interest bearing liabilities and the relative funding of these assets.
During the year ended December 31, 2000, net interest income was $3.4 million. For the year ended December 31, 1999, net interest income was $2.6 million. This increase was primarily attributable to an increase in volume as average interest earning assets increased to $82.4 million in 2000 from $63.7 million in 1999. The average yield on interest earning assets increased to 9.33% from 8.64% in 2000 compared to 1999, while the average cost of interest bearing liabilities increased to 5.90% from 5.31%. The net yield on average interest earning assets increased to 4.10% in 2000 from 4.01% in 1999.
The table "Average Balances, Yields and Rates," provides a detailed analysis of the effective yields and rates on the categories of interest earning assets and interest bearing liabilities for the years ended December 31, 2000 and 1999.
Average Balances, Yields and Rates
Year Ended December 31, 2000 Year Ended December 31,1999
----------------------------- -----------------------------
(Dollars in Thousands)
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances(1) Expense Rates Balances(1) Expense Rates
Assets
Federal funds sold ............................... $ 6,421 $ 396 6.17% $ 9,811 $ 487 4.97%
Investment securities ............................ 9,322 595 6.39 7,376 445 6.03
Loans (2) ........................................ 66,623 6,691 10.04 46,493 4,568 9.82
-------- ------ ----- -------- ------ ----
Total interest earning assets .................. 82,366 7,682 9.33 63,680 5,500 8.64
Cash and due from banks .......................... 1,974 1,815
Allowance for loan losses ........................ (1,264) (763)
Premises and equipment ........................... 959 976
Other assets ..................................... 1,313 636
-------- --------
Total assets ................................... $ 85,348 66,344
======== ========
Liabilities and shareholders' equity
Interest bearing deposits ...................... $ 72,956 4,304 5.90 55,467 2,946 5.31
-------- ------ ----- -------- ------ ----
Total interest bearing liabilities ........... 72,956 4,304 5.90 55,467 2,946 5.31
Noninterest bearing demand deposits .............. 3,732 2,682
Other liabilities ................................ 928 474
-------- --------
Total liabilities ............................ 77,616 58,623
Shareholders' equity ............................. 7,732 7,721
-------- --------
Total liabilities and shareholders' equity .... $ 85,348 $ 66,344
======== ========
Interest rate spread (3) ......................... 3.43 3.33
------ ------
Net interest income and net yield
on earning assets (4) ......................... 3,378 4.10 2,554 4.01
Interest free funds supporting earning assets (5) 9,410 8,213
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(1) Average balances are computed on a daily basis.
(2) Nonaccruing loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(2) Total interest earning assets yield less the total interest bearing
liabilities rate.
(3) Net interest income divided by total interest earning assets.
(4) Total interest earning assets less total interest bearing liabilities.
Rate/Volume Analysis of Net Interest Income
The effect of changes in average balances (volume) and rates on interest income, interest expense and net interest income, for the periods indicated, is shown below. The effect of a change in average balance has been determined by applying the average rate in the earlier period to the change in average balance in the later period, as compared with the earlier period. The effect of a change in the average rate has been determined by applying the average balance in the earlier period to the change in the average rate in the later period, as compared with the earlier period.
Year Ended December 31,
2000 compared to 1999
Increase (Decrease) Due to
--------------------------
(Dollars in Thousands)
Volume Rate Volume/ Rate Change
------ ---- ------------ ------
Interest earned on:
Federal Funds Sold ................................... $ (168) $ 118 $ (41) $ (91)
Investments .......................................... 117 26 7 150
Net Loans ............................................ 1,978 102 44 2,124
------- ------- ------- -------
Total Interest Income .................................. 1,927 246 10 2,183
------- ------- ------- -------
Interest paid on:
Deposits ............................................. 929 327 103 1,359
------- ------- ------- -------
Total Interest Expense ................................. 929 327 103 1,359
------- ------- ------- -------
Change in Net Interest Income .......................... $ 998 $ (81) $ (93) $ 824
======= ======= ======= =======
|
During 2001, management expects that interest rates will not radically change. Therefore, any improvements in net interest income for 2001 are expected to be largely the result of increases in the volume and changes in the mix of interest earning assets and liabilities. Management expects to continue to use aggressive marketing strategies to increase the Bank's market share for both deposits and quality loans within its service area in Greenville, South Carolina. These strategies involve offering attractive interest rates and continuing the Bank's commitment to providing outstanding customer service.
Interest Rate Sensitivity
Interest rate sensitivity management is concerned with the timing and magnitude of repricing assets compared to liabilities and is an important part of asset/liability management. It is the objective of interest rate sensitivity management to generate stable growth in net interest income, and to control the risks associated with interest rate movement. Management constantly reviews interest rate risk exposure and the expected interest rate environment so that adjustments in interest rate sensitivity can be timely made.
The table, "Interest Sensitivity Analysis", indicates that, on a cumulative basis through twelve months, rate sensitive liabilities exceeded rate sensitive assets, resulting in a liability sensitive position at December 31, 2000 of $16.7 million for a cumulative gap ratio of 73.6%. When interest sensitive liabilities exceed interest sensitive assets for a specific repricing "horizon", a negative interest sensitivity gap results. The gap is positive when interest sensitive assets exceed interest sensitive liabilities. For a bank with a negative gap, such as the Bank, rising interest rates would be expected to have a negative effect on net interest income and falling rates would be expected to have the opposite effect.
The table below reflects the balances of interest earning assets and interest bearing liabilities at the earlier of their repricing or maturity dates. Amounts of fixed rate loans are reflected at the earlier of their contractual maturity date or the date at which the loans may be repriced contractually. Time deposits in other banks are reflected in the deposits' maturity dates. Repurchase agreements and other borrowed funds are reflected in the earliest contractual repricing interval due to the immediately available nature of these funds. Interest bearing liabilities with no contractual maturity, such as interest bearing transaction accounts and savings deposits, are reflected in the earliest repricing interval due to contractual arrangements which give management the opportunity to vary the rates paid on these deposits within a thirty day or shorter period. However, the Bank is under no obligation to vary the rates paid on those deposits within any given period. Fixed rate time deposits are reflected at their contractual maturity dates. Fixed rate advances are reflected at their contractual maturity dates, and variable rate advances are reflected in the earliest repricing interval since they were borrowed under the daily rate credit option, and reprice daily.
Interest Sensitivity Analysis
December 31, 2000
-----------------
Within 4-12 Over 1-5 Over 5
3 Months Months Years Years Total
-------- ------ ----- ----- -----
(Dollars in thousands)
Interest earning assets
Federal funds sold ................................... $ 2,520 - - - 2,520
Other investments .................................... - 818 6,930 3,136 10,884
Loans ................................................ 31,576 11,710 23,715 3,674 70,675
-------- -------- -------- -------- --------
Total interest earning assets ................... $ 34,096 $ 12,528 $ 30,645 $ 6,810 $ 84,079
======== ======== ======== ======== ========
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts ............. 1,841 - - - 1,841
Savings ........................................... 14,923 - - - 14,923
Time deposits $100M and over ...................... 4,858 10,316 3,324 - 18,498
Other time deposits ............................... 7,765 23,650 7,743 - 39,158
-------- -------- -------- -------- --------
Total interest bearing deposits ................. 29,387 33,966 11,067 - 74,420
-------- -------- -------- -------- --------
Total interest bearing liabilities .............. $ 29,387 $ 33,966 $ 11,067 $ - $ 74,420
======== ======== ======== ======== ========
Interest sensitivity gap ................................ $ 4,709 (21,438) 19,578 6,810
Cumulative interest sensitivity gap ..................... 4,709 (16,729) 2,849 9,659
Gap ratio ............................................... 116.02% 36.88% 276.90% 100.00%
Cumulative gap ratio .................................... 116.02% 73.59% 103.83% 112.98%
|
Provision for Loan Losses
The allowance for loan losses, established through charges to expense in the form of a provision for loan losses, allows for loan losses inherent in the Bank's loan portfolio. Loan losses or recoveries are charged or credited directly to the allowance. The level of the allowance for loan losses is based on management's judgment as to the amount required to maintain an allowance adequate enough to provide for inherent losses. The Bank provided $865,000 and $ 740,000 to the allowance during the years ended December 31, 2000 and 1999, respectively.
Other Income
In 2000, the Bank had other income of $114,219 principally from service charges, fees and commissions as compared to $158,413 of such income in 1999. The decrease was the result of a lower level of loan originations in 2000.
Other Expenses
Other expenses, which consist primarily of salaries and employee benefits, net occupancy, and data processing expenses, totaled $2,154,084 for the year ended December 31, 2000 as compared to $1,840,793 for the year ended December 31, 1999. The increase in expenses was due to increases in staff and facilities needed to support the Bank's growth. However, the Company also experienced an increase in FDIC insurance costs, professional fees, and directors' fees. Much of the increase in professional fees related to the formation of the Bank's holding company.
Income Taxes
During the year ended December 31, 2000, the Bank recorded a tax expense of $176,253 compared to $45,000 for the year ended December 31, 1999. The Bank accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Certain items of income and expense (principally provision for loan losses and depreciation) are included in one reporting period for financial accounting purposes and another for income tax purposes.
Investment Portfolio
As of December 31, 2000, the Bank's investment portfolio, excluding investments required for membership in the Federal Reserve Bank ("FRB") and Federal Home Loan Bank ("FHLB"), comprised approximately 12.2 % of its total assets. The following table summarizes the carrying value amounts of securities held by the Bank at December 31, 2000 and at December 31, 1999. Available-for-sale securities are stated at estimated fair value. The Bank had no held for investment securities at December 31, 2000 or 1999.
Securities Portfolio Composition
December 31, 2000 December 31, 1999
----------------- -----------------
Net Net
Unrealized Unrealized
Book Holding Fair Book Holding Fair
Value Gain/(Loss) Value Value Gain/(Loss) Value
----- ----------- ----- ----- ----------- -----
(Dollars in thousands)
Available for sale:
U. S. Agency obligations ............................ $ 9,991 $ (45) $ 9,947 $ 6,747 $ (225) $ 6,522
Mortgage-backed securities ..................... 827 (9) 818 1,090 (26) 1,064
-------- -------- -------- -------- -------- --------
$ 10,818 $ (54) $ 10,765 $ 7,837 $ (251) $ 7,586
======== ======== ======== ======== ======== ========
|
The Bank also holds stock of the FRB and FHLB. This stock is recorded at a cost of $118,600 at December 31, 2000, and has no quoted market value. However, redemption of this stock has historically been at par value.
The following table presents maturities and weighted average yields of debt securities available at December 31, 2000. All of the securities are categorized as available-for-sale securities and are stated at estimated fair value.
Securities Portfolio Maturities and Yields
December 31, 2000
Fair
Value Yield
----- -----
(Dollars in thousands)
U. S. Government Agency obligations
Due within one year $ - -%
Due from one to five years 6,930 6.82
Due from five to ten years 3,017 6.75
Due after ten years 818 5.77
------- ----
$10,765 6.36%
======= ====
|
Loan Portfolio
Management believes the loan portfolio is adequately diversified. There are no significant concentrations of loans in any particular individuals or industry or group of related individuals or industries, and there are no foreign loans.
The amount of loans outstanding at December 31, 2000 and 1999, are shown in the following table according to type of loan:
Loan Portfolio Composition
December 31,
------------
2000 1999
---- ----
(Dollars in thousands)
Commercial ............................................. $ 27,781 $ 28,528
Real estate - Construction ............................. 5,853 9,102
Real estate - Mortgage ................................. 31,130 19,261
Consumer ............................................... 5,911 5,999
-------- --------
Total loans ........................................ 70,675 62,890
Less allowance for loan losses ......................... (958) (1,173)
-------- --------
$ 69,717 $ 61,717
======== ========
|
A certain degree of risk taking is inherent in the extension of credit. Management has established loan and credit policies designed to control both the types and amounts of risks assumed and to ultimately minimize losses. Such policies include limitations on loan-to-collateral values for various types of collateral, requirements for appraisals of real estate collateral, problem loan management practices and collection procedures, and nonaccrual and charge-off guidelines.
Commercial loans primarily represent loans made to businesses, and may be made on either a secured or an unsecured basis. When taken, collateral usually consists of liens on receivables, equipment, inventories, furniture and fixtures. Unsecured business loans are generally short-term with emphasis on repayment strengths and low debt to worth ratios. Commercial lending involves significant risk because repayment usually depends on the cash flows generated by a borrower's business, and the debt service capacity of a business can deteriorate because of downturns in national and local economic conditions. To control risk, initial and continuing financial analysis of a borrower's financial information is required.
Real estate construction loans generally consist of financing the construction of 1-4 family dwellings and some nonfarm, nonresidential real estate. Usually, loan to cost ratios are limited to 80% and permanent financing commitments are required prior to the advancement of loan proceeds.
Loans secured by real estate mortgages comprised 44.0% of the Bank's loan portfolio at December 31, 2000. Residential real estate loans consist mainly of first and second mortgages on single family homes, with some multifamily loans. Loan-to-value ratios for these instruments are generally limited to 80%. Nonfarm, nonresidential loans are secured by business and commercial properties with loan-to-value ratios generally limited to 80%. The repayment of both residential and business real estate loans is dependent primarily on the income and cash flows of the borrowers, with the real estate serving as a secondary or liquidation source of repayment.
Maturity and Interest Sensitivity Distribution of Loans
The following table sets forth the maturity distribution of the Company's loans, by type, at December 31, 2000, as well as the type of interest requirement on such loans.
December 31, 2000
-----------------
One Year One to Five Years
Or Less Five Years Or More Total
------- ---------- ------- -----
(Dollars in thousands)
Commercial, financial and industrial ....................... $20,454 $ 7,327 $ - $27,781
Real estate - construction ................................. 4,489 813 551 5,853
Real estate - mortgage ..................................... 18,380 6,292 6,458 31,130
Consumer installment ....................................... 2,247 3,569 95 5,911
------- ------- ------- -------
Total loans ....................................... $45,570 $18,001 $ 7,104 $70,675
======= ======= ======= =======
Predetermined rate $40,668
Variable rate $30,007
|
Nonperforming Loans; Other Problem Assets
When a loan is 90 days past due as to interest or principal or there is serious doubt as to collectibility, the accrual of interest income is generally discontinued unless the estimated net realizable value of collateral is sufficient to assure collection of the principal balance and accrued interest. When the collectibility of a significant amount of principal is in serious doubt, the principal balance is reduced to the estimated fair value of collateral by charge-off to the allowance for loan losses and any subsequent collections are credited first to the remaining principal balance and then to the allowance for loan losses as a recovery of the amount charged off. A nonaccrual loan is not returned to accrual status unless principal and interest are current and the borrower has demonstrated the ability to continue making payments as agreed. At December 31, 2000 and 1999, the Bank had $2,281,570 and $1,203,473, respectively, of nonaccrual loans or loans 90 days or more past due.
Potential Problem Loans
Management has identified and maintains a list of potential problem loans. These are loans that are not included in nonaccrual status, or loans that are past due 90 days or more and still accruing. A loan is added to the potential problem list when management becomes aware of information about possible credit problems of borrowers that causes serious doubts as to the ability of such borrowers to comply with the current loan repayment terms. There were no loans determined by management to be potential problem loans at December 31, 2000.
Assets Acquired in Foreclosure
At December 31, 2000, the Bank had assets acquired in settlements of loans of approximately $888,000. Of that amount, 90.7% consisted of real estate owned. The remainder consisted of automobiles and equipment. The Bank had no real estate owned pursuant to foreclosure or in-substance foreclosure at December 31, 1999. Real estate owned is initially recorded at the lower of net loan principal balance or its estimated fair market value less estimated selling costs. The estimated fair value is determined by appraisal at the time of acquisition.
Allowance for Loan Losses
The allowance for loan losses is increased by direct charges to operating expense. Losses on loans are charged against the allowance in the period in which management has determined that it is more likely than not such loans have become uncollectible. Recoveries of previously charged off loans are credited to the allowance. The table, "Summary of Loan Loss Experience," summarizes loan balances at the end of each period indicated, averages for each period, changes in the allowance arising from charge-offs and recoveries by loan category, and additions to the allowance which have been charged to expense.
In reviewing the adequacy of the allowance for loan losses at each year end, management took into consideration the historical loan losses experienced by the Bank, current economic conditions affecting the borrowers' ability to repay, the volume of loans, types of loans and risks associated with various types, and the trends in delinquent, nonaccruing, and potential problem loans, and the quality of collateral securing nonperforming and problem loans. After charging off all known losses, management considers the allowance for loan losses adequate to cover its estimate of loan losses inherent in the loan portfolio as of December 31, 2000.
In calculating the amount required in the allowance for loan losses, management applies a consistent methodology that is updated quarterly. The methodology utilizes a loan risk grading system and detailed loan reviews to assess credit risks and the overall quality of the loan portfolio, as well as other off-balance-sheet credit risks such as loan commitments and standby letters of credit. Also, the calculation provides for management's assessment of trends in national and local economic conditions that might affect the general quality of the loan portfolio. Regulators review the adequacy of the allowance for loan losses as part of their examination of the Bank and may require adjustments to the allowance based upon information available to them at the time of the examination.
During 2000, the Bank experienced net charge-offs for the first time in the amount of $1.1 million. A significant portion of these charge-offs related to loans originated by a former employee. Management believes that current trends in the portfolio are improving as evidenced by decreases in loans past due over 30 days from 7.56% of the loan portfolio at December 31, 1999 to 5.00% of the loan portfolio at December 31, 2000. Of the loans past due greater than 30 days, approximately 70% are secured by real estate. Management believes that it has adequately provided for losses considering its assessment of collateral values and other factors affecting collectibility. In addition, Management feels that procedures to monitor extensions of credit, construction draws, and current financial condition of borrowers have improved during 2000 as compared to previous periods.
The allowance is not restricted to different segments of the portfolio. The Bank charges losses from any segment of the portfolio to the allowance without any allocation.
Summary of Loan Loss Experience
Year Ended
----------
December 31, 2000 December 31, 1999
----------------- -----------------
(Dollars in thousands)
Total gross loans outstanding at end of period ..................................... $ 70,675 $ 62,890
Average amount of loans outstanding, gross ......................................... 66,623 46,493
-------- --------
Balance of allowance for loan losses - beginning ................................... 1,173 433
-------- --------
Loans charged off:
Real estate loans ............................................................. (770) -
Consumer loans ................................................................ (119) -
Commercial and other loans .................................................... (191) -
-------- --------
Total charge-offs .......................................................... (1,080) -
Recoveries of loans previously charged-off ......................................... - -
-------- --------
Net charge-offs .................................................................... (1,080) -
Additions to allowance charged to expense .......................................... 865 740
-------- --------
Balance of allowance for loan losses - ending ...................................... $ 958 $ 1,173
======== ========
Ratios
Net charge-offs during period to average
loans outstanding during period ............................................ 1.62% -%
Net charge-offs to loans at end of period ..................................... 1.53 -
Allowance for loan losses to average loans .................................... 1.44 2.52
Allowance for loan losses
to loans at end of period ................................................. 1.36 1.87
Allowance for loan losses to nonperforming loans
at end of period ........................................................... 42.0 97.5
Net charge-offs to allowance for loan losses .................................. 1.13 -
Net charge-offs to provision for loan losses .................................. 1.25 -
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Deposits
The amounts and composition of total deposits as of December 31, 2000 and 1999 were as follows:
December 31,
------------
2000 1999
---- ----
Amount % Amount %
------ ----- ------ -----
Noninterest bearing ............................ $ 3,789,108 4.8% $ 2,569,783 3.5%
NOW accounts ................................... 1,840,918 2.4 2,056,040 2.8
Money market accounts .......................... 14,701,710 18.8 11,881,119 16.3
Savings ........................................ 220,696 0.3 148,445 0.2
Time, less than $100,000 ....................... 39,158,883 50.1 37,596,643 51.6
Time, $100,000 and over ........................ 18,497,774 23.6 18,542,497 25.6
----------- ----- ----------- ----
$78,209,089 100.0% $72,794,527 100.0%
=========== ===== =========== =====
|
The average amounts and average rate paid on deposits held by the Bank for the years ended December 31, 2000 and 1999 are summarized below:
Deposits
(Dollars in Thousands)
December 31, 2000 December 31, 1999
----------------- -----------------
Amount % Amount %
------ ----- ------ ------
Noninterest bearing demand ......................................... $ 3,732 - $ 2,682 -
Interest bearing transaction accounts .............................. 1,637 3.28 1,468 1.98
Savings ............................................................ 224 1.69 137 1.22
Money market accounts .............................................. 13,133 5.53 9,087 4.80
Certificates of deposit and individual retirement
accounts ........................................................ 57,962 6.07 44,775 5.54
------- ---- ------- ----
Total average deposits .................................... $76,688 5.07% $58,149 5.61%
======= ==== ======= ====
|
As of December 31, 2000, the Bank held $18.5 million in time deposits of $100,000 or more, with approximately $4.9 million with maturities within three months, $10.3 million with maturities over three through twelve months, and $2.9 million with maturities over twelve months through three years, and $468,000 with maturities over three years. The Bank had no wholesale time deposits (certificates generated through corporations, banks, credit unions, etc., on a national level) as of December 31, 2000.
Return on Equity and Assets
The following table shows the return on assets (net income divided by average assets), return on equity (net income divided by average equity), dividend payout ratio (dividends declared per share divided by net income per share), and equity to assets ratio (average equity divided by average total assets) for the years ended December 31, 2000 and 1999.
Years Ended December 31,
------------------------
2000 1999
---- ----
Return on average assets 0.35% 0.13%
Return on average equity 3.85 1.13
Dividend payout ratio - -
Average equity to average
asset ratio 9.06 11.64
|
Liquidity
Liquidity is the ability to meet current and future obligations through liquidation or maturity of existing assets or the acquisition of additional liabilities. Adequate liquidity is necessary to meet the requirements of customers for loans and deposit withdrawals in the most timely and economical manner. Some liquidity is ensured by maintaining assets which may be immediately converted into cash at minimal cost (amounts due from banks and federal funds sold). However, the most manageable sources of liquidity are composed of liabilities, with the primary focus on liquidity management being on the ability to obtain deposits within the Bank's service area. Core deposits (total deposits less wholesale time deposits) provide a relatively stable funding base, and were equal to 88.5% of total assets at December 31, 2000. Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold, and funds from maturing loans. The Bank is a member of the FHLB of Atlanta and, as such, has the ability to borrow against the security of its 1-4 family residential mortgage loans. At December 31, 2000, the Bank had the ability to borrow up to 10% of assets from the FHLB. The Bank also has $825,000 available through lines of credit with other banks as an additional source of liquidity funding. Management believes that the Bank's overall liquidity sources are adequate to meet its operating needs.
Capital Resources
The equity capital of the Company increased by $429,490 during 2000 as the result of net operating income of $297,270 and unrealized gains, net of tax, in the investment portfolio of $132,220.
The Bank is subject to regulatory capital adequacy standards. Under these standards, financial institutions are required to maintain certain minimum ratios of capital to risk-weighted assets and average total assets. Under the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991, federal financial institution regulatory authorities are required to implement prescribed "prompt corrective actions" upon the deterioration of the capital position of a bank. If the capital position of an affected institution were to fall below certain levels, increasingly stringent regulatory corrective actions are mandated.
The Bank's December 31, 2000 capital ratios are presented in the following table, compared with the "well capitalized" and minimum ratios under the FDIC regulatory definitions and guidelines:
To be well capitalized
For capital under prompt
For capital corrective
adequacy purposes action provisions
----------------- -----------------
Actual Minimum Minimum
------ ------- -------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of December 31, 2000
Total Capital (to risk weighted assets) ............... $9,139 12.4% $5,898 8.0% 7,373 10.0%
Tier 1 Capital (to risk weighted assets) .............. 8,217 11.1 2,949 4.0% 4,424 6.0
Tier 1 Capital (to average assets)(leverage) .......... 8,217 9.5 3,466 4.0% 4,332 5.0
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Inflation
Since the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts), the performance of a bank is affected more by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.
While the effect of inflation on banks is normally not as significant as is its influence on those businesses which have large investments in plant and inventories, it does have an effect. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above-average growth in assets, loans and deposits. Also general increases in the prices of goods and services will result in increased operating expenses.
Item 7. Financial Statements.
The following financial statements of GrandSouth Bancorporation are included herewith:
Report of Independent Certified Public Accountants
Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31,
2000 and 1999 and the period from March 4, 1998 (inception) to
December 31, 1998
Consolidated Statements of Shareholders' Equity for the period from
March 4, 1998 (inception) to December 31, 1998 and the years
ended December 31, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
2000 and 1999 and the period from March 4, 1998 (inception) to
December 31, 1998
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
GrandSouth Bancorporation and Subsidiary
Fountain Inn, South Carolina
We have audited the accompanying consolidated balance sheets of GrandSouth Bancorporation and Subsidiary (the "Company") as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended December 31, 2000 and 1999 and for the period from March 4, 1998 (inception) to December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the GrandSouth Bancorporation and Subsidiary at December 31, 2000 and 1999 and the results of their operations and cash flows for the years ended December 31, 2000 and 1999 and for the period from March 4, 1998 (inception) to December 31, 1998, in conformity with accounting principles generally accepted in the United States of America.
s/Elliott, Davis & Company, LLP
February 7, 2001
Elliott, Davis & Company, LLP
Greenville, South Carolina
|
GRANDSOUTH BANCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
2000 1999
---- ----
ASSETS
Cash and due from banks .......................................................... $ 2,256,288 $ 1,110,995
Federal funds sold ............................................................... 2,520,000 8,420,000
Investment securities available for sale ......................................... 10,764,692 7,586,270
Other investments, at cost ....................................................... 118,600 118,600
Loans, net ....................................................................... 69,717,470 61,717,086
Property and equipment, net ...................................................... 1,221,585 961,060
Assets acquired in settlement of loans ........................................... 887,667 -
Other assets ..................................................................... 905,085 1,064,447
------------ ------------
Total assets .............................................................. $ 88,391,387 $ 80,978,458
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing ........................................................... $ 3,789,108 $ 2,569,783
Interest bearing .............................................................. 74,419,981 70,224,744
------------ ------------
Total deposits ............................................................ 78,209,089 72,794,527
Other liabilities ................................................................ 2,000,715 431,838
------------ ------------
Total liabilities ......................................................... 80,209,804 73,226,365
COMMITMENTS AND CONTINGENCIES - Notes 8 and 12
SHAREHOLDERS' EQUITY
Common stock, no par value in 2000 and $2.50 par
value in 1999, 20,000,000 shares authorized,
1,873,129 shares issued at December 31, 2000 and 1999 ....................... 8,454,217 4,682,823
Additional paid-in capital .................................................... - 3,771,394
Retained deficit .............................................................. (236,695) (533,965)
Accumulated other comprehensive loss .......................................... (35,939) (168,159)
------------ ------------
Total shareholders' equity ................................................ 8,181,583 7,752,093
------------ ------------
Total liabilities and shareholders' equity ................................ $ 88,391,387 $ 80,978,458
============ ============
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period
from March 4,
1998 (inception)
For the years ended through
December 31, December 31,
------------ ------------
2000 1999 1998
---- ---- ----
INTEREST INCOME
Loans and fees on loans .................................................. $ 6,691,021 $ 4,567,676 $ 342,455
Investment securities .................................................... 991,607 932,225 171,479
----------- ----------- -----------
Total interest income ................................................ 7,682,628 5,499,901 513,934
INTEREST EXPENSE
Deposits and borrowings .................................................. 4,304,240 2,945,441 192,230
----------- ----------- -----------
Net interest income .................................................. 3,378,388 2,554,460 321,704
PROVISION FOR POSSIBLE LOAN LOSSES .......................................... 865,000 740,000 433,000
----------- ----------- -----------
Net interest income (loss) after provision for possible
loan losses ........................................................ 2,513,388 1,814,460 (111,296)
----------- ----------- -----------
NONINTEREST INCOME
Service fees on deposit accounts ......................................... 90,890 72,276 3,884
Other .................................................................... 23,329 86,137 4,689
----------- ----------- -----------
Total noninterest income ............................................. 114,219 158,413 8,573
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and benefits .................................................... 1,218,919 1,054,740 300,045
Printing and supplies .................................................... 63,584 88,787 87,902
Advertising .............................................................. 63,994 62,459 14,029
Data processing .......................................................... 172,644 147,107 29,715
Occupancy and equipment .................................................. 211,078 217,589 98,243
Other operating .......................................................... 423,865 270,111 85,388
----------- ----------- -----------
Total noninterest expenses ........................................... 2,154,084 1,840,793 615,322
----------- ----------- -----------
Income (loss) before income taxes .................................... 473,523 132,080 (718,045)
INCOME TAX PROVISION (BENEFIT) .............................................. 176,253 45,000 (97,000)
----------- ----------- -----------
Net income (loss) .................................................... $ 297,270 $ 87,080 $ (621,045)
=========== =========== ===========
BASIC NET INCOME (LOSS) PER COMMON SHARE .................................... $ .16 $ .05 $ (.33)
=========== =========== ===========
DILUTED NET INCOME (LOSS) PER COMMON
SHARE .................................................................... $ .15 $ .05 $ (.33)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic .................................................................. 1,873,129 1,873,129 1,873,129
=========== =========== ===========
Diluted ................................................................ 1,926,003 1,924,387 1,873,129
=========== =========== ===========
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Additional
Common stock other Total
------------ paid-in Retained comprehensive shareholders'
Shares Amount capital deficit loss equity
------ ------ ------- ------- ---- ------
Balance, March 4, 1998 (inception) ......... - $ - $ - $ - $ - $ -
Net loss ................................ - - - (621,045) - (621,045)
Other comprehensive loss - unrealized
loss on investment securities (net of
income tax benefit of $4,100) ......... - - - - (7,971) (7,971)
-----------
Comprehensive loss ...................... - - - - - (629,016)
Sale of stock (net of offering
costs of $60,000) ................. 1,702,847 4,257,118 4,197,118 - - 8,454,236
--------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ................. 1,702,847 4,257,118 4,197,118 (621,045) (7,971) 7,825,220
-----------
Net income .............................. - - - 87,080 - 87,080
Other comprehensive loss - unrealized
loss on investment securities (net of
income tax benefit of $78,769) ........ - - - - (160,188) (160,188)
-----------
Comprehensive loss ...................... - - - - - (73,108)
Stock split effected in the form
of a stock dividend (10%) ............. 170,282 425,705 (425,705) - - -
Cash in lieu of fractional shares
on stock split effected in the
form of a stock dividend .............. - - (19) - - (19)
--------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ................. 1,873,129 4,682,823 3,771,394 (533,965) (168,159) 7,752,093
Net income .............................. - - - 297,270 - 297,270
Other comprehensive income - unrealized
gain on investment securities (net of
income tax expense of $64,692) ....... - - - - 132,220 132,220
-----------
Comprehensive income .................... - - - - - 429,490
Par value conversion upon
exchange of stock ..................... - 3,771,394 (3,771,394) - - -
--------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 ................. 1,873,129 $ 8,454,217 $ - $ (236,695) $ (35,939) $ 8,181,583
========= =========== =========== =========== =========== ===========
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period
from March 4,
1998 (inception)
For the years ended through
December 31, December 31,
------------ ------------
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) ...................................................... $ 297,270 $ 87,080 $ (621,045)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Deferred income tax expense (benefit) ................................ (1,033) 34,324 (97,000)
Provision for possible loan losses ................................... 865,000 740,000 433,000
Depreciation and amortization ........................................ 123,481 124,326 31,321
Gain on sale of property and equipment ............................... (7,264) - -
Loss on sale of investment securities ................................ - 3,051 -
Write-down of assets acquired in settlement of loans ................. 80,000 - -
Decrease (increase) in other assets .................................. 95,226 (788,501) (209,170)
Increase in other liabilities ........................................ 1,568,877 519,237 211,704
------------ ------------ ------------
Net cash provided by (used in) operating activities .............. 3,021,557 719,517 (251,190)
------------ ------------ ------------
INVESTING ACTIVITIES
Decrease (increase) in federal funds sold .............................. 5,900,000 2,550,000 (10,970,000)
Purchase of investment securities ...................................... (3,725,941) (8,614,480) (985,063)
Proceeds from sale of investment securities ............................ - 731,460 -
Proceeds from maturity of investment securities ........................ 758,180 987,902 -
Increase in loans, net ................................................. (9,685,110) (39,686,968) (23,203,118)
Increase in assets acquired in settlement of loans ..................... (147,941) - -
Proceeds from sale of property and equipment ........................... 523,094 - -
Purchase of property and equipment ..................................... (913,108) (189,941) (926,767)
------------ ------------ ------------
Net cash used in investing activities ............................ (7,290,826) (44,222,027) (36,084,948)
------------ ------------ ------------
FINANCING ACTIVITIES
Sale of stock, net ..................................................... - - 8,454,236
Net increase in deposits ............................................... 5,414,562 40,889,962 31,605,464
Cash in lieu of fractional shares on stock split effected
in the form of a stock dividend ...................................... - (19) -
------------ ------------ ------------
Net cash provided by financing activities ........................ 5,414,562 40,889,943 40,059,700
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ............. 1,145,293 (2,612,567) 3,723,562
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD .............................................................. 1,110,995 3,723,562 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 2,256,288 $ 1,110,995 $ 3,723,562
============ ============ ============
SUPPLEMENTAL INFORMATION Cash paid for:
Income taxes ......................................................... $ - $ 222,500 $ -
============ ============ ============
Interest ............................................................. $ 2,440,385 $ 2,789,864 $ 118,949
============ ============ ============
Loans transferred to assets acquired in settlement of loans .......... $ 819,726 $ - $ -
============ ============ ============
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
GrandSouth Bancorporation (the "Company") is a South Carolina corporation organized in 2000 for the purpose of being a holding company for GrandSouth Bank (the "Bank"). On October 2, 2000, pursuant to a Plan of Exchange approved by the shareholders, all of the outstanding shares of $2.50 par value common stock of the Bank were exchanged for shares of no par value common stock of the Company. Common stock and additional paid-in capital amounts have been adjusted as of December 31, 2000 to reflect the par value conversion. The Company presently engages in no business other than that of owning the Bank, has no employees, and operates as one business segment. The Company is regulated by the Federal Reserve Board. The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. For ease of presentation, the formation of the holding company has been treated as if it occurred at the earliest date presented in these consolidated financial statements. This presentation has no effect on net income or shareholders' equity.
The Bank was incorporated in 1998 and operates as a South Carolina chartered bank providing full banking services to its customers. The Bank is subject to regulation by the South Carolina Board of Financial Institutions and the Federal Deposit Insurance Corporation.
Basis of presentation
The accounting and reporting policies conform to accounting principles generally accepted in the United States of America and to general practices in the banking industry. The Company uses the accrual basis of accounting. During the period of organization from March 4, 1998 (inception) to the incorporation date of August 10, 1998 the Bank operated as an association. All transactions of the organizing association are included in these consolidated financial statements.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates.
Concentrations of credit risk
The Company makes loans to individuals and businesses in and around Upstate South Carolina for various personal and commercial purposes. The Company has a diversified loan portfolio and the borrowers' ability to repay their loans is not dependent upon any specific economic sector.
Investment securities
The Bank accounts for investment securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investment in Debt and Equity Securities". The statement requires investments in equity and debt securities to be classified into three categories:
1. Available for sale: These are securities which are not classified as either held to maturity or as trading securities. These securities are reported at fair market value which is determined using quoted market prices. Unrealized gains and losses are reported, net of income taxes, as separate components of shareholders' equity (accumulated other comprehensive loss). Gains or losses on dispositions of securities are based on the difference between the net proceeds and the adjusted carrying amounts of the securities sold using the specific identification method. Premiums and discounts are amortized into interest income by a method that approximates a level yield.
2. Held to maturity: These are investment securities which the Company has the ability and intent to hold until maturity. These securities are stated at cost, adjusted for amortization of premiums and the accretion of discounts. Premiums and discounts are amortized into interest income by a method that approximates a level yield. The Company has no held to maturity securities.
3. Trading: These are securities which are bought and held principally for the purpose of selling in the near future. Trading securities are reported at fair market value, and related unrealized gains and losses are recognized in the income statement. The Company has no trading securities.
Loans, interest and fee income on loans
Loans are stated at the principal balance outstanding. Unearned discount, unamortized loan fees, and the allowance for possible loan losses are deducted from total loans in the consolidated balance sheet. Interest income is recognized on an accrual basis over the term of the loan based on the principal amount outstanding.
Loans are generally placed on non-accrual status when principal or interest becomes ninety days past due, or when payment in full is not anticipated. When a loan is placed on non-accrual status, interest accrued but not received is generally reversed against interest income. If collectibility is in doubt, cash receipts on non-accrual loans are not recorded as interest income, but are used to reduce principal. Loans are not returned to accrual status until the borrower demonstrates the ability to pay principal and interest. Loans on non-accrual status as well as real estate acquired through foreclosure or deed taken in lieu of foreclosure are included in non-performing assets.
Allowance for possible loan losses
The provision for possible loan losses charged to operating expenses reflect the amount deemed appropriate by management to establish an adequate reserve to meet the present and foreseeable risk characteristics of the current loan portfolio. Management's judgement is based on periodic and regular evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, and prevailing and anticipated economic conditions. Loans which are determined to be uncollectible are charged against the allowance. Provision for possible loan losses and recoveries on loans previously charged off are added to the allowance.
The Company accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". This standard requires that all lenders value loans at the loan's fair value if it is probable that the lender will be unable to collect all amounts due according to the terms of the loan agreement. Fair value may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate.
Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the reported principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled debt restructuring. For these accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to operations, while major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in income from operations.
Assets acquired in settlement of loans
Assets acquired in settlement of loans include real estate acquired through foreclosure or deed taken in lieu of foreclosure, and repossessed assets. These assets are recorded at the lower of the carrying value of the loans or the estimated fair value of the related asset, net of estimated selling costs. The excess carrying value, if any, is charged to the allowance for possible loan losses upon transfers. If further reduction in value occurs, charges are included in income from operations.
Income taxes
The financial statements have been prepared on the accrual basis. When income and expenses are recognized in different periods for financial reporting purposes versus for purposes of computing income taxes currently payable, deferred taxes are provided on such temporary differences. The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax return. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled.
Advertising and public relations expense
Advertising, promotional, and other business development costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailings are expensed in the period in which the direct mailings are sent.
Net income (loss) per common share
Net income (loss) per common share is computed on the basis of the weighted average number of common shares outstanding in accordance with SFAS No. 128, `Earnings per Share". The treasury stock method is used to compute the effect of stock options on the weighted average number of common shares outstanding for diluted earnings per share. In 1999, the Company issued an eleven for ten stock split effected in the form of a ten percent stock dividend. Per share amounts have been retroactively restated to reflect the stock split.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "Cash and Due From Banks". Cash and cash equivalents have an original maturity of three months or less.
Fair values of financial instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," as amended by SFAS No. 119, requires disclosure of fair value information for financial instruments, whether or not recognized in the consolidated balance sheet, when it is practicable to estimate the fair value. SFAS No. 107 defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company's common stock. In addition, other nonfinancial instruments such as property and equipment and other assets and liabilities are not subject to the disclosure requirements.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." All derivatives are to be measured at fair market value and recognized in the balance sheet as assets and liabilities. SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" was issued in June 2000 and amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. The two statements are to be adopted concurrently and are effective for fiscal years and quarters beginning after June 15, 2000. The adoption of SFAS No. 133 and SFAS No. 138 did not have a material impact on the presentation of the Company's consolidated financial results or consolidated financial position.
Other accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Risks and Uncertainties
In the normal course of its business the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrower's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators' judgments based on information available to them at the time of their examination.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current presentation. These reclassifications have no effect on previously reported net income.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances, computed by applying prescribed percentages to its various types of deposits, either at the bank or on deposit with the Federal Reserve Bank. At December 31, 2000 and 1999 these required reserves were met by vault cash.
NOTE 3 - FEDERAL FUNDS SOLD
When the Bank's cash reserves (Note 2) are in excess of the required amount, it may lend the excess to other banks on a daily basis. As of December 31, 2000 and 1999, federal funds sold amounted to $2,520,000 and $8,420,000, respectively.
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for sale are as follows:
December 31, 2000
Gross unrealized
Amortized ---------------- Fair
cost Gains Losses value
---- ----- ------ -----
Federal agencies ................................... $ 9,991,148 $ 46,122 $ 90,867 $ 9,946,403
Mortgage-backed .................................... 827,183 1,239 10,133 818,289
----------- ----------- ----------- -----------
Total investment securities ................. $10,818,331 $ 47,361 $ 101,000 $10,764,692
=========== =========== =========== ===========
December 31, 1999
-----------------
Federal agencies ................................... $6,746,819 $ - $ 225,286 $6,521,533
Mortgage-backed .................................... 1,090,479 - 25,742 1,064,737
---------- ---------- ---------- ----------
Total investment securities ................. $7,837,298 $ - $ 251,028 $7,586,270
========== ========== ========== ==========
|
The amortized costs and fair values of securities available for sale at December 31, 2000, by contractual maturity, are shown in the following chart. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
cost Fair value
---- ----------
One to five years .......................... $ 6,985,015 $ 6,929,995
Five to ten years .......................... 3,006,133 3,016,408
After ten years ............................ 827,183 818,289
----------- -----------
Total investment securities ............ $10,818,331 $10,764,692
=========== ===========
|
Investment securities with an aggregate amortized cost of $553,351 (fair value of $553,164) at December 31, 2000 and $590,793 (fair value of $586,178) at December 31, 1999 were pledged to collateralize public deposits and other purposes.
The Bank, as a member institution of the Federal Home Loan Bank (FHLB) of Atlanta, is required to own capital stock in the FHLB based generally upon the balance of mortgage loans pledged and FHLB borrowings. FHLB capital stock with a cost of $118,600 at December 31, 2000 and 1999, is included in other investments in the consolidated balance sheets. No ready market exists for the stock, and it has no quoted market value. However, redemption of the stock has historically been at par value. The Bank had no outstanding borrowings from the FHLB at December 31, 2000 or 1999.
NOTE 5 - LOANS
The composition of net loans by major loan category is presented below:
December 31,
------------
2000 1999
---- ----
Commercial ..................................... $27,781,092 $28,528,661
Real estate - construction ..................... 5,853,417 9,101,912
Real estate - mortgage ......................... 31,129,745 19,260,774
Consumer ....................................... 5,911,115 5,998,739
Loans, gross ................................... 70,675,369 62,890,086
Less allowance for possible loan losses ........ 957,899 1,173,000
----------- -----------
Loans, net ..................................... $69,717,470 $61,717,086
=========== ===========
|
At December 31, 2000 and 1999, non-accrual loans totaled $2,281,570 and $1,203,473, respectively. The gross interest income which would have been recorded under the original terms of the loans amounted to $158,028 and $19,402 in 2000 and 1999, respectively. There were no non-accrual loans in 1998. Variable rate and fixed rate loans totaled $30,007,361 and $40,668,008 at December 31, 2000.
The following is a summary of the activity within the allowance for possible loan losses for the periods presented:
For the periods ended
December 31,
------------
2000 1999 1998
---- ---- ----
Balance, beginning of year .......... $ 1,173,000 $ 433,000 $ -
Provision for possible loan losses .. 865,000 740,000 433,000
Loans charged against the allowance . (1,080,101) - -
----------- ----------- -----------
Balance, end of year ................ $ 957,899 $ 1,173,000 $ 433,000
=========== =========== ===========
|
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. Components of property and equipment included in the balance sheet are as follows:
December 31,
------------
2000 1999
---- ----
Land ....................................... $ 331,322 $ -
Building and leasehold improvements ........ 655,505 655,505
Furniture and equipment .................... 434,932 415,602
Vehicles ................................... 58,895 45,600
Construction in progress ................... 5,687 -
----------- -----------
1,486,341 1,116,707
Accumulated depreciation ................... (264,756) (155,647)
----------- -----------
Total property and equipment ........... $ 1,221,585 $ 961,060
=========== ===========
|
The Bank purchased land in 2000 to construct its main office. Costs associated with preparing the land for construction are included in construction in progress at December 31, 2000.
Depreciation expense for the periods ended December 31, 2000, 1999 and 1998 amounted to $136,753, $124,326, and $31,321, respectively. Depreciation is charged to operations over the estimated useful lives of the assets. The estimated useful lives and methods of depreciation for the principal items follow:
Type of Asset Life in Years Depreciation Method
------------- ------------- -------------------
Software 3 Straight-line
Furniture and equipment 5 to 7 Straight-line
Buildings and improvements 5 to 40 Straight-line
Vehicles 3 Straight-line
|
NOTE 7 - DEPOSITS
The following is a detail of deposit accounts:
December 31,
------------
2000 1999
---- ----
Noninterest bearing ...................... $ 3,789,108 $ 2,569,783
Interest bearing:
NOW accounts ........................... 1,840,918 2,056,040
Money market accounts .................. 14,701,710 11,881,119
Savings ................................ 220,696 148,445
----------- -----------
20,552,432 16,655,387
----------- -----------
Time, less than $100,000 ............... 39,158,883 37,596,643
Time, $100,000 and over ................ 18,497,774 18,542,497
----------- -----------
57,656,657 56,139,140
----------- -----------
Total deposits ........................... $78,209,089 $72,794,527
=========== ===========
|
Interest expense on time deposits greater than $100,000 was approximately $1,077,154, $658,465, and $50,000 in 2000, 1999 and 1998, respectively.
At December 31, 2000 the scheduled maturities of certificates of deposit are as follows:
2001 $47,207,618
2002 9,205,120
2003 568,640
2004 -
2005 675,279
-----------
$57,656,657
===========
|
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the Bank's financial position.
The Bank purchased land in 2000 to construct a new main office. The Company has not entered into a construction contract but estimates total costs will be approximately $2.2 million and the office will be completed in the summer of 2001.
The Company leases a branch office under a non-cancelable operating lease which expires in February 2001 with monthly lease payments of $2,000. Subsequent to year-end, the Company exercised a five-year renewal option which expires in February 2006 with monthly lease payments of $3,000. The lease contains two additional five-year renewal options with provisions for adjustments to the monthly lease payments. The lease agreement requires the Company to pay all taxes, insurance and maintenance costs.
The Company also leases land upon which it constructed a branch office under a non-cancelable operating lease which expires in March of 2018. The lease requires monthly lease payments of $750. The lease contains four renewal options of five years each with provisions for adjustments to the monthly lease payments. The lease agreement requires the Company to pay all property taxes.
Future minimum lease payments under these operating leases are summarized as follows:
For the years ended
December 31,
------------
2001 $ 43,000
2002 45,000
2003 45,000
2004 45,000
2005 45,000
Thereafter 116,250
-----------
$ 339,250
===========
|
Refer to Note 12 concerning financial instruments with off balance sheet risk.
NOTE 9 - UNUSED LINES OF CREDIT
At December 31, 2000, the Bank had an unused line of credit to purchase federal funds totaling $825,000 from an unrelated bank. This line of credit is available on a one to seven day basis for general corporate purposes of the Bank. The lender has reserved the right to withdraw the line at its option. The Bank had a second unused line of credit with the FHLB to borrow up to ten percent of the Bank's total assets. The line of credit agreement requires the Bank to pledge investment securities as collateral.
NOTE 10 - INCOME TAXES
The following summary of the provision for income taxes includes tax deferrals which arise from temporary differences in the recognition of certain items of revenue and expense for tax and financial reporting purposes for the periods ended December 31:
2000 1999 1998
---- ---- ----
Income taxes currently payable
Federal ............................. $ 164,286 $ 6,776 $ -
State ............................... 13,000 3,900 -
--------- --------- ---------
177,286 10,676 -
Deferred tax provision (benefit) ...... (1,033) 34,324 (97,000)
--------- --------- ---------
Provision (benefit) ............. $ 176,253 $ 45,000 $ (97,000)
========= ========= =========
|
The income tax effect of cumulative temporary differences at December 31, are as follows:
Deferred tax asset (liability)
------------------------------
2000 1999
---- ----
Allowance for possible loan losses ............. $ 325,686 $ 251,600
Unrealized net losses on investment
securities available for sale .......... 18,237 82,839
Depreciation ................................... (19,016) (10,244)
--------- ---------
324,907 324,195
Valuation allowance ............................ (260,752) (196,471)
--------- ---------
Net deferred tax asset ................... $ 64,155 $ 127,724
========= =========
|
The net deferred tax asset is included in other assets in the consolidated balance sheets.
The provision for income taxes is reconciled to the amount of income tax computed at the federal statutory rate on income before income taxes for the periods ended December 31, as follows:
2000 1999 1998
---- ---- ----
Amount % Amount % Amount %
------ -------- ------ --------- ------ ----------
Tax expense (benefit) at statutory rate ........ $ 160,998 34% $ 44,907 34% $(244,135) (34)%
Increase (decrease) in taxes
resulting from:
State bank tax (net of
federal benefit) ......................... 8,829 2 2,574 - -
Other ...................................... 6,426 1 (2,481) - 147,135 20
--------- --------- --------- --------- --------- ---------
Income tax provision (benefit) ........... $ 176,253 37% $ 45,000 34% $ (97,000) (14)%
========= ========= ========= ========= ========= =========
|
NOTE 11 - RELATED PARTY TRANSACTIONS
Certain directors, executive officers and companies with which they are affiliated, are customers of and have banking transactions with the Bank in the ordinary course of business. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable arms-length transactions.
A summary of loan transactions with directors, including their affiliates and executive officers are as follows:
For the years ended
December 31,
------------
2000 1999
---- ----
Balance, beginning of period ............. $ 1,108,611 $ 1,418,303
New loans ................................ 135,940 729,608
Less loan payments ....................... (168,480) (1,039,300)
----------- -----------
Balance, end of period ................... $ 1,076,071 $ 1,108,611
=========== ===========
|
Deposits by directors and their related interests at December 31, 2000 and 1999 approximated $2,193,000 and $2,178,000, respectively.
A director, shareholder and executive officer of the Company is a partner in a partnership from which the Company leases operating facilities and land (see Note 8). Lease expenses charged to operations under these agreements approximated $33,600 in 2000 and 1999, and $22,000 in 1998.
NOTE 12 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
In the ordinary course of business, and to meet the financing needs of its customers, the Bank is a party to various financial instruments with off balance sheet risk. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amount of those instruments reflects the extent of involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At December 31, 2000 and 1999, unfunded commitments to extend credit were approximately $10,634,000 and $11,480,000, respectively. Variable rate and fixed rate unfunded commitments to extend credit were approximately $4,343,000 and $6,291,000, respectively, at December 31, 2000. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.
At December 31, 2000 and 1999, there were outstanding letters of credit totaling $335,400 and $840,850, respectively.
NOTE 13 - EMPLOYEE BENEFIT PLAN
On September 1, 1998, the Bank adopted the GrandSouth Bank Profit Sharing Section 401(k) Plan for the benefit of all eligible employees. The Bank contributes fifty percent of the first four percent of the employee's compensation contributed to the Plan. Contributions made to the Plan in 2000, 1999, and 1998 amounted to $20,107, $9,745, and $1,472, respectively.
NOTE 14 - STOCK OPTION PLAN
During 1998, the Board of Directors approved a stock option plan for the benefit of the directors, officers and employees. The Board may grant up to 187,000 options at an option price per share not less than the fair market value on the date of grant. All options granted to officers and employees vest 20 percent each year for five years and expire 10 years from the grant date. The Bank has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
Accordingly, no compensation cost has been recognized for the stock option plan. Had compensation cost been determined based on the fair value at the grant date for the above stock option awards consistent with the provisions of SFAS 123, the Bank's net income (loss) and net income (loss) per common share would have been decreased (increased) to the pro forma amounts indicated below:
For the periods ended
December 31,
------------
2000 1999 1998
---- ---- ----
Net income (loss) - as reported ........................................ $297,270 $87,080 $(621,045)
Net income (loss) - pro forma .......................................... 261,839 49,559 (658,565)
Basic net income (loss) per common share - as reported ................. .16 .05 (.33)
Basic net income (loss) per common share - pro forma ................... .14 .03 (.39)
Diluted net income (loss) per common share - as reported ............... .15 .05 (.33)
Diluted net income (loss) per common share - pro forma ................. .13 .02 (.39)
|
The fair value of the option grant is estimated on the date of grant using the Black-Scholes option pricing model and the minimum value method allowed by SFAS 123. The risk free interest rate used was 5.89 percent, the expected option life was 5 years and the assumed dividend rate was zero.
A summary of the status of the plan and changes during the year is presented below:
For the periods ended December 31,
----------------------------------
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
Outstanding at beginning of period ............. 154,000 $4.55 154,000 $4.55 - $ -
Granted ........................................ - - - - 154,000 4.55
Exercised ...................................... - - - - - -
Forfeited or expired ........................... 8,800 4.55 - - - -
----- ------- -----
Outstanding at end of period ................... 145,200 4.55 154,000 4.55 154,000 4.55
===== ======= =====
Options exercisable at December 31, ............ 59,400 4.55 30,800 - - -
Shares available for grant ..................... 41,800 - 33,000 - 33,000 -
|
Granted shares and per share exercise prices have been restated to reflect the 1999 stock split effected in the form of a stock dividend (10%).
NOTE 15 - COMMON STOCK AND EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share", requires that the Bank present
basic and diluted net income (loss) per common share. The assumed conversion of
stock options creates the difference between basic and diluted net income (loss)
per common share. Income (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding for each
period presented. The weighted average number of common shares outstanding for
basic net income (loss) per common share was 1,873,129 in 2000, 1999 and 1998.
The weighted average number of common shares outstanding for diluted net income
per common share was 1,926,003 in 2000 and 1,924,387 in 1999. In 1998 the effect
of stock options was antidilutive. For ease of presentation, shares of stock
were considered outstanding for all of 1998. The difference in the weighted
average number of shares outstanding for basic net income (loss) per common
share and the weighted average number of shares outstanding for diluted net
income (loss) per common share was the effect of the assumed exercise of the
stock options outstanding. The treasury stock method is used to compute the
effect of stock options on the weighted average number of common shares
outstanding for the diluted method.
The Bank issued a ten percent common stock split effected in the form of a stock dividend in 1999. Net income (loss) per common share in 1998 has been restated to reflect this transaction.
NOTE 16 - DIVIDENDS
There are no current plans to initiate payment of cash dividends and future dividend policy will depend on the Bank's earnings, capital requirements, financial condition and other factors considered relevant by the Bank's Board of Directors. The Bank is restricted by banking regulations in its ability to pay dividends and must obtain the approval of the State Board of Financial Institutions prior to payment.
NOTE 17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2000, that the Bank meets all capital adequacy requirements to which it is subject.
NOTE 17 - REGULATORY MATTERS, Continued
As of December 31, 2000, the most recent notification of the banking regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios and minimum regulatory amounts and ratios are presented as follows:
To be well capitalized
For capital under prompt corrective
adequacy purposes action provisions
Actual ----------------- -----------------
------ Minimum Minimum
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(amounts in $000)
As of December 31, 2000
Total Capital (to risk weighted assets) .............. $9,139 12.4% $5,898 8.0% $7,373 10.0%
Tier 1 Capital (to risk weighted
assets) ............................................. 8,217 11.1 2,949 4.0 4,424 6.0
Tier 1 Capital (to average assets) .................... 8,217 9.5 3,466 4.0 4,332 5.0
As of December 31, 1999
Total Capital (to risk weighted assets) .............. $8,721 12.8% $5,434 8.0% $6,793 10.0%
Tier 1 Capital (to risk weighted assets) ............. 7,868 11.6 2,717 4.0 4,076 6.0
Tier 1 Capital (to average assets) .................... 7,868 9.5 3,300 4.0 4,125 5.0
|
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information, whether or not recognized in the balance sheets, when it is practical to estimate the fair value. SFAS No. 107 defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or other instruments. Certain items are specifically excluded from the disclosure requirements, including the Bank's common stock, property and equipment and other assets and liabilities.
Fair value approximates carrying value for cash and due from banks and federal funds sold due to the short-term nature of the instrument.
Investment securities available for sale are valued using quoted fair market prices. Other investments at cost are considered to be an appropriate estimate of fair value due to historical redemption of the stock at cost. Fair value for the Bank's off-balance sheet financial instruments is based on the discounted present value of the estimated future cash flows.
Fair value for loans maturing after one year is based on the discounted present value of the estimated future cash flows. Discount rates used in these computations approximate the rates currently offered for similar loans of comparable terms and credit quality.
Fair value for demand deposit accounts is equal to the carrying value. Interest-bearing accounts with no fixed maturity date are valued based on rates offered within the Bank's market using current interest rates on similar instruments. Certificate of deposit accounts and maturing within one year are valued at their carrying value. The fair value of certificate of deposit accounts maturing after one year are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
The Bank has used management's best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts which could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses which would be incurred in an actual sale or settlement are not taken into consideration in the fair value presented.
The estimated fair values of the Bank's financial instruments are as follows:
December 31,
------------
2000 1999
---- ----
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
Financial Assets:
Cash and due from banks .................................. $ 2,256,288 $ 2,256,288 $ 1,110,995 $ 1,110,995
Federal funds sold ....................................... 2,520,000 2,520,000 8,420,000 8,420,000
Investment securities available for sale ................. 10,764,692 10,764,692 7,586,270 7,586,270
Other investments, at cost ............................... 118,600 118,600 118,600 118,600
Loans .................................................... 69,717,470 76,291,827 61,717,086 53,371,572
Financial Liabilities:
Deposits ................................................. 78,209,089 83,762,436 72,794,527 72,539,447
Financial Instruments with Off-Balance Sheet Risk:
Standby letters of credit ................................ 335,400 335,400 840,850 840,850
Commitments to extend credit ............................. 10,634,000 10,634,000 11,480,000 11,480,000
|
NOTE 19 - PARENT COMPANY FINANCIAL INFORMATION
Following is condensed financial information of GrandSouth Bancorporation (parent company only, since inception on October 20, 2000):
CONDENSED BALANCE SHEET
ASSETS
Investment in bank subsidiary ........................... $8,181,583
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Shareholders' equity .................................... $8,181,583
==========
|
CONDENSED STATEMENT OF INCOME
For the period ended
December 31,
------------
2000
----
REVENUES .................................................... $ -
EXPENSES .................................................... -
EQUITY IN UNDISTRIBUTED NET INCOME
OF BANK SUBSIDIARY ....................................... 297,270
--------
Net income ........................................... $297,270
========
|
CONDENSED STATEMENT OF CASH FLOWS
Net income ................................................. $ 297,270
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of Bank subsidiary .... (297,270)
---------
Net cash provided by operating activities ........... -
---------
CASH, BEGINNING OF PERIOD .................................... -
---------
CASH, END OF PERIOD .......................................... $ -
=========
|
NOTE 20 - SUBSEQUENT EVENT
On January 2, 2001 the Company issued ten-year variable rate convertible subordinated debentures (the "debentures") due January 2, 2011 in the aggregate amount of $4,000,000. Interest is payable quarterly at a rate of prime minus 2 percent (7.50 percent at January 2, 2001). The holders of debentures may, at any time prior to the maturity, convert the principal amount of the debenture into common stock of the Company at the conversion ratio of $6.50 (approximate fair market value at January 2, 2001) of debenture principal for one share of the Company's common stock. The Company may redeem the debentures at any time after December 31, 2005, as a whole or in part from time to time at predetermined prices.
If the convertible debentures had been issued during the year, the number of common shares of stock that would have been issued had the debentures been converted would have been included for purposes of calculating diluted earnings per share. If the debentures had been outstanding for all of 2000, 615,384 additional shares would have been added to the weighted average number of shares outstanding for purposes of calculating diluted earnings per share, and diluted earnings per share would have been approximately $.12 per share for the year ended December 31, 2000.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.
The information set forth under the captions "Management of the Company" and "Section 16(a) Beneficial Ownership Reporting Compliance" in registrant's definitive proxy statement filed with the Commission for the 2001 Annual Meeting of Shareholders is incorporated herein by reference.
Item 10. Executive Compensation.
The information set forth under the captions "Management Compensation" and "Stock Option Plan" in registrant's definitive proxy statement filed with the Commission for the 2001 Annual Meeting of Shareholders is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in registrant's definitive proxy statement filed with the Commission for the 2001 Annual Meeting of Shareholders is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information set forth under the caption "Certain Relationships and Related Transactions" in registrant's definitive proxy statement filed with the Commission for the 2001 Annual Meeting of Shareholders is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
(a) Description of Exhibits. Exhibit No. Description 3.1 Articles of Incorporation of Registrant* 3.2 Bylaws of Registrant* 4.1 Form of Common Stock Certificate 10.1 Stock Option Plan 10.2 Form of Stock Option Agreement 21 Subsidiaries of Registrant ------------- |
*Incorporated by reference to Form 8-A filed November 13, 2000
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1999.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GrandSouth Bancorporation
April 2, 2001 By: s/Ronald K. Earnest
-----------------------------------------
Ronald K. Earnest
President and Chief Executive Officer
By: s/J. B. Garrett
----------------------------------------
J. B. Garrett
Vice President
(Principal Financial and Principal
Accounting Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
__________________________ Director April __, 2001
Roger L. Broyles
s/Ronald K. Earnest
President, Chief Executive Officer, Director April 2, 2001
--------------------------------
Ronald K. Earnest
s/Harold E. Garrett
Director April 2, 2001
--------------------------------
Harold E. Garrett
s/Mason Y. Garrett
Chairman, Director April 2, 2001
--------------------------------
Mason Y. Garrett
s/Michael L. Gault
Director April 2, 2001
--------------------------------
Michael L. Gault
Director April __, 2001
--------------------------------
Baety O. Gross
__________________________ Director April __, 2001
S. Hunter Howard, Jr.
|
EXHIBIT INDEX
Exhibit No. Description 3.1 Articles of Incorporation of Registrant* 3.2 Bylaws of Registrant* 4.1 Form of Common Stock Certificate 10.1 Stock Option Plan 10.2 Form of Stock Option Agreement 21 Subsidiaries of Registrant ------------- |
*Incorporated by reference to Form 8-A filed November 13, 2000
Exhibit 4.1
COMMON STOCK CUSIP
[FORM OF COMMON STOCK CERTIFICATE]
GRANDSOUTH BANCORPORATION
ORGANIZED UNDER THE LAWS OF SOUTH CAROLINA
This certificate is transferable in
New York, New York
This certifies that is the owner of shares of the COMMON STOCK, no Par Value, of GRANDSOUTH BANCORPORATION, fully paid and nonassessable transferable only on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly indorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Articles of Incorporation and of the Bylaws of the Corporation and all amendments and supplements thereto, copies of which are on file with the Corporation, to all of which the holder by acceptance of this Certificate assents. This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.
In witness whereof, the Corporation has caused this Certificate to bear the facsimile signatures of its duly authorized officers and its facsimile seal to be hereunto affixed.
[SEAL]
-------------------------- -----------------------------------------
President Secretary
COUNTERSIGNED AND REGISTERED:
Transfer Agent and Registrar
By:
--------------------------------------
Authorized Signature
|
[REVERSE OF STOCK CERTIFICATE]
GRANDSOUTH BANCORPORATION
The Corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued and, if the Corporation is authorized to issue any preferred or special class in series, the variations in the relative rights and preferences between the shares or each such series so far as the same have been fixed and determined, and the authority of the board of directors to fix and determine the relative rights and preferences of other series.
[USUAL TRANSFER FORM OMITTED]
GrandSouth Bank
1998 STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as the GrandSouth Bank 1998
Stock Option Plan (the "Plan"). The purpose of the Plan is to attract and retain
the best available personnel for positions of substantial responsibility and to
provide additional incentive to directors, officers and key employees of
GrandSouth Bank (the "Bank"), or any present or future parent or subsidiary of
the Bank, and to promote the success of the business. The Plan is intended to
provide for the grant of "Incentive Stock Options," within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and
Non-qualified Stock Options, options that do not so qualify. Each and every one
of the provisions of the Plan relating to Incentive Stock Options shall be
interpreted to conform to the requirements of Section 422 of the Code.
2. Definitions. As used herein, the following definitions shall apply.
(a) "Award" means the grant by the Board or the Committee of an Incentive Stock Option or a Non-qualified Stock Option, or any combination thereof, as provided in the Plan.
(b) "Bank" shall mean GrandSouth Bank, or any successor corporation thereto.
(c) "Board" shall mean the Board of Directors of the Bank, or any successor or parent corporation thereto.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) "Committee" shall mean the Stock Option Committee appointed by the Board in accordance with paragraph 5(a) of the Plan.
(f) "Common Stock" shall mean common stock, $2.50 par value per share, of the Bank, or any successor or parent corporation thereto.
(g) "Continuous Employment" or "Continuous Status as an Employee" shall mean the absence of any interruption or termination of employment with the Bank or any present or future Parent or Subsidiary of the Bank. Employment shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Bank (provided, however, in the case of Incentive Stock Options, no such leave may extend beyond 90 days unless reemployment rights are guaranteed by law), or in the case of transfers between payroll locations of the Bank or between the Bank and any of its Parent, its Subsidiaries or a successor.
(h) "Director" shall mean a member of the Board of the Bank, or any successor or parent corporation thereto.
(i) "Effective Date" shall mean the date specified in Section 15 hereof.
(j) "Employee" shall mean any person employed by the Bank or any present or future Parent or Subsidiary of the Bank.
(k) "Incentive Stock Option" or "ISO" shall mean an option to purchase Shares granted by the Committee pursuant to Section 8 hereof which is subject to the limitations and restrictions of Section 8 hereof and is intended to qualify under Section 422 of the Code.
(l) "Non-qualified Stock Option" shall mean an option to purchase Shares granted pursuant to Section 9 hereof, which option is not intended to qualify under Section 422 of the Code.
(m) "Option" shall mean an Incentive or Non-qualified Stock Option granted pursuant to this Plan providing the holder of such Option with the right to purchase Common Stock.
(n) "Optioned Stock" shall mean stock subject to an Option granted pursuant to the Plan.
(o) "Optionee" shall mean any person who receives an Option or Award pursuant to the Plan.
(p) "Parent" shall mean any present or future corporation which would be a "parent corporation" as defined in Subsections 424(e) and (g) of the Code.
(q) "Participant" means any officer or key employee of the Bank or any Parent or Subsidiary of the Bank or any other person providing a service to the Bank who is selected by the Board or the Committee to receive an Award, or who by the express terms of the Plan is granted an Award.
(r) "Plan" shall mean GrandSouth Bank 1998 Stock Option Plan.
(s) "Share" shall mean one share of the Common Stock.
(t) "Subsidiary" shall mean any present or future corporation which
would be a "subsidiary corporation" as defined in Subsections 424(f) and
(g) of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the provisions of Section 13 hereof, the aggregate number of Shares with respect to which Awards may be made pursuant to the Plan shall be 170,000. Such Shares shall be authorized but unissued shares of the Common Stock. Shares of Common Stock subject to Options which for any reason are terminated unexercised or expire shall again be available for issuance under the Plan.
4. Six Month Holding Period.
A total of six months must elapse between the date of the grant of an Option and the date of the sale of Common Stock received through the exercise of an Option.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the Board or a Committee appointed by the Board, which shall serve at the pleasure of the Board. Such Committee shall be constituted solely of two or more Directors who are not currently officers or employees of the Bank or any of its subsidiaries, and who qualify to administer the Plan as contemplated by Rule 16b-3 under the Securities Exchange Act of 1934, or any successor rule.
(b) Powers of the Committee. The Board or the Committee is authorized (but only to the extent not contrary to the express provisions of the Plan or, in the case of the Committee, to resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the form and content of Awards to be issued under the Plan and to make other determinations necessary or advisable for the administration of the Plan. The Committee also shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members present at any meeting at which a quorum is present shall be deemed the action of the Committee. In no event may the Board or the Committee revoke outstanding Awards without the consent of the Participant.
The Chairman of the Board of Directors of the Bank and such other officers as shall be designated by the Board or the Committee are hereby authorized to execute instruments evidencing Awards on behalf of the Bank and to cause them to be delivered to the participants.
(c) Effect of Board's or Committee's Decision. All decisions, determinations and interpretations of the Board or the Committee shall be final and conclusive on all persons affected thereby.
6. Eligibility. Awards may be granted to directors, officers, key employees and other persons. The Board or the Committee shall from time to time determine the directors, officers, key employees and other persons who shall be granted Awards under the Plan, the number to be granted to each such director, officer, key employee and other persons under the Plan, and whether Awards granted to each such Participant under the Plan shall be Incentive and/or Non-qualified Stock Options (provided, however, Incentive Stock Options may only be granted to persons who are employees, including officers, of the Bank). In selecting participants and in determining the number of Shares of Common Stock to be granted to each such Participant pursuant to each Award granted under the Plan, the Board or the Committee may consider the nature of the services rendered by each such Participant, each such Participant's current and potential contribution to the Bank and such other factors as the Board or the Committee may, in its sole discretion, deem relevant. Directors, officers, key employees or other persons who have been granted an Award may, if otherwise eligible, be granted additional Awards.
7. Term of the Plan. The Plan shall continue in effect for a term of ten years from the Effective Date, unless sooner terminated pursuant to Section 18 hereof. No Option shall be granted under the Plan after ten years from the Effective Date.
8. Terms and Conditions of Incentive Stock Options. Incentive Stock Options may be granted only to Participants who are Employees. Each Incentive Stock Option granted pursuant to the Plan shall be evidenced by a written agreement, executed by the Bank and the Optionee, which states the number of shares of common stock subject to the Options granted thereby and the period of exercisability of the Options, and in such form as the Board or the Committee shall from time to time approve. Each and every Incentive Stock Option granted pursuant to the Plan shall comply with, and be subject to, the following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive Stock Option granted under the Plan may be exercised shall not, as to any particular Incentive Stock Option, be less than the fair market value of the Common Stock at the time such Incentive Stock Option is granted. For such purposes, if the Common Stock is traded otherwise than on a national securities exchange at the time of the granting of an Option, then the price per Share of the Optioned Stock shall be not less than the mean between the bid and asked price on the date the Incentive Stock Option is granted or, if there is no bid and asked price on said date, then on the next prior business day on which there was a bid and asked price. If no such bid and asked price is available, then the price per Share shall be determined by the Board or the Committee. If the Common Stock is listed on a national securities exchange at the time of the granting of an Incentive Stock Option, then the price per Share shall be not less than the average of the highest and lowest selling price on such exchange on the date such Incentive Stock Option is granted or, if there were no sales on said date, then the price shall be not less than the mean between the bid and asked price on such date.
(ii) In the case of an Employee who owns Common Stock representing more than ten percent (10%) of the outstanding Common Stock at the time the Incentive Stock Option is granted, the Incentive Stock Option price shall not be less than one hundred and ten percent (110%) of the fair market value of the Common Stock at the time the Incentive Stock Option is granted.
(b) Payment. Full payment for each Share of Common Stock purchased upon the exercise of any Incentive Stock Option granted under the Plan shall be made at the time of exercise of each such Incentive Stock Option and shall be paid in cash. No Shares of Common Stock shall be issued until full payment therefor has been received by the Bank, and no Optionee shall have any of the rights of a stockholder of the Bank until Shares of Common Stock are issued to him.
(c) Term of Incentive Stock Option. The term of each Incentive Stock option granted pursuant to the Plan shall be not more ten (10) years from the date each such Incentive Stock Option is granted, provided that in the case of an Employee who owns stock representing more than ten percent (10%) of the Common Stock outstanding at the time the Incentive Stock Option is granted, the term of the Incentive Stock Option shall not exceed five (5) years.
(d) Exercise Generally. Except as otherwise provided in Section 10 hereof, no Incentive Stock Option may be exercised unless the Optionee shall have been in the Continuous Employment of the Bank at all times during the period beginning with the date of grant of any such Incentive Stock Option and ending on the date three months prior to the date of exercise of any such Incentive Stock Option. The Board or the Committee may at the time of grant impose additional conditions upon the right of an Optionee to exercise any Incentive Stock Option granted hereunder which are not inconsistent with the terms of the Plan or the requirements for qualification as an Incentive Stock Option under Section 422 of the Code.
(e) Limitation on Options to be Exercised. The aggregate fair market value (determined as of the date the Option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by each Employee during any calendar year (under all Incentive Stock Option plans, as defined in Section 422 of the Code, of the Bank or any present or future Parent or Subsidiary of the Bank) shall not exceed $100,000. Notwithstanding the prior provisions of this Section 8(e), the Board or the Committee may grant Options in excess of the foregoing limitations, provided said Options shall be clearly and specifically designated as not being Incentive Stock Options, as defined in Section 422 of the Code.
(f) Transferability. Any Incentive Stock Option granted pursuant to the Plan shall be exercised during an Optionee's lifetime only by the Optionee to whom it was granted and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution.
9. Terms and Conditions of Non-qualified Stock Options. Each Non-qualified Stock Option granted pursuant to the Plan shall be evidenced by a written agreement, executed by the Bank and the Optionee, which states the number of shares of common stock subject to the Options granted thereby and the period of exercisability of the Options, and in such form as the Board or the Committee shall from time to time approve. Each and every Non-qualified Stock Option granted pursuant to the Plan shall comply with and be subject to the following terms and conditions.
(a) Option Price. The exercise price per Share of Common Stock for each Non-qualified Stock Option granted pursuant to the Plan shall be at such price as the Board or the Committee may determine in its sole discretion.
(b) Payment. Full payment for each Share of Common Stock purchased upon the exercise of any Non-qualified Stock Option granted under the Plan shall be made at the time of exercise of each such Non-qualified Stock Option and shall be paid in cash. No Shares of Common Stock shall be issued until full payment therefor has been received by the Bank and no Optionee shall have any of the rights of a stockholder of the Bank until the Shares of Common Stock are issued to him.
(c) Term. The term of each Non-qualified Stock Option granted pursuant to the Plan shall be not more than ten (10) years from the date each such Non-qualified Stock Option is granted.
(d) Exercise Generally. The Board or the Committee may impose additional conditions upon the right of any Participant to exercise any Non-qualified Stock Option granted hereunder which are not inconsistent with the terms of the Plan.
(e) Cashless Exercise. An Optionee who has held a Non-qualified Stock Option for at least six months may engage in the "cashless exercise" of the Option. In a cashless exercise, an Optionee gives the Bank written notice of the exercise of the Option together with an order to a registered broker-dealer or equivalent third party, to sell part or all of the Optioned Stock and to deliver enough of the proceeds to the Bank to pay the Option price and any applicable withholding taxes. If the Optionee does not sell the Optioned Stock through a registered broker-dealer or equivalent third party, he can give the Bank written notice of the exercise of the Option and the third party purchaser of the Optioned Stock shall pay the Option price plus any applicable withholding taxes to the Bank.
(f) Transferability. Any Non-qualified Stock Option granted pursuant to the Plan shall be exercised during an Optionee's lifetime only by the Optionee to whom it was granted and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution.
10. Effect of Termination of Employment, Disability or Death on Incentive Stock Options.
(a) Termination of Employment. In the event that any Optionee's
employment with the Bank shall terminate for any reason, other than
Permanent and Total Disability (as such term is defined in Section 22 (e)
(3) of the Code) or death, all of any such Optionee's Incentive Stock
Options, and all of any such Optionee's rights to purchase or receive
Shares of Common Stock pursuant thereto, shall automatically terminate on
the earlier of (i) the respective expiration dates of any such Incentive
Stock Options or (ii) the expiration of not more than three months after
the date of such termination of employment, but only if, and to the extent
that, the Optionee was entitled to exercise any such Incentive Stock
Options at the date of such termination of employment.
(b) Disability. In the event that any Optionee's employment with the Bank shall terminate as the result of the permanent and Total Disability of such Optionee, such Optionee may exercise any Incentive Stock Options granted to him pursuant to the Plan at any time prior to the earlier of (i) the respective expiration dates of any such Incentive Stock Options or (ii) the date which is one year after the date of such termination of employment, but only if, and to the extent that, the Optionee was entitled to exercise any such Incentive Stock Options at the date of such termination of employment.
(c) Death. In the event of the death of an Optionee, any Incentive Stock Options granted to such Optionee may be exercised by the person or persons to whom the Optionee's rights under any such Incentive Stock Options pass by will or by the laws of descent and distribution (including the Optionee's estate during the period of administration) at any time prior to the earlier of (i) the respective expiration dates of any such Incentive Stock Options or (ii) the date which is one year after the date of death of such Optionee but only if, and to the extent that, the Optionee was entitled to exercise any such Incentive Stock Options at the date of death. For purposes of this Section 10(c), any Incentive Stock Option held by an Optionee shall be considered exercisable at the date of his death if the only unsatisfied condition precedent to the exercisability of such Incentive Stock Option at the date of death is the passage of a specified period of time. At the discretion of the Board or the Committee, upon exercise of such Options the Optionee may receive Shares or cash or combination thereof. If cash shall be paid in lieu of Shares, such cash shall be equal to the difference between the fair market value of such Shares and the exercise price of such Options on the exercise date.
(d) Incentive Stock Options Deemed Exercisable. For purposes of Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any Optionee shall be considered exercisable at the date of termination of his employment if any such Incentive Stock Option would have been exercisable at such date of termination of employment.
(e) Termination of Incentive Stock Options. To the extent that any Incentive Stock Option granted under the Plan to any Optionee whose employment with the Bank terminates shall not have been exercised within the applicable period set forth in this Section 10, any such Incentive Stock Option, and all rights to purchase or receive Shares of Common Stock pursuant thereto, as the case may be, shall terminate on the last day of the applicable period.
11. Effect of Termination of Employment, Disability or Death on Non-qualified Stock Options. The terms and conditions of Non-qualified Stock Options relating to the effect of the termination of an Optionee's employment, disability of an Optionee or his death shall be such terms and conditions as the Board or the Committee shall, in its sole discretion, determine at the time of termination, unless specifically provided for by the terms of the Agreement at the time of grant of the Award.
12. Right of Repurchase and Restrictions on Disposition. The Board or the Committee, in its sole discretion, may include at the time of award, as a term of any Incentive Stock Option or Non-qualified Stock Option, the right (the "Repurchase Right") but not the obligation, to repurchase all or any amount of the Shares acquired by an Optionee pursuant to the exercise of any such Options. The intent of the Repurchase Right is to encourage the continued employment of the Optionee. The Repurchase Right shall provide for, among other things, a specified duration of the Repurchase Right, a specified price per Share to be paid upon the exercise of the Repurchase Right and a restriction on the disposition of the Shares by the Optionee during the period of the Repurchase Right. The Repurchase Right may permit the Bank to transfer or assign such right to another party. The Bank may exercise the Repurchase Right only to the extent permitted by applicable law.
13. Recapitalization, Merger, Consolidation, Change in Control and Similar Transactions.
(a) Adjustment. The aggregate number of Shares of Common Stock for which Options may be granted hereunder, the number of Shares of Common Stock covered by each outstanding Option, and the exercise price per Share of Common Stock of each such Option, shall all be proportionately adjusted for any increase or decrease in the number of issued and outstanding Shares of Common Stock resulting from a subdivision or consolidation of Shares (whether by reason of merger, consolidation, recapitalization, reclassification, splitup, spin-off, stock split, combination of shares, or otherwise) or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such Shares of Common Stock effected without the receipt of consideration by the Bank (other than Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become immediately exercisable in the event of a change in control or imminent change in control of the Bank. In the event of such a change in control or imminent change in control, the Optionee shall, at the discretion of the Board or the Committee, be entitled to receive cash in an amount equal to the fair market value of the Common Stock subject to any Incentive or Non-qualified Stock Option over the Option Price of such Shares, in exchange for the surrender of such Options by the Optionee on that date. For purposes of this Section 13, "change in control" shall mean: (i) the execution of an agreement for the sale of all, or a material portion, of the assets of the Bank; (ii) the execution of an agreement for a merger or recapitalization of the Bank or any merger or recapitalization whereby the Bank is not the surviving entity; (iii) a change of control of the Bank, as otherwise defined or determined by the State Board of Financial Institutions pursuant to the laws of the State of South Carolina, or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of 25% or more of the outstanding voting securities of the Bank by any person, trust, entity or group. This limitation shall not apply to the purchase of shares by underwriters in connection with a public offering of Bank stock, or the purchase of shares of up to 25% of any class of securities of the Bank by a tax qualified employee stock benefit plan of the Bank or to a transaction which forms a holding company for the Bank, if the shareholders of the Bank own substantially the same proportionate interests of the stock of the holding company immeiately after the transaction except for changes caused by the exercise of dissenter's rights. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. For purposes of this Section 13, "imminent change in control" shall refer to any offer or announcement, oral or written, by any person or persons acting as a group, to acquire control of the Bank. Whether there is an imminent change in control shall be determined by the Board or the Committee. The decision of the Board or the Committee as to whether a change in control or imminent change in control has occurred shall be conclusive and binding.
(c) Cancellation and Payment for Options in the Event of Extraordinary Corporate Action. Subject to any required action by the stockholders of the Bank, in the event of any change in control, recapitalization, merger, consolidation, exchange of shares, spin-off, reorganization, tender offer, liquidation or other extraordinary corporate action or event, the Board or the Committee, in its sole discretion, shall have the power, prior or subsequent to such action or event to:
(i) cancel any or all previously granted Options, provided that consideration is paid to the Optionee in connection therewith which consideration is sufficient to put the Optionee in as favorable a financial position as he would have been if the options had not been cancelled; and/or
(ii) subject to Section 13(a) and (b) above, make such other adjustments in connection with the Plan as the Board or the Committee, in its sole discretion, deems necessary, desirable, appropriate or advisable; provided, however, that no action shall be taken by the Committee which would cause Incentive Stock Options granted pursuant to the Plan to fail to meet the requirements of Section 422 of the Code.
Except as expressly provided in Sections 13(a) and 13(b) hereof, no Optionee shall have any rights by reason of the occurrence of any of the events described in this Section 13.
(d) Acceleration. The Board or the Committee shall at all times have the power to accelerate the exercise date of Options previously granted under the Plan.
14. Time of Granting Options. The date of grant of an Option under the Plan shall, for all purposes, be the date on which the Board or the Committee makes the determination to grant such Option. Notice of the determination of the grant of an Option shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant in a form determined by the Board or the Committee.
15. Effective Date. The Plan shall become effective upon adoption by the Board of Directors. Options may be granted prior to ratification of the Plan by the stockholders of the Bank if the exercise of such Options is subject to such stockholder ratification.
16. Approval by Stockholders. The Plan shall be approved by stockholders of the Bank within twelve months before or after the date the Plan becomes effective.
17. Modification of Options. At any time and from time to time, the Board may or may authorize the Committee to direct the execution of an instrument providing for the modification of any outstanding Option, provided no such modification, extension or renewal shall confer on the holder of said Option any right or benefit which could not be conferred on him by the grant of a new Option at such time, or shall not materially decrease the Optionee's benefits under the Option without the consent of the holder of the Option, except as otherwise permitted under Section 18 hereof. Notwithstanding anything herein to the contrary, the Board or the Committee shall have the authority to cancel outstanding Options with the consent of the Optionee and to reissue new Options at a lower exercise price, (provided, however, the exercise price for Incentive Stock Options shall in no event be less than the then fair market value per share of Common Stock), in the event that the fair market value per share of Common Stock at any time prior to the date of exercise of outstanding Options falls below the exercise price of such Options.
18. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or discontinue the Plan, except that no action of the Board may increase (other than as provided in Section 13 hereof) the maximum number of Shares permitted to be optioned under the Plan, materially increase the benefits accruing to Participants under the Plan or materially modify the requirements for eligibility for participation in the Plan unless such action of the Board shall be subject to approval or ratification by the stockholders of the Bank.
(b) Change in Applicable Law. Notwithstanding any other provision contained in the Plan, in the event of a change in any federal or state law, rule or regulation which would make the exercise of all or part of any previously granted Incentive and/or Non-qualified Stock Option unlawful or subject the Bank to any penalty, the Committee may restrict any such exercise without the consent of the Optionee or other holder thereof in order to comply with any such law, rule or regulation or to avoid any such penalty.
19. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to any Option granted under the Plan unless the issuance and delivery of such Shares shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, any applicable state securities law and the requirements of any stock exchange upon which the Shares may then be listed.
The inability of the Bank to obtain approval from any regulatory body or authority deemed by the Bank's counsel to be necessary to the lawful issuance and sale of any Shares hereunder shall relieve the Bank of any liability in respect of the non-issuance or sale of such Shares.
As a condition to the exercise of an Option, the Bank may require the person exercising the Option to make such representations and warranties as may be necessary to assure the availability of an exemption from the registration requirements of federal or state securities law.
20. Reservation of Shares. During the term of the Plan, the Bank will reserve and keep available a umber of Shares sufficient to satisfy the requirements of the Plan.
21. Unsecured Obligation. No Participant under the Plan shall have any interest in any fund or special asset of the Bank by reason of the Plan or the grant of any Incentive or Non-qualified Stock Option under the Plan. No trust fund shall be created in connection with the Plan or any grant of any Incentive or Non-qualified Stock Option hereunder and there shall be no required funding of amounts which may become payable to any Participant.
22. Withholding Tax. The Bank shall have the right to deduct from all amounts paid in cash with respect to the cashless exercise of Options under the Plan any taxes required by law to be withheld with respect to such cash payments. Where a Participant or other person is entitled to receive Shares pursuant to the exercise of an Option pursuant to the Plan, the Bank shall have the right to require the Participant or such other person to pay the Bank the amount of any taxes which the Bank is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or sell without notice, a number of such Shares sufficient to cover the amount required to be withheld.
23. Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of South Carolina, except to the extent that federal law shall be deemed to apply.
24. Compliance With Rule 16b-3. With respect to persons to whom options are granted hereunder who are subject to Section 16 of the Securities Exchange Act of 1934: (i) this Plan is intended to comply with all applicable conditions of Rule 16b-3 or its successors, (ii) all transactions involving insider-participants are subject to such conditions are expressly set forth in the Plan, and (iii) any provision of the Plan or action by the Plan's administrators that is contrary to a condition of Rule 16b-3 shall not apply to insider-participants.
[FORM OF STOCK OPTION AGREEMENT]
GRANDSOUTH BANK
STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into between GrandSouth Bank, a South Carolina banking corporation (the "Bank"), and the person named in Appendix A hereto as the Holder (the "Holder"), as of the date set forth in Appendix A hereto as the Date of Grant, in connection with the grant of options pursuant to the GrandSouth Bank 1998 Stock Option Plan (the "Plan"). Appendix A hereto is incorporated by reference herein ("Appendix A").
W I T N E S S E T H:
WHEREAS, the Holder is employed by the Bank or one of its subsidiaries in a key position or is an officer or director of the Bank and the Bank desires to retain the Holder in its services, to encourage the Holder to own Common Stock (as defined in the Plan) of the Bank and to give the Holder added incentive to advance the interests of the Bank through the Plan and, therefore, desires to grant the Holder an option to purchase shares of Common Stock of the Bank under terms and conditions established by the Board of Directors or a committee thereof (as set forth in the Plan).
NOW, THEREFORE, in consideration of these premises, the parties agree that the following shall constitute the Agreement between the Bank and the Holder:
1. Grant of Option. Subject to the terms and conditions set forth
herein, the Bank grants to the Holder incentive stock options qualified under
Section 422 of the Internal Revenue Code (the "Code") ("Incentive Stock
Options") and/or non-qualified stock options ("Non-qualified Stock Options") to
purchase from the Bank the number of shares specified in Appendix A hereto, at
the price, for the period, and on the terms set forth in Appendix A.
2. Additional Terms of Option and Terms of Exercise. The term of the options granted hereby may be reduced only on account of termination of employment, disability or death of the Holder as provided in Paragraphs 4 and 5 hereof, or in the event of certain extraordinary corporate actions as set forth in the Plan. At any time and from time to time when any option or portion thereof is exercisable, the same may be exercised in whole or in part. Except as provided in Paragraphs 4 and 5 hereof, no option shall be exercisable unless, at the time of the exercise, the Holder is then, and has been continuously since such option was granted, an employee of the Bank. Leave of absence from employment by the Bank when granted by the Bank because of sick leave, military leave or any other reason approved by the Bank, to the extent permitted under the Code and applicable regulations, shall not be considered as interruption or termination of employment for any purpose under the Plan.
The Holder shall also be subject to the following:
(a) With respect to an Incentive Stock Option granted under the Plan, the aggregate fair market value of shares of Common Stock subject to such Incentive Stock Option and the aggregate fair market value of shares of Common Stock or stock of any affiliate (or a predecessor of the Bank or an affiliate) subject to any other incentive stock option (within the meaning of Section 422 of the Code) of the Bank and its affiliates (or a predecessor corporation of any such corporation), to the extent such options become first exercisable in any calendar year, may not (with respect to any holder) exceed $100,000, determined as of the date the Incentive Stock Option is granted.
(b) Any options granted hereby which are in excess of the fair market value limitations set forth in Paragraph (a) of this subsection shall be deemed "non-statutory" or "non-qualified" and shall not be Incentive Stock Options granted hereunder.
(c) The right to exercise any option granted hereunder shall be forfeited in the event the Holder shall be dismissed or resign as the consequence of the commission of a crime involving moral turpitude.
3. Exercise of Options
The options granted hereunder shall be exercisable only upon delivery
to the Bank at its main office of a written notice: (a) stating the Holder's
election to exercise, (b) specifying the number of shares to be purchased, and
(c) enclosing payment for the shares purchased in full. Payment shall be made in
cash unless Appendix A specifies that cashless exercise is permitted. Any
cashless exercise shall comply with Section 9(e) of the Plan. As promptly as
practicable thereafter, a certificate or certificates for the number of shares
to which the notice refers shall be issued, provided, however, that the time of
such delivery may be postponed by the Bank for such period as may be required by
the Bank with reasonable diligence to comply with applicable listing
requirements of any securities exchange or to comply with applicable state or
federal law. In no case may a fraction of a share be purchased or issued under
the Plan.
The Holder shall not, by reason of the Plan and the granting to him of any option hereunder, have or thereby acquire any rights of a shareholder of the Bank with respect to the shares covered by the option unless and until his ownership shall have been recorded on the stock record books of the Bank and a certificate for such shares shall have been issued and delivered to him.
4. Effect of Termination of Employment, Disability or Death on Incentive Stock Options.
(a) Termination of Employment. If the Holder's employment by the Bank
or any of its subsidiaries is terminated because of the Holder's retirement, or
for disability with the approval of the Bank or any of its subsidiaries, or for
any other reason except death or termination pursuant to paragraph 2(c) hereof,
the Holder shall have the right at any time within three months thereafter (but
in any event no later than the date of the expiration of the option period) to
exercise the Holder's Incentive Stock Options with respect to the number of
shares which were immediately purchasable by the Holder at the time of
termination of employment, and the Holder's right to purchase any remaining
shares shall terminate forthwith. Notwithstanding the foregoing, in the event
employment is terminated due to disability as defined under Section 22(e)(3) of
the Code, the Holder shall have the right at any time within one year thereafter
(but in any event no later than the date of the expiration of the option period)
to exercise such Incentive Stock Options.
This Agreement shall not in any event confer on the Holder any right to continue in the employment of the Bank or any of its subsidiaries, or affect their right to terminate the Holder's service at any time, and nothing contained herein shall be deemed a waiver or modification of any provision contained in any agreement between the Holder and the Bank or any parent or subsidiary thereof.
(b) Death of Holder of Option. In the event of the death of the Holder while the Holder is in the employ of the Bank or any of its subsidiaries, any Incentive Stock Option or unexercised portion thereof granted to the Holder shall be exercisable at any time prior to the expiration of one year after the date of such death (but in any event no later than the date of the expiration of the option period), but only by the estate of the Holder or by the person or persons to whom the Holder's rights under the Incentive Stock Option shall pass by the Holder's will or by the laws of descent and distribution of the state of the Holder's domicile at the time of the Holder's death, and then only if and to the extent that the Holder was entitled to exercise the Incentive Stock Option at the date of his death. The estate of the Holder or the person or persons so exercising such Incentive Stock Option after the Holder's death shall, simultaneously with the delivery of notice to exercise and the payment for the shares purchased, deliver to the Bank such proof of the right of such estate or such person or persons to exercise the Incentive Stock Option as may reasonably be required by the Board of Directors and counsel.
5. Effect of Termination of Employment, Disability or Death on Non-qualified Stock Options.
The terms and conditions of Non-qualified Stock Options relating to the effect of the termination of the Holder's employment, or the Holder's death or disability shall be such terms and conditions as the Board or the Committee shall, in its sole discretion, determine at the time of termination, unless otherwise specifically provided for in Appendix A hereto.
6. Options not Transferable
Options granted hereby shall not be transferable otherwise than by will or by the laws of descent and distribution, and shall be exercisable during the Holder's lifetime only by the Holder.
7. Adjustment of Shares
In the event of stock dividends, stock splits, recapitalization, combination or exchange of shares, merger, consolidation, reorganization, or any other increase or decrease in the number of Shares of Common Stock effected without the receipt of consideration by the Bank (other than Shares held by dissenting stockholders), the number of shares subject to the Plan, and the number of shares, the option price, and the exercise date thereof subject to this Agreement, shall be appropriately adjusted by the Board of Directors, whose determination shall be conclusive with respect to such adjustment. Certain other adjustments may (or shall) also be made with respect to the options in connection with the foregoing events or a change in control or imminent change in control as provided in the Plan.
8. Investment Letter. The Holder agrees, and any other party that purchases any shares of the Common Stock pursuant to any options granted hereby must as a condition precedent to such purchase likewise agree, that the shares of Common Stock acquired upon exercise of any options shall be acquired for his own account for investment only and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Act"), or other applicable securities laws. If the Board of Directors so determines, any Common Stock certificates issued upon exercise of any option shall bear a legend to the effect that the shares have been so acquired. The Bank may, but in no event shall be required to, bear any expense of complying with the Act, other applicable securities laws or the rules and regulations of any national securities exchange or other regulatory authority in connection with the registration, qualification, or transfer, as the case may be, of any option or any shares of Common Stock acquired upon the exercise hereof. The foregoing restrictions on the transfer of the shares of Common Stock shall be inoperative if (a) the Bank previously shall have been furnished with an opinion of counsel, satisfactory to it, to the effect that such transfer will not involve any violation of the Act or other applicable securities laws, or (b) the shares of Common Stock shall have been duly registered in compliance with the Act and other applicable securities laws. If any option, or the shares of Common Stock subject to any option, are so registered under the Act and listed on any securities exchange, the Holder agrees, and any other party that purchases any shares of Common Stock pursuant to any option must as a condition precedent to such purchase likewise agree, that he will not make a public offering of the said shares except on a national securities exchange on which the Common Stock of the Bank is then registered and listed.
9. No Effect on Capital Structure. This grant of options shall not affect the right of the Bank or any affiliate thereof to reclassify, recapitalize or otherwise change its capital or debt structure or to merge, consolidate, convey any or all of its assets, dissolve, liquidate, windup, or otherwise reorganize.
10. Amendment, Suspension and Termination
The Board may at any time alter, suspend or discontinue the Plan, provided, however, that the Board shall not, without the approval of the shareholders of the Bank, amend the Plan to: (a) increase the maximum number of shares as to which options may be granted (other than as provided in Paragraph 13 of the Plan), (b) materially increase the benefits accruing to participants under the Plan, or (c) materially modify the requirements for eligibility for participation in the Plan.
The options granted hereby will terminate automatically at the close of business on the date which is ten years from the date of grant as set forth in Appendix A unless terminated prior thereto as hereinabove provided or unless otherwise provided in Appendix A.
11. Board Authority. Any question concerning the interpretation of this Agreement, any adjustments equired to be made under Paragraph 7 of this Agreement, and any controversy which may arise under this Agreement shall be determined by the Board of Directors of the Bank in its sole discretion.
12. Plan Governs. The terms of this Agreement are governed by the terms of the Plan, a copy of which is attached hereto as Appendix B and made a part hereof as if fully set forth herein, and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall govern. Initially capitalized terms used in this agreement shall have the same meaning as provided in the Plan, unless otherwise specifically provided herein.
13. Notice. Whenever any notice is required or permitted hereunder, such notice must be in writing and personally delivered, or sent by mail. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address which such person has theretofore specified by written notice delivered in accordance herewith. The Bank or Holder may change, at any time and from time to time, by written notice to the other, the address previously specified for receiving notices. Until changed in accordance herewith, the Bank specifies its address as set forth below:
GrandSouth Bank
327 Fairview Road
Simpsonville, South Carolina 29681
Until changed in accordance herewith, the Holder specifies his address is as set forth on Appendix A hereto.
14. Unenforceability of Portion of Agreement. In the event any provision of this Agreement shall be held to be illegal, invalid, or unenforceable for any reason, the illegality, invalidity, or unenforceability of such provision shall not affect the remaining provisions of this Agreement, but shall be fully severable and this Agreement shall be construed and enforced as if the illegal, invalid, or unenforceable provision had never been included herein.
IN WITNESS HEREOF, the Bank has caused this Agreement to be executed and the Holder has hereunder set his hand on the day and year set forth on Appendix A as the Date of Grant.
HOLDER GRANDSOUTH BANK
By:
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Title:
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GRANDSOUTH BANK
STOCK OPTION AGREEMENT PURSUANT TO THE
GRANDSOUTH BANK 1998 STOCK OPTION PLAN (THE "PLAN")
APPENDIX A
(Incentive pursuant to Section 422A of the Internal
Revenue Code or non-qualified)
3. NUMBER OF SHARES SUBJECT TO OPTION:
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4. EXERCISE PRICE PER SHARE:
-----------------------
5. DATE OF GRANT:
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6. EXERCISE TERMS:
(b) CASHLESS EXERCISE PERMITTED (May only be permitted for non-qualified stock options): YES ___ NO __
(c) RIGHT OF REPURCHASE PERMITTED PURSUANT TO SECTION 12 OF THE PLAN:
YES ___ NO ___
IF RIGHT OF REPURCHASE IS PERMITTED, THE TERMS ARE AS FOLLOW:
(d) OTHER TERMS:
(Ten years from date of grant, unless otherwise specified here)
HOLDER GRANDSOUTH BANK
By:
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APPENDIX B
GRANDSOUTH BANK
1998 STOCK OPTION PLAN
[TEXT OMITTED. SEE EXHIBIT 10.1 FOR TEXT.]
Exhibit 21
SUBSIDIARIES OF REGISTRANT
Name Jurisdiction of Incorporation ---- ----------------------------- GrandSouth Bank South Carolina |