UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ________________ TO _______________.
Commission File Number: 000-31937
GRANDSOUTH BANCORPORATION
(Exact name of registrant as specified in its charter)
Incorporated in the State of South Carolina
I.R.S. Employer Identification Number 57-1104394
381 Halton Road, Greenville, SC 29607
(Address of Principal Executive Offices)
(864) 770-1000
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
[ ] Yes [ ] No (Not yet applicable to the Registrant)
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock - No Par Value, 3,573,695 Shares Outstanding on May 11, 2009
GRANDSOUTH BANCORPORATION
FORM 10-Q
Index
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets ............................................... 3
Consolidated Statements of Income ......................................... 4
Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income ......................................... 5
Consolidated Statements of Cash Flows ..................................... 6
Notes to Unaudited Consolidated Financial Statements ...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................ 19
Item 4T. Controls and Procedures ............................................................ 20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ....................... 20
Item 6. Exhibits .................................................................. 20
SIGNATURES .................................................................................. 21
|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GRANDSOUTH BANCORPORATION
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2009 2008
---- ----
(Dollars in thousands)
Assets
Cash and due from banks .................................................................. $ 3,687 $ 2,329
Interest bearing transaction accounts with other banks ................................... 5,188 8,453
Federal funds sold ....................................................................... - 429
--------- ---------
Cash and cash equivalents ............................................................ 8,875 11,211
Certificates of deposit with other banks ................................................. 2,000 2,000
Securities available-for-sale ............................................................ 45,211 47,378
Other investments, at cost ............................................................... 2,045 1,926
Loans, net of allowance for loan losses $3,770 for 2009 and
$4,110 for 2008 ...................................................................... 301,237 297,523
Premises and equipment, net .............................................................. 4,698 4,744
Bank owned life insurance ................................................................ 4,994 4,944
Assets acquired in settlement of loans ................................................... 1,345 674
Interest receivable ...................................................................... 2,132 2,077
Deferred income taxes .................................................................... 748 1,033
Goodwill ................................................................................. 737 737
Other assets ............................................................................. 946 770
--------- ---------
Total assets ...................................................................... $ 374,968 $ 375,017
========= =========
Liabilities
Deposits
Noninterest bearing .................................................................. $ 14,511 $ 15,331
Interest bearing ..................................................................... 290,466 295,554
--------- ---------
Total deposits .................................................................... 304,977 310,885
Short-term Federal Home Loan Bank advances ............................................... 2,000 -
Long-term Federal Home Loan Bank advances ................................................ 24,000 29,000
Junior subordinated debentures ........................................................... 8,247 8,247
Interest payable ......................................................................... 538 639
Other liabilities ........................................................................ 2,234 2,073
--------- ---------
Total liabilities ................................................................. 341,996 350,844
--------- ---------
Shareholders' equity
Preferred stock, Series T - $1,000 per share liquidation preference; issued
and oustanding - 9,000 at March 31, 2009 and
none at December 31, 2008 ............................................................ 7,531 -
Preferred stock, Series W - $1,000 per share liquidation preference;
issued and oustanding - 450 at March 31, 2009 and
none at December 31, 2008 ............................................................ 1,479 -
Common stock - no par value; 20,000,000 shares authorized;
issued and outstanding - 3,573,695 at March 31, 2009 and
3,573,695 at December 31, 2008 ....................................................... 19,969 19,940
Retained earnings ........................................................................ 4,200 3,970
Accumulated other comprehensive income (loss) ............................................ (207) 263
--------- ---------
Total shareholders' equity ........................................................ 32,972 24,173
--------- ---------
Total liabilities and shareholders' equity ........................................ $ 374,968 $ 375,017
========= =========
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2009 2008
----- ----
(Dollars in thousands,
except per share)
Interest income
Loans, including fees ........................................................................... $4,840 $5,771
Investment securities
Taxable ..................................................................................... 449 617
Nontaxable .................................................................................. 137 141
Dividends ....................................................................................... - 14
Other, principally federal funds sold ........................................................... 47 48
------ ------
Total interest income ....................................................................... 5,473 6,591
------ ------
Interest expense
Deposits ........................................................................................ 2,168 3,138
Federal Home Loan Bank advances ................................................................. 227 80
Junior subordinated debt ........................................................................ 69 137
------ ------
Total interest expense ...................................................................... 2,464 3,355
------ ------
Net interest income .................................................................................. 3,009 3,236
Provision for loan losses ............................................................................ 600 255
------ ------
Net interest income after provision for loan losses .................................................. 2,409 2,981
------ ------
Noninterest income
Service charges on deposit accounts ............................................................. 124 110
Other income .................................................................................... 100 76
------ ------
Total noninterest income .................................................................... 224 186
------ ------
Noninterest expenses
Salaries and employee benefits .................................................................. 1,297 1,356
Occupancy and equipment ......................................................................... 164 176
Data processing ................................................................................. 117 144
Insurance expense ............................................................................... 110 66
Professional services ........................................................................... 118 143
Other expense ................................................................................... 240 330
------ ------
Total noninterest expenses .................................................................. 2,046 2,215
------ ------
Income before income taxes ........................................................................... 587 952
Income tax expense ................................................................................... 216 340
------ ------
Net income ........................................................................................... 371 612
------ ------
Deductions for amounts not available to common shareholders:
Net amortization (accretion) of preferred stock to liquidation preference value ................. 20 -
Dividends declared or accumulated on preferred stock ............................................ 109 -
------ ------
Net income available to common shareholders .......................................................... $ 242 $ 612
====== ======
Per share of common stock
Net income available to common shareholders ..................................................... $ 0.07 $ 0.18
Net income available to common shareholders, assuming dilution .................................. 0.07 0.17
Cash dividends declared ......................................................................... 0.02 0.02
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income
(Unaudited)
Accumulated
Shares of Other
Common Preferred Common Retained Comprehensive
Stock Stock Stock Earnings Income (Loss) Total
----- ----- ----- -------- ------------- -----
(Dollars in thousands, except per share)
Balance, January 1, 2008, previously reported ........... 3,381,488 $ - $ 19,200 $ 3,083 $ 184 $ 22,467
Correction of accounting error (Note 4) ................. - - - (183) - (183)
--------- --------- --------- --------- --------- ---------
Balance January 1, 2008, as corrected ................... 3,381,488 - 19,200 2,900 184 22,284
Comprehensive income:
Net income ......................................... - - - 612 - 612
---------
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $76 .............................. - - - - 146 146
---------
Total other comprehensive income ............... - - - - - 146
---------
Total comprehensive income ................... - - - - - 758
---------
Share-based compensation ................................ - - 34 - - 34
Cash dividend declared on common stock,
$.02 per share ..................................... - - - (68) - (68)
--------- --------- --------- --------- --------- ---------
Balance, March 31, 2008 ................................. 3,381,488 $ - $ 19,234 $ 3,444 $ 330 $ 23,008
========= ========= ========= ========= ========= =========
Balance, January 1, 2009 ................................ 3,573,695 $ - $ 19,940 $ 3,970 $ 263 $ 24,173
---------
Comprehensive income:
Net income ......................................... - - - 371 - 371
---------
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $242 ............................. - - - - (470) (470)
---------
Total other comprehensive income ............... - - - - - (470)
---------
Total comprehensive income ................... - - - - - (99)
---------
Issuance of preferred stock ............................. - 8,990 - - - 8,990
Cash dividends declared on preferred stock .............. - - - (49) - (49)
Net accretion (amortization) of preferred stock ......... - 20 - (20) - -
Share-based compensation ................................ - - 29 - - 29
Cash dividend declared on common stock,
$.02 per share ..................................... - - - (72) - (72)
--------- --------- --------- --------- --------- ---------
Balance, March 31, 2009 ................................. 3,573,695 $ 9,010 $ 19,969 $ 4,200 $ (207) $ 32,972
========= ========= ========= ========= ========= =========
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2009 2008
---- ----
(Dollars in thousands)
Operating activities
Net income ............................................................................... $ 371 $ 612
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses ...................................................... 600 255
Depreciation ................................................................... 75 82
Securities accretion and premium amortization .................................. (250) (7)
Gain on sale of premises and equipment ......................................... (15) (14)
(Gain) loss on sale of assets acquired in settlement of loans .................. (9) 53
Increase in cash surrender value of bank owned life insurance .................. (50) (46)
(Increase) decrease in other assets ............................................ (231) 486
Increase (decrease) in acrued expenses and other liabilities ................... 60 (216)
Increase (decrease) in deferred tax assets ..................................... 527 (4)
Share-based compensation ....................................................... 29 34
-------- --------
Net cash provided by operating activities ................................. 1,107 1,235
-------- --------
Investing activities
Purchases of securities available-for-sale ............................................... - (959)
Principal paydowns of available-for-sale mortgage-backed
investment securities ............................................................... 1,705 1,225
Maturities and calls of securities available-for-sale .................................... - 3,000
Proceeds from redemptions of other investments ........................................... 225 -
Purchases of other investments ........................................................... (344) (306)
Net increase in loans made to customers .................................................. (5,523) (6,037)
Purchases of premises and equipment ...................................................... (37) (71)
Proceeds from sales of premises and equipment ............................................ 23 19
Proceeds from sale of assets acquired in settlement of loans ............................. 547 1,392
-------- --------
Net cash used by investing activities ..................................... (3,404) (1,737)
-------- --------
Financing activities
Net (decrease) increase in deposits ...................................................... (5,908) 1,006
Net increase in short-term Federal Home Loan Bank advances ............................... 2,000 -
(Decrease) increase in long-term Federal Home Loan Bank advances ......................... (5,000) 5,000
Proceeds from issuance of preferred stock and warrants ................................... 8,990 -
Cash dividends paid - common stock ....................................................... (72) -
Cash dividends paid - preferred stock .................................................... (49) -
-------- --------
Net cash (used) provided by financing activities .......................... (39) 6,006
-------- --------
(Decrease) increase in cash and cash equivalents ............................................... (2,336) 5,504
Cash and cash equivalents, beginning of period ................................................. 11,211 9,005
-------- --------
Cash and cash equivalents, end of period ....................................................... $ 8,875 $ 14,509
======== ========
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Three Months Ended
March 31,
2009 2008
---- ----
(Dollars in thousands)
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for
Interest ............................................................................. $ 2,565 $ 3,458
Income taxes ......................................................................... - 737
Noncash investing and financing activities:
Other comprehensive income or (loss) ................................................. (470) 146
Transfers of loans to assets acquired in settlement of loans ......................... 1,209 -
Cash dividends declared and unpaid on common stock ................................... 72 68
Accretion and amortization of preferred stock discount and premium ................... 20 -
|
The accompanying notes are an integral part of these consolidated financial statements.
GRANDSOUTH BANCORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 - ORGANIZATION
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. 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 Board of Governors of the Federal Reserve System (the "Federal Reserve"). The unaudited consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.
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 State Board of Financial Institutions and the Federal Deposit Insurance Corporation.
NOTE 2 - BASIS OF PRESENTATION
A summary of significant accounting policies and the audited financial statements for 2008 are included in GrandSouth Bancorporation's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.
The accompanying interim financial statements in this report are unaudited. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present a fair statement of the results for the interim period have been made. The results of operations for any interim period are not necessarily indicative of the results to be expected for an entire year. These interim financial statements should be read in conjunction with the annual financial statements and notes thereto included in the 2008 Annual Report on Form 10-K.
Certain prior period amounts have been reclassified to conform to the current presentation. These reclassifications have no effect on previously reported shareholders' equity or net income.
NOTE 3 - NON-PERFORMING LOANS
As of March 31, 2009, there were $6,253 in nonaccrual loans, $342 in loans 90 or more days past due and still accruing interest and no restructured loans.
NOTE 4 - SHAREHOLDERS' EQUITY
On January 9, 2009, the Company issued 9,000 shares of its Series T cumulative perpetual preferred stock to the U. S. Treasury for proceeds of approximately $9,000. During the first five years after issuance, dividends are payable quarterly at a 5% annual rate. After that time, the annual dividend rate increases to 9%. In addition, the Company simultaneously issued warrants to the Treasury for 450 shares of the Company's Series W perpetual cumulative preferred stock for no additional proceeds. The Treasury immediately exercised the warrants, resulting in the issuance of the Series W preferred shares. Dividends on this series are payable quarterly at an annual rate of 9%. In both cases, the annual rate is applied to the liquidation preference amount of $1,000 per share to calculate the dividend amount.
The Company recorded the issuance of the preferred shares and the warrants based on the proportion that the fair value of the Series T preferred and the intrinsic value of the Series W warrants bore to the total proceeds received. No adjustments of the recorded amounts were made upon issuance of the Series W cumulative preferred stock. The Company is amortizing or accreting the difference between the recorded amounts and the liquidation preference amounts over the five year estimated life of the shares using the straight-line method which is not materially different from the yield method.
In March 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force ("EITF") in Issue No. 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements." The EITF's consensus concluded that an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board Opinion No. 12, "Omnibus Opinion - 1967," (if the arrangement is, in substance, an individual deferred compensation contract) if the employer has agreed to maintain a life insurance policy during the employee's retirement or provide the employee with a death benefit based on the substantive agreement with the employee. Additionally, the EITF concluded that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The EITF observed that in determining the nature and substance of the arrangement, the employer should assess what future cash flows the employer is entitled to, if any, as well as the employee's obligation and ability to repay the employer. The consensus in this issue was effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years with earlier application permitted. The consensus further directed entities to recognize the impacts of applying the consensus in this Issue through either a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or a change in accounting principle through retrospective application to all prior periods.
The Company did not adopt the accounting principle with respect to its split-dollar life insurance arrangements within the prescribed time period. During the first quarter of 2009, the Company reported the effects thereof as a correction of an accounting error as presented in the Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income as a cumulative-effect adjustment. The balance of the Company's retained earnings account as of January 1, 2008 was reduced by $183 and a corresponding increase was recognized in the amount of other liabilities. The effect of the correction on previously reported retained earnings and net income for 2008 and the first quarter of 2009 are not material.
NOTE 5 - NET INCOME PER COMMON SHARE
Net income per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share." Diluted net income per common share is computed by dividing net income available to common shareholders by the sum of the weighted average number of shares of common stock outstanding during each period plus the assumed exercise of dilutive stock options using the treasury stock method. Net income available to common shareholders excludes the amounts of dividends due to holders of the Company's outstanding cumulative preferred stock regardless of whether such dividends are declared. Also excluded are the effects of accreting or amortizing differences in the carrying values of preferred stock to their liquidation values.
Following is a reconciliation of basic net income per common share to diluted net income per common share for the three months ended March 31, 2009 and 2008.
(Unaudited)
Three Months Ended
March 31,
2009 2008
---- ----
(Dollars in thousands,
except per share amounts)
Net income per common share, basic
Numerator - net income available to common shareholders ............................ $ 242 $ 612
========== ==========
Denominator
Weighted average common shares issued and outstanding ............................ 3,573,695 3,381,488
========== ==========
Net income per common share, basic .................................... $ .07 $ .18
========== ==========
Net income per common share, assuming dilution
Numerator - net income available to common shareholders ............................ $ 242 $ 612
========== ==========
Denominator
Weighted average common shares issued and outstanding ............................ 3,573,695 3,381,488
Effect of dilutive stock options ................................................. 22,043 186,440
---------- ----------
Total shares .......................................................... 3,595,738 3,567,928
========== ==========
Net income per common share, assuming dilution ........................ $ .07 $ .17
========== ==========
|
NOTE 6 -FAIR VALUE MEASUREMENTS
The Company implemented Statement of Financial Accounting Standards No. 157, "Fair Value Measurements," ("SFAS No. 157") as required on January 1, 2008. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date (an exit price), and establishes a framework for measuring fair value. It also establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, eliminates the consideration of large position discounts for financial instruments quoted in active markets, requires consideration of the Company's creditworthiness when valuing its liabilities, and expands disclosures about instruments measured at fair value.
The three level hierarchy is described briefly as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity or that are significant to the fair value of the assets or liabilities. Such values may be determined by the use of pricing models, certain discounted cash flow methodologies, or similar techniques, or by the use and incorporation of significant management judgment or estimation.
In February 2008, the Financial Accounting Standards Board Staff issued FASB Staff Position No. FAS 157-2 ("FSP 157-2") which delayed for one year the effective date of the application of Statement of Financial Accounting Standards No. 157 "Fair Value Measurements" ("SFAS No. 157") to nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Accordingly, the Company only partially applied SFAS No. 157 in periods prior to January 1, 2009. The major categories of assets or liabilities disclosed at fair value in the financial statements for which the Company previously did not apply the provisions of SFAS No. 157 under the provisions of FSP 157-2 were goodwill and assets acquired in settlement of loans.
The following is a summary of the measurement attributes applicable to financial assets and liabilities that are measured at fair value on a recurring basis:
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description March 31, 2009 (Level 1) (Level 2) (Level 3)
----------- -------------- --------- --------- ---------
(Dollars in thousands)
Securities available-for-sale $ - $ 45,211 $ -
|
Pricing for the Company's securities available-for-sale is obtained from an independent third-party that uses a process that may incorporate current market prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, other reference data and industry and economic events that a market participant would be expected to use in valuing the securities. Not all of the inputs listed apply to each individual security at each measurement date. The independent third party assigns specific securities into an "asset class" for the purpose of assigning the applicable level of the fair value hierarchy used to value the securities. The techniques used after adoption of SFAS No. 157 are consistent with the methods used previously. Available-for-sale securities continue to be measured at fair value with unrealized gains and losses recorded in other comprehensive income.
The following is a summary of the measurement attributes applicable to assets and liabilities that were measured at fair value on a non-recurring basis during, and which remained outstanding as of the end of, the interim period ended March 31, 2009:
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description March 31, 2009 (Level 1) (Level 2) (Level 3)
----------- -------------- --------- --------- ---------
(Dollars in thousands)
Collateral-dependent impaired loans $ - $ 4,691 $ -
Assets acquired in settlement of loans $ - $ 670 $ -
|
Collateral-dependent impaired loans consist of nonaccrual loans and potential problem loans for which the underlying collateral provides the sole repayment source. The Company measures the amount of the impairment for such loans by determining the difference between the fair value of the underlying collateral and the recorded amount of the loan in accordance with SFAS No. 114 "Accounting by Creditors for Impairment of a Loan."
The fair value of the underlying collateral generally is based on appraisals performed in accordance with applicable appraisal standards by independent appraisers engaged by the Company. If management obtains a new independently prepared appraisal near the time that a collateral-dependent loan becomes impaired, the appraisal indicates that the collateral value is less than the loan's recorded amount, and the recorded amount of the loan is adjusted downward to an amount not significantly different than the appraised value, the fair value measurement is considered to be a Level 2 measurement. If the appraised value of the property exceeds the loan's recorded amount, the recorded amount is not adjusted upward and the measurement of the loan is not considered to be a fair value measurement.
In some cases, management updates values reflected in older appraisals obtained at the time of loan origination and already in the Company's possession using its own knowledge, judgments and assumptions about current market and other conditions in lieu of obtaining a new independent appraisal. In such cases, the measurement is considered to be a Level 3 measurement.
When the fair value of the collateral is less than the recorded amount of the loan, a valuation allowance is established for the difference. The valuation allowance for impaired loans is a component of the allowance for loan losses. As new information about the loan is received, management reevaluates the fair value of the collateral and makes adjustments to the valuation allowance as appropriate. However, if the fair value of the collateral subsequently recovers in value such that it exceeds the recorded loan amount, no adjustment is made in the loan's value for the excess. The amount of the valuation allowance related to the Company's collateral dependent impaired loans was $798 as of March 31, 2009.
Assets acquired in settlement of loans consist primarily of real estate and personal property that is held for sale. The Company generally obtains updated independent appraisals of real estate collateral at the time that foreclosure proceedings are initiated (Level 2). Fair values of personal property may be determined by acquiring dealers' quotes (Level 2) or, because the dollar amounts involved are relatively small, management may estimate the probable selling price (Level 3). In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," such properties are recorded initially at the lower of the previous carrying amount of the loan or the property's fair value less estimated selling costs. Subsequently, as new information about the property is received or as conditions change, the fair values of such properties are remeasured and, if the value of a particular has deteriorated further, a valuation allowance may be established to record appropriate downward adjustments. Subsequent increases in that property's value may be recorded only to the extent of any previously recorded valuation adjustments.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities," ("SFAS No. 159" or the "Statement") which was effective for the Company as of January 1, 2008. Under the provisions of SFAS No. 159, entities may choose, but are not required, to measure many financial instruments and certain other items at their fair values, with changes in the fair values of those instruments reported in earnings. The Company has not elected to measure at fair value any financial instruments under the provisions of SFAS No. 159.
NOTE 7 - VARIABLE INTEREST ENTITY
On May 3, 2006, the Company sponsored the creation of a Delaware statutory trust, GrandSouth Capital Trust I (the "Trust"), and is the sole owner of the $247 in common securities issued by the Trust. On May 10, 2006, the Trust issued $8,000 in floating rate capital securities. The proceeds of this issuance, and the amount of the Company's investment in the common securities, were used to acquire $8,247 principal amount of the Company's floating rate junior subordinated debt securities due 2036 ("Debentures"), which securities, and the accrued interest thereon, now constitute the Trust's sole assets. The interest
rate associated with the debt securities, and the distribution rate on the common securities of the Trust, is adjustable quarterly at 3 month LIBOR plus 185 basis points, and was 3.08% as of March 31, 2009. The Company may defer interest payments on the Debentures for up to twenty consecutive quarters, but not beyond the stated maturity date of the Debentures. In the event that such interest payments are deferred by the Company, the Trust may defer distributions on the capital and common securities. In such an event, the Company would be restricted in its ability to pay dividends on its common stock and perform under other obligations that are not senior to the Debentures.
The Debentures are redeemable at par at the option of the Company, in whole or in part, on any interest payment date on or after June 23, 2011. Prior to that date, the Debentures are redeemable at par plus a premium of up to 4.40% of par upon the occurrence of certain events that would have a negative tax effect on the Trust or that would cause it to be required to be registered as an investment company under the Investment Company Act of 1940 or that would cause trust preferred securities not to be eligible to be treated as Tier 1 capital by the Federal Reserve Board. Upon repayment or redemption of the Debentures, the Trust will use the proceeds of the transaction to redeem an equivalent amount of capital securities and common securities. The Trust's obligations under the capital securities are unconditionally guaranteed by the Company. In accordance with Financial Accounting Standards Board Interpretation 46(R), the Trust is not consolidated in the Company's financial statements.
NOTE 8 -NEW ACCOUNTING PRONOUNCEMENTS
On April 9, 2009, The Financial Accounting Standards Board ("FASB") issued three staff positions related to fair value which are discussed below. The primary effect of adoption of these staff positions will be to increase the disclosures required to be made during interim periods.
FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," amends FASB Statement No 107 to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and amends APB Opinion No. 28 to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009. The Company will adopt this FSP as of its mandatory adoption date.
FSP No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," provides additional guidance for estimating fair value in accordance with FASB Statement No. 157 when the volume and level of activity for the asset or liability have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP is effective for interim and annual reporting periods ending after June 15, 2009 and is to be applied prospectively. Early adoption for periods ending after March 15, 2009 is permitted in limited circumstances. The Company will adopt this FSP as of its mandatory adoption date.
FSP No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," amends the other-than-temporary guidance in U.S. Generally Accepted Accounting Principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP requires that entities disclose information for interim and annual periods to enable users of its financial statements to understand the types of available-for-sale and held-to-maturity debt and equity securities held, including information about investments in an unrealized loss position for which an other-than-temporary impairment has or has not been recognized and information that enables users to understand the reasons that an other-than-temporary impairment of a debt security was not recognized in earnings and the methodology and inputs used to calculate the portion of the total other-than-temporary impairment that was recognized in earnings. This FSP is effective for interim and annual periods ending after June 15, 2009 with early adoption for periods ending after March 15, 2009 permitted in limited circumstances. The Company will adopt this FSP as of its mandatory adoption date.
Also on April 1, 2009, the FASB FSP SFAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies." The FSP requires that assets acquired and liabilities assumed in a business combination that arise from a contingency be recognized at fair value. If fair value cannot be determined during the measurement period as determined in SFAS 141(R), the asset or liability can still be recognized if it can be determined that it is probable that the asset existed or the liability had been incurred as of the measurement date and if the amount of the asset or liability can be reasonably estimated. If it is not determined that the asset/liability existed/was incurred or if no reasonable amount can be determined, no asset or liability is recognized. The entity should determine a rational basis for subsequently measuring the acquired assets and assumed liabilities. Contingent consideration agreements should be recognized initially at fair value and subsequently reevaluated in accordance with guidance found in paragraph 65 of SFAS 141(R). The FSP is effective for business combinations with an acquisition date on or after the beginning of the Company's first annual reporting period beginning on or after December 15, 2008. The Company will assess the impact of the FSP if and when a future acquisition occurs.
The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 111 on April 9, 2009 to amend Topic 5.M., "Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities" and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the staff's previous views related to equity securities; however, debt securities are excluded from its scope. The SAB provides that "other-than-temporary" impairment is not necessarily the same as "Permanent" impairment and unless evidence exists to a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Company's financial position.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.
CAUTIONARY NOTICE WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of the securities laws. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, 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.
All statements that are not historical facts are statements that could be "forward-looking statements." You can identify these forward-looking statements through the use of words such as "may," "will," "should," "could," "would," "expect," "anticipate," "assume," "indicate," "contemplate," "seek," "plan," "predict," "target," "potential," "believe," "intend," "estimate," "project," "continue," or other similar words. Forward-looking statements include, but are not limited to, statements regarding the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, income, business operations and proposed services.
These forward-looking statements are based on current expectations, estimates and projections about the banking industry, management's beliefs, and assumptions made by management. Such information includes, without limitation, discussions as to estimates, expectations, beliefs, plans, strategies, and objectives concerning future financial and operating performance. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. The risks and uncertainties include, but are not limited to:
o future economic and business conditions;
o lack of sustained growth and disruptions in the economies of the
Company's market areas;
o government monetary and fiscal policies;
o the effects of changes in interest rates on the levels, composition
and costs of deposits, loan demand, and the values of loan collateral,
securities, and interest sensitive assets and liabilities;
o the effects of competition from a wide variety of local, regional,
national and other providers of financial, investment, and insurance
services, as well as competitors that offer banking products and
services by mail, telephone, computer and/or the Internet;
o credit risks;
o higher than anticipated levels of defaults on loans;
o perceptions by depositors about the safety of their deposits;
o capital adequacy;
o the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the value of
collateral securing loans;
o ability to weather the current economic downturn;
o loss of consumer or investor confidence;
o availability of liquidity sources;
o the risks of opening new offices, including, without limitation, the
related costs and time of building customer relationships and
integrating operations as part of these endeavors and the failure to
achieve expected gains, revenue growth and/or expense savings from
such endeavors;
o changes in laws and regulations, including tax, banking and securities
laws and regulations;
o changes in accounting policies, rules and practices;
o changes in technology or products may be more difficult or costly, or
less effective, than anticipated;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions and
economic confidence; and
o other factors and information described in this report and in any of
the other reports that we file with the Securities and Exchange
Commission under the Securities Exchange Act of 1934.
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The Company has no obligation, and does not undertake, to update, revise or correct any of the forward-looking statements after the date of this report. The Company has expressed its expectations, beliefs and projections in good faith and believes they have a reasonable basis. However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished.
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the financial statements and related notes appearing in the 2008 Annual Report on Form 10-K for GrandSouth Bancorporation. Results of operations for the three-month period ended March 31, 2009 are not necessarily indicative of the results to be attained for any other periods. The following information may contain forward looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Dollars are in thousands, except per share data.
Critical Accounting Policies
The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's financial statements. The significant accounting policies of the Company are described in the notes to the audited consolidated financial statements included in the Company's 2008 Form 10-K.
Certain accounting policies involve significant estimates and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The estimates and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and
estimates, which could have a material impact on the carrying value of assets and liabilities and the results of operations of the Company.
The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of its consolidated financial statements. Refer to the "Provision and Allowance for Loan Losses" section in this report and the "Provision for Loan Losses" and "Allowance for Loan Losses" sections in the Company's 2008 Form 10-K for a detailed description of the Company's estimation process and methodology related to the allowance for loan losses.
CHANGES IN FINANCIAL CONDITION
During the first three months of 2009, loans increased by $3,374, or 1.1%, and securities available-for-sale decreased by $2,167, or 4.6%. Deposits decreased by $5,908, or 1.9% and net borrowings from the Federal Home Loan Bank ("FHLB") decreased by $3,000. The Company issued two series of fixed rate cumulative perpetual preferred stock under the U. S. Treasury's Capital Purchase Program during the 2009 period for aggregate proceeds of approximately $9,000.
The economy of the Company's market area deteriorated significantly over the past year. Unemployment for the Greenville, SC Metropolitan Statistical Area was 9.8% as of March 31, 2009, compared with 4.6% as of March 31, 2008. Coupled with the ongoing deterioration of home prices and significantly reduced values of many other asset classes, this trend has led many consumers to withdraw from the marketplace. Consequently, demand for loans has decreased and the repayment performance of loans previously granted is distressed at levels not seen in recent times. These trends are evident in the increase in nonaccrual and past due loans, higher holdings of assets acquired in settlement of loans, higher provisions for loan losses and lower net income.
RESULTS OF OPERATIONS
Earnings Performance
Net income for the first three months of 2009 was $371, a decrease of $241, or 39.4%, from the comparable 2008 period. Net interest income for the 2009 period was impacted by compression of both net interest spread and net yield on earning assets. The yield on earning assets decreased by 186 basis points and rates paid for interest bearing liabilities decreased by 136 basis points. The average volume of earning assets for the first quarter of 2009 was 9.1% more than for the same prior year quarter, and average interest bearing liabilities were 6.9% higher than the prior year quarter.
Earnings per common share for the first quarter of 2009 were $0.07 compared with $0.18 for the first quarter of 2008. Earnings per common share, assuming dilution for the 2009 and 2008 periods were $0.07 and $0.17, respectively.
Summary Income Statement
------------------------
For the Three Months Ended March 31, 2009 2008 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................... $ 5,473 $ 6,591 $(1,118) -17.0%
Interest expense ................................... 2,464 3,355 (891) -26.6%
------- ------- ------
Net interest income ................................ 3,009 3,236 (227) -7.0%
Provision for loan losses .......................... 600 255 345 135.3%
Noninterest income ................................. 224 186 38 20.4%
Noninterest expenses ............................... 2,046 2,215 (169) -7.6%
Income tax expense ................................. 216 340 (124) -36.5%
------- ------- ------
Net income ......................................... $ 371 $ 612 $ (241) -39.4%
======= ======= ======
|
Net Interest Income
Net interest income is the difference between the interest earned on earning assets and the interest paid for funds acquired to support those assets. Net interest income, the principal source of the Company's earnings, was $3,009 and $3,236 for the three months ended March 31, 2009 and 2008, respectively.
Changes that affect net interest income are changes in the average rate earned on interest earning assets, changes in the average rate paid on interest bearing liabilities, and changes in the volume of interest earning assets and interest bearing liabilities. In addition, loans that become nonaccrual loans negatively affect interest income and net interest income in two ways. First, when a loan becomes nonaccrual, any previously accrued but uncollected income is reversed against current period income. Second, future accruals of income are discontinued until such time as the loan has again performed in accordance with its contractual provisions for a considerable period of time and collection of the remaining loan amount is reasonably assured.
Average Balances, Income and Expenses, and Yields and Rates
For the Three Months Ended March 31,
------------------------------------
2009 2008
---- ----
Interest Annualized Interest Annualized
Average Income/ Yields/ Average Income/ Yields/
Balances (1) Expense Rates Balances (1) Expense Rates
------------ ------- ----- ------------ ------- -----
Federal funds sold and due from Federal
Home Loan Bank ........................... $ 5,398 $ 47 3.53% $ 5,741 $ 48 3.36%
Investment securities (2) ....................... 50,506 586 4.71% 59,406 772 5.23%
Loans (2) (3) (4) ............................... 306,130 4,840 6.41% 266,581 5,771 8.71%
-------- -------- -------- --------
Total interest earning assets ....... 362,034 5,473 6.13% 331,728 6,591 7.99%
Interest bearing deposits ....................... $290,275 $ 2,168 3.03% $287,816 $ 3,138 4.39%
Federal Home Loan Bank advances ................. 27,728 227 3.32% 9,176 80 3.51%
Junior subordinated debt ........................ 8,247 69 3.39% 8,247 137 6.68%
-------- -------- -------- --------
Total interest bearing
liabilities ....................... 326,250 2,464 3.06% 305,239 3,355 4.42%
Net interest spread (5) ......................... 3.07% 3.57%
Net interest income and net yield
on earning assets (6) .................... $ 3,009 3.37% $ 3,236 3.92%
|
As shown in the table, average interest earning assets for the first quarter of 2009 increased by $30,306 over the same period in 2008, while average interest bearing liabilities increased by $21,011.
For the first quarter of 2009, the average yield on earning assets was 6.13% compared with 7.99% for the first quarter of 2008. The primary factor in this decrease was a 230 basis point decrease in the yield on loans. A significant percentage of the Company's loans are variable rate loans. Over the past year, the Federal Reserve Board aggressively lowered interest rates in an effort to prevent the effects of problems that originated in subprime lending markets from spreading to other credit markets. Those actions by the Federal Reserve Board normally are followed by actions by money center banks to reduce their prime lending rates. As of March 31, 2009, the prime rate was 3.25% compared with 5.25% as of March 31, 2008. Requirements contained in many of the Company's variable rate loan agreements obligate it to reset interest rates on the same schedule as the money center banks. However, the Company's loan agreements in many cases contain provisions that establish a loan's applicable rate at a fixed amount above the nominal prime rate. Some agreements, especially those originated more recently, may provide for the maintenance of minimum rates (floors) above prime.
Interest income derived from investment securities decreased by $186. The yield on these assets decreased by 52 basis points and the average amounts held decreased by $8,900, or 15.0%.
The average cost of interest bearing liabilities was 3.06% for the 2009 period, compared with 4.42% for the 2008 quarter. The rate paid in the first quarter of 2009 for the Company's junior subordinated debentures was 329 basis points lower than the rate paid for the same period of 2008.
The following table reflects changes in the Company's net interest income. In general, the positive effect of increased volumes of earning assets was more than offset by lower yields and by increased volumes of interest bearing deposits.
Analysis of Changes in Net Interest Income
Three Months Ended
March 31, 2009
--------------
Volume (3) Rate (3) Total
---------- -------- -----
Federal funds sold ...................... $ (3) $ 2 $ (1)
Investment securities (1) ............... (112) (74) (186)
Loans (1) (2) ........................... 744 (1,675) (931)
------- ------- -------
Total interest income ......... 629 (1,747) (1,118)
------- ------- -------
Interest bearing deposits ............... 13 (983) (970)
Federal Home Loan Bank advances ......... 151 (4) 147
Junior subordinated debt ................ - (68) (68)
------- ------- -------
Total interest expense ........ 164 (1,055) (891)
------- ------- -------
Net interest income ...... $ 465 $ (692) $ (227)
======= ======= =======
-------
|
(1) The changes in rate are not calculated on a fully tax-equivalent basis.
(2) Interest income on nonaccruing loans is recognized on a cash basis. Loan
income includes fees, which are immaterial to the calculation.
(3) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume based on the percentage of rate or
volume variances to the sum of the absolute variances, except in categories
having balances in only one period. In such cases, the entire variance is
attributed to volume differences.
Noninterest Income
Noninterest income was $224 and $186 for the three months ended March 31, 2009 and 2008, respectively. Service charges on deposit accounts increased by $14 due to higher levels of assessable activity and mortgage loan origination fees increased by $10. During the 2009 three month period, the Company recorded a gain on the sale of assets acquired in settlement of loans of $9.
Noninterest Expenses
Noninterest expenses for the three months ended March 31, 2009 and 2008 were $2,046 and $2,215, respectively. Salaries and employee benefits decreased by $59 primarily due to the elimination of incentives and automobile allowances which resulted in savings of $80 and a $38 reduction in bonuses. Those savings were partially offset by a $27 increase in employee insurance benefits expenses, salary increases of $16 and an increase of $16 for other employee benefits. Data processing expenses decreased by $27 due to the achievement of pricing breakpoints associated with higher transaction volumes. Insurance expense increased by $44 due to a $51 increase in FDIC insurance premiums. These expenses are expected to increase throughout the remainder of the year when higher assessment rates are expected to be imposed by FDIC. Professional services expenses decreased by $25 primarily due to a $70 decrease in fees paid for other outsourced accounting services which were partially offset by increases in fees paid for other consulting and legal services. Other expenses decreased by $65 primarily due to a $10 decrease in marketing expenses and the non-recurrence of a $53 loss on the sale of assets acquired in settlement of loans recognized in the 2008 period.
Provision and Allowance for Loan Losses
The allowance for loan losses was 1.24% of loans as of March 31, 2009 compared with 1.36% as of December 31, 2008. The provision for loan losses was $600 and $255 for the three month periods ended March 31, 2009 and 2008, respectively. The amount of the provision for the 2009 period increased primarily as the result of net charge-offs of $940 during the period and continuing high levels of non-performing loans. Management reviews the adequacy of the allowance on an ongoing basis and believes it is adequate.
The following table shows the changes in allowance for loan and lease losses during the periods shown:
Three Months Ended Year Ended Three Months Ended
March 31, 2009 December 31, 2008 March 31, 2008
-------------- ----------------- --------------
Allowance at beginning of period ................................. $ 4,110 $ 2,943 $ 2,943
Provision for loan losses ........................................ 600 2,880 255
Charge-offs ...................................................... (1,066) (2,382) (241)
Recoveries ....................................................... 126 669 114
------- ------- -------
Allowance at end of period ....................................... $ 3,770 $ 4,110 $ 3,071
======= ======= =======
Allowance as a percentage of loans outstanding
at period end .................................................. 1.24% 1.36% 1.14%
Annualized net charge-offs as a percentage
of average loans ............................................... 1.23% 0.61% 0.19%
|
Loans
The following table shows the composition of the loan portfolio at each date
indicated.
March 31, 2009 December 31, 2008
-------------- -----------------
Commercial, financial and agricultural ........................... $ 45,327 15% $ 42,734 14%
Real estate - construction, land development and
other land ..................................................... 70,575 23% 75,537 25%
Real estate - mortgage ........................................... 183,864 60% 178,387 59%
Installment loans ................................................ 5,241 2% 4,975 2%
-------- --- -------- ---
Total loans ...................................................... $305,007 100% $301,633 100%
======== === ======== ===
|
Non-Performing Loans
Following is a summary of non-performing loans as of March 31, 2009 and December 31, 2008:
March 31, 2009 December 31, 2008
-------------- -----------------
Non-performing loans
Nonaccrual loans ............................................................. $6,253 $6,497
Loans past due 90 days or more and still accruing ............................ 342 714
------ ------
Total .......................................................... $6,595 $7,211
====== ======
Non-performing loans as a percentage of:
Loans outstanding ............................................................ 2.16% 2.39%
Allowance for loan losses .................................................... 174.93% 175.45%
|
There were no restructured loans during either period. Impaired loans as of March 31, 2009 totaled $7,992 compared with $9,779 as of December 31, 2008. Of the $7,992 outstanding at March 31, 2009, $4,990 required a valuation allowance of $798 compared with $5,887 requiring a valuation allowance of $1,655 as of December 31, 2008. Slightly lower levels of non-accrual loans as of March 31, 2009 resulted from charge-off of approximately $512 of such loans during the period and the transfer of $1,209 of such loans to assets acquired in settlement of loans during the 2009 period. As of March 31, 2009, 94% of nonaccrual loans were secured by real estate and 6% were secured by other collateral.
Potential problem loans, consisting of loans where information about the borrower's possible credit problems causes management to have serious doubts about the borrower's ability to comply with current repayment terms, which may result in subsequent classification of such loans as non-performing loans, totaled $4,108 as of March 31, 2009 compared with $3,300 as of December 31, 2008.
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 provided by maintaining assets which may be immediately converted into cash at minimal cost. 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. Asset liquidity is provided from several sources, including amounts due from banks, federal funds sold, funds from maturing loans and funds from the sale of investment securities.
The Bank is a member of the FHLB of Atlanta (the "FHLB") and, as such, has the ability to borrow against the security of its 1-4 family residential mortgage loans and qualifying commercial loans. At March 31, 2009, the Bank had the ability to borrow up to $82,680 from the FHLB and $26,000 of such borrowings were outstanding. The FHLB requires that securities, qualifying loans and stock of the FHLB owned by the Bank be pledged to secure any advances from the FHLB.
The Bank also has $4,400 available through lines of credit with other banks as an additional source of liquidity funding. Management believes that the Company's and the Bank's overall liquidity sources are adequate to meet their operating needs in the ordinary course of business.
The Company's loan-to-deposit ratio was 100.0% as of March 31, 2009 and 97.0% as of December 31, 2008.
CAPITAL RESOURCES
The capital base for the Company increased by $8,799 during the first three months of 2009. This net change is due to increases in equity resulting from $8,990 in proceeds from issuing preferred stock, net income of $371, share-based compensation of $29, and offsetting decreases from unrealized net losses on investment securities, net of related tax effects, of $470, and $49 and $72 cash dividends declared on preferred stock and common stock, respectively, during the first three months of 2009. The preferred stock is included in Tier 1 capital for purposes of computing the Company's regulatory capital ratios.
As of March 31, 2009, unrealized losses on investment securities are not considered to be other than temporary because the Company has the ability and intent to hold the securities until such time as the value recovers or the securities mature.
The Company's average equity-to-assets ratio was 8.36% at March 31, 2009, compared with 6.54% at December 31, 2008.
The Federal Reserve and the Federal Deposit Insurance Corporation ("FDIC") have issued guidelines for risk-based capital requirements for bank holding companies and banks. As of March 31, 2009, the Company and Bank exceeded the capital levels that are required to be maintained.
It is management's objective to maintain the capital levels such that the Bank will continue to be considered well capitalized. However, no assurance can be given that this objective will be achieved. The Company anticipates that it will maintain capital at levels that will allow the Company and the Bank to qualify as being adequately capitalized as defined by regulation.
Company and Bank capital ratios at March 31, 2009 are presented in the following table, compared with the "well capitalized" (applies only to the Bank) and minimum ratios under the Federal Reserve and FDIC regulatory definitions and guidelines:
Total
Tier 1 Capital Leverage
------ ------- --------
Company ................................... 10.0% 14.1% 8.3%
Bank ...................................... 9.7% 10.9% 8.1%
Minimum "well-capitalized" requirement .... 6.0% 10.0% 5.0%
Minimum requirement ....................... 4.0% 8.0% 4.0%
|
OFF-BALANCE-SHEET ARRANGEMENTS
The Company, through operations of the Bank, makes contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to customers of the Bank at predetermined interest rates for a specified period of time. At March 31, 2009, the Bank had issued commitments to extend credit of $69,999 through various types of lending.
The commitments generally expire over one year. Past experience indicates that many of these commitments to extend credit will expire unused. However, as described in "Liquidity," the Company believes that it has adequate sources of liquidity to fund commitments that are drawn upon by borrowers.
In addition to commitments to extend credit, the Bank also issues standby letters of credit which are assurances to a third party that it will not suffer a loss if the Bank's customer fails to meet its contractual obligations to the third party. Standby letters of credit totaled $1,200 at March 31, 2009. Past experience indicates that many of these standby letters of credit will expire unused. However, through its various sources of liquidity, the Bank believes that it will have the necessary resources to meet these obligations should the need arise.
Neither the Company nor its subsidiary is involved in other off-balance sheet contractual relationships, unconsolidated related entities that have off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments or significantly impact earnings. Obligations under noncancelable operating lease agreements totaled approximately $281 at March 31, 2009. These obligations are payable over several years as shown in Note 10 to the Company's audited Financial Statements included in the Company's 2008 Annual Report on Form 10-K.
Commitments and Contingencies
As a result of the acquisition of $2,413 in specialty commercial loans during the second quarter of 2005, the Company is obligated to pay the seller's former owners a percentage of the outstanding loan balances each quarter. Such payments may be reduced if losses on the loans exceed certain levels. Currently, the percentage payout is 3% annually, but the percentage declines over the life of an agreement that expires May 16, 2015. No payments were made under the agreement during the first quarter of 2009 due to the level of losses on the loans.
Variable Interest Entity
On May 3, 2006, the Company sponsored the creation of a Delaware statutory trust, GrandSouth Capital Trust I (the "Trust"), and is the sole owner of the common securities issued by the Trust. On May 10, 2006, the Trust issued $8,000 in floating rate capital securities. The proceeds of this issuance, and the amount of the Company's investment in the common securities, were used to acquire $8,247 principal amount of the Company's floating rate junior subordinated debt securities due 2036 ("Debentures"), which securities, and the accrued interest thereon, now constitute the Trust's sole assets. The interest rate associated with the debt securities, and the distribution rate on the common securities of the Trust, is adjustable quarterly at 3 month LIBOR plus 185 basis points. The Company may defer interest payments on the Debentures for up to twenty consecutive quarters, but not beyond the stated maturity date of the Debentures. In the event that such interest payments are deferred by the Company, the Trust may defer distributions on the capital and common securities. In such an event, the Company would be restricted in its ability to pay dividends on its common stock and perform under other obligations that are not senior to the Debentures.
The Debentures are redeemable at par at the option of the Company, in whole or in part, on any interest payment date on or after June 23, 2011. Prior to that date, the Debentures are redeemable at par plus a premium of up to 4.40% of par upon the occurrence of certain events that would have a negative tax effect on the Trust or that would cause it to be required to be registered as an investment company under the Investment Company Act of 1940 or that would cause trust preferred securities not to be eligible to be treated as Tier 1 capital by the Federal Reserve Board. Upon repayment or redemption of the Debentures, the Trust will use the proceeds of the transaction to redeem an equivalent amount of capital securities and common securities. The Trust's obligations under the capital securities are unconditionally guaranteed by the Company. In accordance with Financial Accounting Standards Board Interpretation 46(R), the Trust is not consolidated in the Company's financial statements.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks, such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk and this risk could potentially have the largest material effect on the Company's financial condition and results of operations. Other types of market risks such as foreign currency exchange risk and commodity price risk do not arise in the normal course of community banking activities.
As of March 31, 2009 there was no significant change from the interest rate sensitivity analysis as of December 31, 2008. The foregoing disclosures related to the market risk of the Company should be read in connection with Management's Discussion and Analysis or Plan of Operation included in the 2008 Annual Report on Form 10-K.
Item 4T. - Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or 240.15d-15(b) of the Company's disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Company's chief executive officer and chief financial officer concluded that such controls and procedures, as of the end of the period covered by this report, were effective.
In connection with management's evaluation required by 17 C.F.R. 240.13a-15(d) or 240.15d-15(d) of the Company's internal control over financial reporting, management has determined that there has been no change in the Company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On January 4, 2009, the Company held a special meeting of shareholders for the purpose of voting on an amendment to the Company's Articles of Incorporation to authorize the issuance of 20 million shares of preferred stock with such preferences, limitations and relative rights, within legal limits, of the class, or one or more series within the class, as are set by the Board of Directors. The requisite number of shares voted in favor of the amendment. The results of the voting were as follows:
Number of shares voted FOR Number of shares voted AGAINST Abstentions Broker Non-Votes
-------------------------- ------------------------------ ----------- ----------------
2,483,073 13,777 399 0
|
Item 6. - Exhibits
3.1 Articles of Incorporation, as amended
4.1 Terms of Series T Preferred Stock and Series W Preferred Stock
(see Exhibit 3.1, Articles of Incorporation, as amended)
4.2(a) Form of Certificate for Series T Preferred Stock (1)
4.2(b) Form of Certificate for Series W Preferred Stock (1)
4.3 Warrant for Purchase of Shares of Series W Preferred Stock (1)
10.1 Letter Agreement, dated January 9, 2009, between GrandSouth Bancorporation and the United States Department of the Treasury with respect to the issuance and sale of Series T Preferred Stock and the Warrant (1)
31.1 Rule 13a-14(a)/15d-14(a) Certification of principal executive officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of principal accounting officer
32 Certifications pursuant to 18 U.S.C. Section 1350
(1) Incorporated by reference to exhibits to the Company's Form 8-K filed January 12, 2009.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GRANDSOUTH BANCORPORATION
Registrant
By: /s/ Mason Y. Garrett Date:May 15, 2009
------------------------------------------- ---------------
Mason Y. Garrett
Chief Executive Officer
By: /s/ J. B. Garrett Date: May 15, 2009
------------------------------------------- ------------
J. B. Garrett
Chief Financial Officer
|
EXHIBIT INDEX
3.1 Articles of Incorporation, as amended
4.1 Terms of Series T Preferred Stock and Series W Preferred Stock
(see Exhibit 3.1, Articles of Incorporation, as amended)
4.2(a) Form of Certificate for Series T Preferred Stock (1)
4.2(b) Form of Certificate for Series W Preferred Stock (1)
4.3 Warrant for Purchase of Shares of Series W Preferred Stock (1)
10.1 Letter Agreement, dated January 9, 2009, between GrandSouth Bancorporation and the United States Department of the Treasury with respect to the issuance and sale of Series T Preferred Stock and the Warrant (1)
31.1 Rule 13a-14(a)/15d-14(a) Certification of principal executive officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of principal accounting officer
32 Certifications pursuant to 18 U.S.C. Section 1350
(1) Incorporated by reference to exhibits to the Company's Form 8-K filed January 12, 2009.
EXHIBIT 3.1
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF INCORPORATION
1. The name of the proposed corporation is GrandSouth Bancorporation.
2. The initial registered office of the corporation is 327 Fairview Road, Simpsonville, South Carolina 29681 and the initial registered agent at such address is Ronald K. Earnest.
I hereby consent to the appointment as registered agent of the corporation
/s/
----------------------------------
Agent's Signature
|
3. The corporation is authorized to issue shares of stock as follows. Complete a or b whichever is applicable:
a. [x] The corporation is authorized to issue a single class of shares, and the total number of shares authorized is 20,000,000 shares of common stock, no par value.
b. [ ] The corporation is authorized to issue more than one class of shares:
The relative rights, preferences, and limitations of the shares of each class, and of each series within a class, are as follows:
4. The existence of the corporation shall begin when these articles are filed with the Secretary of State unless a delayed date is indicated (See ss. 33-1-230(b)): .
5. The optional provisions which the corporation elects to include in the articles of incorporation are as follows (See ss. 33-2-102 and the applicable comments thereto; and 35-2-105 and 35-2-221 of the 1976 South Carolina Code):
A. NO PREEMPTIVE RIGHTS.
No holder of shares of the Corporation of any class, now or hereafter authorized, shall have any preferential or preemptive right to subscribe for, purchase or receive any shares of the stock of the Corporation of any class, now or hereafter authorized, or any options or warrants for such shares, or any securities convertible into, carrying an option to purchase or exchangeable for such shares, which may at any time be issued, sold or offered for sale by the Corporation.
B. NO CUMULATIVE VOTING.
The holders of shares entitled to vote at an election of directors shall not have the right to cumulate their votes.
C. NUMBER OF DIRECTORS.
The Board of Directors shall have the power to set the number of directors from time to time at five or more directors.
D. BUSINESS COMBINATIONS.
Whether or not the Corporation has a class of voting shares registered with the Securities and Exchange Commission or another federal agency under Section 12 of the Securities Exchange Act of 1934 (the "1934 Act"), any "business combination," as defined in S.C. Code Section 35-2-205 (as such section may from time to time be amended) shall only be undertaken in compliance with the provisions of Article 2 of Chapter 2 of Title 35 of the South Carolina Code (as such article may from time to time be amended), as though the Corporation had a class of voting shares registered under the 1934 Act; provided, however, if Article 2 of Chapter 2 of Title 35 of the South Carolina Code shall at any time be repealed, this provision of the Corporation's Articles of Incorporation shall not also be repealed, but shall remain in effect, unless repealed by the shareholders, in the form such Article 2 was in effect immediately prior to such repeal.
E. LIMITATION OF DIRECTOR LIABILITY.
No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director occurring after the effective date hereof; provided, however, the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve gross negligence, intentional misconduct or a knowing violation of law, (iii) imposed for unlawful distributions as set forth in Section 33-8-330 of the South Carolina Business Corporation Act of 1988, as it may be amended from time to time (the "Act") or (iv) for any transaction from which the director derived an improper personal benefit. This provision shall eliminate or limit the liability of a director only to the maximum extent permitted from time to time by Section 33-2-102(e) and by the Act or any successor law or laws. Any repeal or modification of the foregoing protection by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.
F. QUORUM.
A majority of the shares entitled to vote thereat shall constitute a quorum at any meeting of shareholders for the transaction of any business.
G. MERGERS, CONSOLIDATIONS, EXCHANGES, SALES OF ASSETS OR DISSOLUTION.
With respect to any plan or merger, consolidation or exchange, or any plan for the sale of all, or substantially all, the property and assets, with or without the good will, of the Corporation or any resolution to dissolve the Corporation, which plan or resolution shall not have been adopted by the affirmative vote of at least two-thirds of the full board of directors, such plan or resolution must be approved by the affirmative vote of holders of 80% of the outstanding shares of the Corporation.
H. NOMINATION OF DIRECTORS.
No person shall be eligible to be elected a director of the Corporation at a meeting of shareholders unless that person has been nominated by a record shareholder entitled to vote at such meeting by giving written notice of such nomination to the Secretary of the Corporation at least ninety days prior to the date of the meeting. Such written notice shall provide any information required in the Bylaws of the Corporation.
I. REMOVAL OF DIRECTORS.
An affirmative vote of 80% of the outstanding shares of the Corporation shall be required to remove any or all of the directors without cause.
J. DUTY OF DIRECTORS.
When evaluating any proposed plan of merger, consolidation, exchange, or sale of all, or substantially all, of the assets of the Corporation, the Board of Directors shall consider the interests of the employees of the Corporation and the community or communities in which the Corporation and its subsidiaries, if any, do business in addition to the interests of the Corporation's shareholders.
K. AMENDMENT TO ARTICLES OF INCORPORATION.
Any amendment to the Articles of Incorporation of the Corporation which amends, alters, repeals or is inconsistent with any of the provisions of Article 5.A, B, C, D, E, F, G, H, I or J above, or this Article 5.K, unless such amendment shall have been approved by the affirmative vote of at least two-thirds of the full board of directors, shall not be effective unless it is approved by the affirmative vote of 80% of the outstanding shares of the Corporation. If two-thirds of the full Board of Directors approves such an amendment, the amendment need only be approved by an affirmative vote of holders of two-thirds of the outstanding shares of the Corporation.
Any amendment to the Articles of Incorporation (other than these amendments which may be adopted by the Board of Directors without Shareholder approval) to change the number of shares the Corporation is authorized to issue or to change the name of the Corporation may be adopted upon approval by the affirmative vote of a majority of the outstanding shares of the Corporation.
6. The name and address of each incorporator is as follows (only one is required):
Name Address Signature
Ronald K. Earnest 327 Fairview Road /s/Ronald K. Earnest
Simpsonville, SC ------------------------
|
I, George S. King, Jr., an attorney licensed to practice in the State of South Carolina, certify that the corporation, to whose articles of incorporation this certificate is attached, has complied with the requirements Section 33-2-102 of the 1976 South Carolina Code.
Date 6/7/00
----------------------- /s/George S. King, Jr.
----------------------------------------
(Signature)
|
1426 Main Street, Suite 1200
Address:--------------------------------
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
TYPE OR PRINT CLEARLY IN BLACK INK
Pursuant Section 33-10-106 of the 1976 South Carolina Code of Laws, as amended, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation:
1. The name of the corporation is GrandSouth Bancorporation
2. Date of Incorporation June 7, 2000
3. Agent's Name and Address Ronald K. Earnest, 381 Halton, Road, Greenville,
SC 29607
4. On January 5, 2009, the corporation adopted the following Amendment(s) of its Articles of Incorporation: (Type or attach the complete text of each Amendment)
See Text of Amendment to Articles of Incorporation attached hereto.
5. The manner, if not set forth in the Amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the Amendment shall be effected, is as follows: (if not applicable, insert "not applicable" or "NA").
6. Complete either "a" or "b," whichever is applicable.
a. [x] Amendment(s) adopted by shareholder action.
At the date of adoption of the Amendment(s), the number of outstanding shares of each voting group entitled to vote separately on the Amendment(s), and vote of such shares was:
Number of Number of Number of Votes Number of Undisputed
Voting Outstanding Votes Entitled Represented at Shares
Group Shares to be Cast the Meeting For or Against
----- ------ ---------- ----------- --------------
Common 3,565,964 3,565,964 2,497,249 2,483,073 13,777
|
Note: Pursuant to Section 33-10-106(6)(i), of the 1976 South Carolina Code of Laws, as amended, the corporation can alternatively state the total number of disputed shares cast for the amendment by each voting group together with a statement that the number cast for the amendment by each voting group was sufficient for approval by that voting group.
b. [ ] The Amendment(s) was duly adopted by the incorporators or board of directors without shareholder approval pursuant to Sections 33-6-102(d), 33-10-102 and 33-10-105 of the 1976 South Carolina Code of Laws, as amended, and shareholder action was not required.
Date January 5, 2009
---------------------- GrandSouth Bancorporation
----------------------------------------
Name of Corporation
s/Ronald K. Earnest, President
----------------------------------------
Signature
Ronald K. Earnest, President
----------------------------------------
Type or Print Name and Office
|
FILING INSTRUCTIONS
1. Two copies of this form, one of which can be either a duplicate original or a conformed copy, must be filed.
2. If the space in this form is insufficient, please attach additional sheets containing a reference to the appropriate paragraph in this form.
3. Filing fees and taxes payable to the Secretary of State at time of filing application.
Filing Fee $ 10.00
Filing Tax 100.00
------
Total $ 110.00
Return to: Secretary of State
PO Box 11350
Columbia, SC 29211
DOM-ARTICLES OF AMENDMENT FORM REVISED BY SOUTH CAROLINA
SECRETARY OF STATE, JANUARY 2000
|
GRANDSOUTH BANCORPORATION
Text of Amendment to Articles of Incorporation
Article 3 of the Articles of Incorporation of GrandSouth Bancorporation is amended to read as follows:
3. The corporation is authorized to issue shares of stock as follows. Complete a or b whichever is applicable:
a. /_/ The corporation is authorized to issue a single class of shares, and the total number of shares authorized is _____________________.
b. /X/ The corporation is authorized to issue more than one class of shares:
Class of Shares Authorized No. of Each Class Common Stock 20,000,000 Preferred Stock 20,000,000 |
The relative rights, preferences, and limitations of the shares of each class, and of each series within a class, are as follows:
Common Stock: The shares of common stock shall have unlimited voting rights and are entitled, together with any series of preferred stock which also has such right specified, to receive the net assets of the corporation upon dissolution.
Preferred Stock: The board of directors may determine, in whole or part, the preferences, limitations, and relative rights (within the limits set forth in Section 33-6-101 of the South Carolina Business Corporation Act) of one or more series within the class of preferred stock before the issuance of any shares of that series.
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
TYPE OR PRINT CLEARLY IN BLACK INK
Pursuant Section 33-10-106 of the 1976 South Carolina Code of Laws, as amended, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation:
1. The name of the corporation is GrandSouth Bancorporation
2. Date of Incorporation June 7, 2000
3. Agent's Name and Address Ronald K. Earnest, 381 Halton Road, Greenville, SC 29606
4. On January 5, 2009, the corporation adopted the following Amendment(s) of its Articles of Incorporation: (Type or attach the complete text of each Amendment)
See Anex A and Annex B attached hereto.
5. The manner, if not set forth in the Amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the Amendment shall be effected, is as follows: (if not applicable, insert "not applicable" or "NA").
NA
6. Complete either "a" or "b," whichever is applicable.
a. [ ] Amendment(s) adopted by shareholder action.
At the date of adoption of the Amendment(s), the number of outstanding shares of each voting group entitled to vote separately on the Amendment(s), and vote of such shares was:
Number of Number of Number of Votes Number of Undisputed
Voting Outstanding Votes Entitled Represented at Shares
Group Shares to be Cast the Meeting For or Against
----- ------ ---------- ----------- --------------
|
Note: Pursuant to Section 33-10-106(6)(i), of the 1976 South Carolina Code of Laws, as amended, the corporation can alternatively state the total number of disputed shares cast for the amendment by each voting group together with a statement that the number cast for the amendment by each voting group was sufficient for approval by that voting group.
b. [x] The Amendment(s) was duly adopted by the incorporators or board of directors without shareholder approval pursuant to Sections 33-6-102(d), 33-10-102 and 33-10-105 of the 1976 South Carolina Code of Laws, as amended, and shareholder action was not required.
Date January 5, 2009
--------------- GrandSouth Bancorporation
----------------------------------------
Name of Corporation
s/Ronald K. Earnest
----------------------------------------
Signature
Ronald K. Earnest, President
----------------------------------------
Type or Print Name and Office
|
FILING INSTRUCTIONS
1. Two copies of this form, one of which can be either a duplicate original or a conformed copy, must be filed.
2. If the space in this form is insufficient, please attach additional sheets containing a reference to the appropriate paragraph in this form.
3. Filing fees and taxes payable to the Secretary of State at time of filing application.
Filing Fee $ 10.00
Filing Tax 100.00
------
Total $ 110.00
Return to: Secretary of State
PO Box 11350
Columbia, SC 29211
|
DOM-ARTICLES OF AMENDMENT FORM REVISED BY SOUTH CAROLINA
SECRETARY OF STATE, JANUARY 2000
ANNEX A
FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES T
OF
GRANDSOUTH BANCORPORATION
Pursuant to the provisions of Sections 33-6-102 and 33-10-106 of the South Carolina Business Corporation Act of 1988, as amended, and the Articles of Incorporation of GrandSouth Bancorporation (the "Issuer"), a series of Preferred Stock, no par value per share, of the Issuer is hereby created, and the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:
Part 1. Designation and Number of Shares. There is hereby created out of the authorized and unissued shares of preferred stock of the Issuer a series of preferred stock designated as the "Fixed Rate Cumulative Perpetual Preferred Stock, Series T" (the "Designated Preferred Stock"). The authorized number of shares of Designated Preferred Stock shall be 9,000.
Part. 2. Definitions. The following terms are used in this Annex A (including the Standard Provisions hereto) as defined below:
(a) "Common Stock" means the common stock, no par value per share, of the Issuer.
(b) "Dividend Payment Date" means February 15, May 15, August 15 and November 15 of each year.
(c) "Junior Stock" means the Common Stock, and any other class or series of stock of the Issuer the terms of which expressly provide that it ranks junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Issuer.
(d) "Liquidation Amount" means $1,000 per share of Designated Preferred Stock.
(e) "Minimum Amount" means $2,250,000.
(f) "Parity Stock" means any class or series of stock of the Issuer (other than Designated Preferred Stock) the terms of which do not expressly provide that such class or series will rank senior or junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Issuer (in each case without regard to whether dividends accrue cumulatively or non-cumulatively). Without limiting the foregoing, Parity Stock shall include the Issuer's Fixed Rate Cumulative Perpetual Preferred Stock, Series W.
(g) "Signing Date" means January 9, 2009.
Part. 3. Certain Voting Matters. Holders of shares of Designated Preferred Stock will be entitled to one vote for each such share on any matter on which holders of Designated Preferred Stock are entitled to vote, including any action by written consent.
UST Seq. No. 327
Part 4. Standard Provisions. The Standard Provisions of the Designated Preferred
Stock are as follow:
Section 1. General Matters. Each share of Designated Preferred Stock shall be identical in all respects to every other share of Designated Preferred Stock. The Designated Preferred Stock shall be perpetual, subject to the provisions of Section 5 of these Standard Provisions that form a part of the Certificate of Designations. The Designated Preferred Stock shall rank equally with Parity Stock and shall rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Issuer.
Section 2. S tandard Definitions. As used herein with respect to Designated Preferred Stock:
(a) "Applicable Dividend Rate" means (i) during the period from the Original Issue Date to, but excluding, the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 5% per annum and (ii) from and after the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 9% per annum.
(b) "Appropriate Federal Banking Agency" means the "appropriate Federal banking agency" with respect to the Issuer as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)), or any successor provision.
(c) "Business Combination" means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Issuer's stockholders.
(d) "Business Day" means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.
(e) "Bylaws" means the bylaws of the Issuer, as they may be amended from time to time.
(f) "Certificate of Designations" means the Certificate of Designations or comparable instrument relating to the Designated Preferred Stock, of which these Standard Provisions form a part, as it may be amended from time to time.
(g) "Charter" means the Issuer's certificate or articles of incorporation, articles of association, or similar organizational document.
(h) "Dividend Period" has the meaning set forth in Section 3(a).
(i) "Dividend Record Date" has the meaning set forth in Section 3(a).
(j) "Liquidation Preference" has the meaning set forth in Section 4(a).
UST Seq. No. 327
(k) "Original Issue Date" means the date on which shares of Designated Preferred Stock are first issued.
(l) "Preferred Director" has the meaning set forth in Section 7(b).
(m) "Preferred Stock" means any and all series of preferred stock of the Issuer, including the Designated Preferred Stock.
(n) "Qualified Equity Offering" means the sale and issuance for cash by the Issuer to persons other than the Issuer or any of its subsidiaries after the Original Issue Date of shares of perpetual Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be included in Tier 1 capital of the Issuer at the time of issuance under the applicable risk-based capital guidelines of the Issuer's Appropriate Federal Banking Agency (other than any such sales and issuances made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to November 17, 2008).
(o) "Standard Provisions" mean these Standard Provisions that form a part of the Certificate of Designations relating to the Designated Preferred Stock.
(p) "Successor Preferred Stock" has the meaning set forth in Section 5(a).
(q) "Voting Parity Stock" means, with regard to any matter as to which the holders of Designated Preferred Stock are entitled to vote as specified in Sections 7(a) and 7(b) of these Standard Provisions that form a part of the Certificate of Designations, any and all series of Parity Stock upon which like voting rights have been conferred and are exercisable with respect to such matter.
Section 3. Dividends.
(a) Rate. Holders of Designated Preferred Stock shall be entitled to receive, on each share of Designated Preferred Stock if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors, but only out of assets legally available therefor, cumulative cash dividends with respect to each Dividend Period (as defined below) at a rate per annum equal to the Applicable Dividend Rate on (i) the Liquidation Amount per share of Designated Preferred Stock and (ii) the amount of accrued and unpaid dividends for any prior Dividend Period on such share of Designated Preferred Stock, if any. Such dividends shall begin to accrue and be cumulative from the Original Issue Date, shall compound on each subsequent Dividend Payment Date (i.e., no dividends shall accrue on other dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable quarterly in arrears on each Dividend Payment Date, commencing with the first such Dividend Payment Date to occur at least 20 calendar days after the Original Issue Date. In the event that any Dividend Payment Date would otherwise fall on a day that is not a Business Day, the dividend payment due on that date will be postponed to the next day that is a Business Day and no additional dividends will accrue as a result of that postponement. The period from and including any Dividend Payment Date to, but excluding, the next Dividend Payment Date is a "Dividend
UST Seq. No. 327
Period", provided that the initial Dividend Period shall be the period from and including the Original Issue Date to, but excluding, the next Dividend Payment Date.
Dividends that are payable on Designated Preferred Stock in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends payable on Designated Preferred Stock on any date prior to the end of a Dividend Period, and for the initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months, and actual days elapsed over a 30-day month.
Dividends that are payable on Designated Preferred Stock on any Dividend Payment Date will be payable to holders of record of Designated Preferred Stock as they appear on the stock register of the Issuer on the applicable record date, which shall be the 15th calendar day immediately preceding such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 nor less than 10 days prior to such Dividend Payment Date (each, a "Dividend Record Date"). Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day.
Holders of Designated Preferred Stock shall not be entitled to any dividends, whether payable in cash, securities or other property, other than dividends (if any) declared and payable on Designated Preferred Stock as specified in this Section 3 (subject to the other provisions of the Certificate of Designations).
(b) Priority of Dividends. So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than dividends payable solely in shares of Common Stock) or Parity Stock, subject to the immediately following paragraph in the case of Parity Stock and no Common Stock, Junior Stock or Parity Stock shall be, directly or indirectly, purchased. redeemed or otherwise acquired for consideration by the Issuer or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been or are contemporaneously declared and paid in full (or have been declared and a sum sufficient for the payment thereof has been set aside for the benefit of the holders of shares of Designated Preferred Stock on the applicable record date). The foregoing limitation shall not apply to (i) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice; (ii) the acquisition by the Issuer or any of its subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Issuer or any of its subsidiaries), including as trustees or custodians; and (iii) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case. solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock.
UST Seq. No. 327
When dividends are not paid (or declared and a sum sufficient for payment thereof set aside for the benefit of the holders thereof on the applicable record date) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period related to such Dividend Payment Date) in full upon Designated Preferred Stock and any shares of Parity Stock, all dividends declared on Designated Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of Designated Preferred Stock (including, if applicable as provided in Section 3(a) above, dividends on such amount) and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) (subject to their having been declared by the Board of Directors or a duly authorized committee of the Board of Directors out of legally available funds and including, in the case of Parity Stock that bears cumulative dividends, all accrued but unpaid dividends) bear to each other. If the Board of Directors or a duly authorized committee of the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Issuer will provide written notice to the holders of Designated Preferred Stock prior to such Dividend Payment Date.
Subject to the foregoing, and not otherwise, such dividends (payable in cash, securities or other property) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on any securities, including Common Stock and other Junior Stock, from time to time out of any funds legally available for such payment, and holders of Designated Preferred Stock shall not be entitled to participate in any such dividends.
Section 4. Liquidation Rights.
(a) Voluntary or Involuntary Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the Issuer, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the Issuer or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Issuer, subject to the rights of any creditors of the Issuer, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the Issuer ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount), whether or not declared, to the date of payment (such amounts collectively, the "Liquidation Preference").
(b) Partial Payment. If in any distribution described in Section 4(a) above the assets of the Issuer or proceeds thereof are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Issuer ranking equally with Designated Preferred Stock as to such
UST Seq. No. 327
distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled.
(c) Residual Distributions. If the Liquidation Preference has been paid in full to all holders of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Issuer ranking equally with Designated Preferred Stock as to such distribution has been paid in full, the holders of other stock of the Issuer shall be entitled to receive all remaining assets of the Issuer (or proceeds thereof) according to their respective rights and preferences.
(d) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 4, the merger or consolidation of the Issuer with any other corporation or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Issuer, shall not constitute a liquidation, dissolution or winding up of the Issuer.
Section 5. Redemption.
(a) Optional Redemption. Except as provided below, the Designated
Preferred Stock may not be redeemed prior to the first Dividend Payment Date
falling on or after the third anniversary of the Original Issue Date. On or
after the first Dividend Payment Date falling on or after the third anniversary
of the Original Issue Date, the Issuer, at its option, subject to the approval
of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at
any time and from time to time, out of funds legally available therefor, the
shares of Designated Preferred Stock at the time outstanding, upon notice given
as provided in Section 5(c) below, at a redemption price equal to the sum of (i)
the Liquidation Amount per share and (ii) except as otherwise provided below,
any accrued and unpaid dividends (including, if applicable as provided in
Section 3(a) above, dividends on such amount) (regardless of whether any
dividends are actually declared) to, but excluding, the date fixed for
redemption.
Notwithstanding the foregoing, prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Issuer, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption; provided that (x) the Issuer (or any successor by Business Combination) has received aggregate gross proceeds of not less than the Minimum Amount (plus the "Minimum Amount" as defined in the relevant certificate of designations for each other outstanding series of preferred stock of such successor that was originally issued to the United States Department of the Treasury (the "Successor Preferred Stock") in connection with the Troubled Asset Relief Program Capital Purchase Program) from one or more Qualified Equity Offerings (including Qualified Equity Offerings of such successor), and (y) the
UST Seq. No. 327
aggregate redemption price of the Designated Preferred Stock (and any Successor Preferred Stock) redeemed pursuant to this paragraph may not exceed the aggregate net cash proceeds received by the Issuer (or any successor by Business Combination) from such Qualified Equity Offerings (including Qualified Equity Offerings of such successor).
The redemption price for any shares of Designated Preferred Stock shall
be payable on the redemption date to the holder of such shares against surrender
of the certificate(s) evidencing such shares to the Issuer or its agent. Any
declared but unpaid dividends payable on a redemption date that occurs
subsequent to the Dividend Record Date for a Dividend Period shall not be paid
to the holder entitled to receive the redemption price on the redemption date,
but rather shall be paid to the holder of record of the redeemed shares on such
Dividend Record Date relating to the Dividend Payment Date as provided in
Section 3 above.
(b) No Sinking Fund. The Designated Preferred Stock will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Designated Preferred Stock will have no right to require redemption or repurchase of any shares of Designated Preferred Stock.
(c) Notice of Redemption. Notice of every redemption of shares of Designated Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Issuer. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Designated Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Designated Preferred Stock. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any other similar facility, notice of redemption may be given to the holders of Designated Preferred Stock at such time and in any manner permitted by such facility. Each notice of redemption given to a holder shall state: (1) the redemption date; (2) the number of shares of Designated Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; and (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.
(d) Partial Redemption. In case of any redemption of part of the shares of Designated Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board of Directors or a duly authorized committee thereof may determine to be fair and equitable. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which shares of Designated Preferred Stock shall be redeemed from time to time. If fewer than all the shares represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without charge to the holder thereof.
(e) Effectiveness of Redemption. If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been deposited by the Issuer, in trust for the
UST Seq. No. 327
pro rata benefit of the holders of the shares called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accrue on all shares so called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to the Issuer, after which time the holders of the shares so called for redemption shall look only to the Issuer for payment of the redemption price of such shares.
(f) Status of Redeemed Shares. Shares of Designated Preferred Stock that are redeemed, repurchased or otherwise acquired by the Issuer shall revert to authorized but unissued shares of Preferred Stock (provided that any such cancelled shares of Designated Preferred Stock may be reissued only as shares of any series of Preferred Stock other than Designated Preferred Stock).
Section 6. Conversion. Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.
Section 7. Voting Rights.
(a) General. The holders of Designated Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by law.
(b) Preferred Stock Directors. Whenever, at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly Dividend Periods or more, whether or not consecutive, the authorized number of directors of the Issuer shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors (hereinafter the "Preferred Directors" and each a "Preferred Director") to fill such newly created directorships at the Issuer's next annual meeting of stockholders (or at a special meeting called for that purpose prior to such next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been declared and paid in full at which time such right shall terminate with respect to the Designated Preferred Stock, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned; provided that it shall be a qualification for
UST Seq. No. 327
election for any Preferred Director that the election of such Preferred Director shall not cause the Issuer to violate any corporate governance requirements of any securities exchange or other trading facility on which securities of the Issuer may then be listed or traded that listed or traded companies must have a majority of independent directors. Upon any termination of the right of the holders of shares of Designated Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the Preferred Directors shall cease to be qualified as directors, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause, and any vacancy created thereby may be filled, only by the affirmative vote of the holders a majority of the shares of Designated Preferred Stock at the time outstanding voting separately as a class together with the holders of shares of Voting Parity Stock, to the extent the voting rights of such holders described above are then exercisable. If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred.
(c) Class Voting Rights as to Particular Matters. So long as any shares of Designated Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or by the Charter, the vote or consent of the holders of at least 66 2/3% of the shares of Designated Preferred Stock at the time outstanding, voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:
(i) Authorization of Senior Stock. Any amendment or alteration of the Certificate of Designations for the Designated Preferred Stock or the Charter to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Issuer ranking senior to Designated Preferred Stock with respect to either or both the payment of dividends and/or the distribution of assets on any liquidation, dissolution or winding up of the Issuer;
(ii) Amendment of Designated Preferred Stock. Any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter (including, unless no vote on such merger or consolidation is required by Section 7(c)(iii) below, any amendment, alteration or repeal by means of a merger, consolidation or otherwise) so as to adversely affect the rights, preferences, privileges or voting powers of the Designated Preferred Stock; or
(iii) Share Exchanges, Reclassifications. Mergers and Consolidations. Any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the Issuer with another corporation or other entity, unless in each case (x) the shares of Designated Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Issuer is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Designated Preferred Stock immediately prior to such consummation, taken as a whole;
UST Seq. No. 327
provided, however, that for all purposes of this Section 7(c), any increase in the amount of the authorized Preferred Stock, including any increase in the authorized amount of Designated Preferred Stock necessary to satisfy preemptive or similar rights granted by the Issuer to other persons prior to the Signing Date, or the creation and issuance, or an increase in the authorized or issued amount, whether pursuant to preemptive or similar rights or otherwise, of any other series of Preferred Stock, or any securities convertible into or exchangeable or exercisable for any other series of Preferred Stock, ranking equally with and/or junior to Designated Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and the distribution of assets upon liquidation, dissolution or winding up of the Issuer will not be deemed to adversely affect the rights, preferences, privileges or voting powers, and shall not require the affirmative vote or consent of, the holders of outstanding shares of the Designated Preferred Stock.
(d) Changes after Provision for Redemption. No vote or consent of the holders of Designated Preferred Stock shall be required pursuant to Section 7(c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of the Designated Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been deposited in trust for such redemption, in each case pursuant to Section 5 above.
(e) Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Designated Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules of the Board of Directors or any duly authorized committee of the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Charter, the Bylaws, and applicable law and the rules of any national securities exchange or other trading facility on which Designated Preferred Stock is listed or traded at the time.
Section 8. Record Holders. To the fullest extent permitted by applicable law, the Issuer and the transfer agent for Designated Preferred Stock may deem and treat the record holder of any share of Designated Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Issuer nor such transfer agent shall be affected by any notice to the contrary.
Section 9. Notices. All notices or communications in respect of Designated Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Charter or Bylaws or by applicable law. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any similar facility, such notices may be given to the holders of Designated Preferred Stock in any manner permitted by such facility.
Section 10. No Preemptive Rights. No share of Designated Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Issuer, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.
UST Seq. No. 327
Section 11. Replacement Certificates. The Issuer shall replace any mutilated certificate at the holder's expense upon surrender of that certificate to the Issuer. The Issuer shall replace certificates that become destroyed, stolen or lost at the holder's expense upon delivery to the Issuer of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Issuer.
Section 12. Other Rights. The shares of Designated Preferred Stock shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.
* * * * * * * * *
UST Seq. No. 327
ANNEX B
FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES W
OF
GRANDSOUTH BANCORPORATION
Pursuant to the provisions of Sections 33-6-102 and 33-10-106 of the South Carolina Business Corporation Act of 1988, as amended, and the Articles of Incorporation of GrandSouth Bancorporation (the "Issuer"), a series of Preferred Stock, no par value per share, of the Issuer is hereby created, and the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:
Part 1. Designation and Number of Shares. There is hereby created out of the authorized and unissued shares of preferred stock of the Issuer a series of preferred stock designated as the "Fixed Rate Cumulative Perpetual Preferred Stock, Series W" (the "Designated Preferred Stock"). The authorized number of shares of Designated Preferred Stock shall be 451.
Part. 2. Definitions. The following terms are used in this Annex B (including the Standard Provisions hereto) as defined below:
(a) "Common Stock" means the common stock, no par value per share, of the Issuer.
(b) "Dividend Payment Date" means February 15, May 15, August 15 and November 15 of each year.
(c) "Junior Stock" means the Common Stock, and any other class or series of stock of the Issuer the terms of which expressly provide that it ranks junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Issuer.
(d) "Liquidation Amount" means $1,000 per share of Designated Preferred Stock.
(e) "Minimum Amount" means $112,500.
(f) "Parity Stock" means any class or series of stock of the Issuer (other than Designated Preferred Stock) the terms of which do not expressly provide that such class or series will rank senior or junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Issuer (in each case without regard to whether dividends accrue cumulatively or non-cumulatively). Without limiting the foregoing, Parity Stock shall include the Issuer's UST Preferred Stock.
(g) "Signing Date" means January 9, 2009.
(h) "UST Preferred Stock" means the Issuer's Fixed Rate Cumulative Perpetual Preferred Stock, Series T.
UST Seq. No. 327
Part. 3. Certain Voting Matters. Holders of shares of Designated Preferred Stock will be entitled to one vote for each such share on any matter on which holders of Designated Preferred Stock are entitled to vote, including any action by written consent.
Part 4. Standard Provisions. The Standard Provisions of the Designated Preferred
Stock are as follow:
Section 1. General Matters. Each share of Designated Preferred Stock shall be identical in all respects to every other share of Designated Preferred Stock. The Designated Preferred Stock shall be perpetual, subject to the provisions of Section 5 of these Standard Provisions that form a part of the Certificate of Designations. The Designated Preferred Stock shall rank equally with Parity Stock and shall rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Issuer.
Section 2. Standard Definitions. As used herein with respect to Designated Preferred Stock:
(a) "Appropriate Federal Banking Agency" means the "appropriate Federal banking agency" with respect to the Issuer as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)), or any successor provision.
(b) "Business Combination" means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Issuer's stockholders.
(c) "Business Day" means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.
(d) "Bylaws" means the bylaws of the Issuer, as they may be amended from time to time.
(e) "Certificate of Designations" means the Certificate of Designations or comparable instrument relating to the Designated Preferred Stock, of which these Standard Provisions form a part, as it may be amended from time to time.
(f) "Charter" means the Issuer's certificate or articles of incorporation, articles of association, or similar organizational document.
(g) "Dividend Period" has the meaning set forth in Section 3(a).
(h) "Dividend Record Date" has the meaning set forth in Section 3(a).
(i) "Liquidation Preference" has the meaning set forth in Section 4(a).
UST Seq. No. 327
(j) "Original Issue Date" means the date on which shares of Designated Preferred Stock are first issued.
(k) "Preferred Director" has the meaning set forth in Section 7(b).
(l) "Preferred Stock" means any and all series of preferred stock of the Issuer, including the Designated Preferred Stock.
(m) "Qualified Equity Offering" means the sale and issuance for cash by the Issuer to persons other than the Issuer or any of its subsidiaries after the Original Issue Date of shares of perpetual Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be included in Tier 1 capital of the Issuer at the time of issuance under the applicable risk-based capital guidelines of the Issuer's Appropriate Federal Banking Agency (other than any such sales and issuances made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to November 17, 2008).
(n) "Standard Provisions" mean these Standard Provisions that form a part of the Certificate of Designations relating to the Designated Preferred Stock.
(o) "Successor Preferred Stock" has the meaning set forth in Section 5(a).
(p) "Voting Parity Stock" means, with regard to any matter as to which the holders of Designated Preferred Stock are entitled to vote as specified in Sections 7(a) and 7(b) of these Standard Provisions that form a part of the Certificate of Designations, any and all series of Parity Stock upon which like voting rights have been conferred and are exercisable with respect to such matter.
Section 3. Dividends.
(a) Rate. Holders of Designated Preferred Stock shall be entitled to receive, on each share of Designated Preferred Stock if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors, but only out of assets legally available therefor, cumulative cash dividends with respect to each Dividend Period (as defined below) at a per annum rate of 9.0% on (i) the Liquidation Amount per share of Designated Preferred Stock and (ii) the amount of accrued and unpaid dividends for any prior Dividend Period on such share of Designated Preferred Stock, if any. Such dividends shall begin to accrue and be cumulative from the Original Issue Date, shall compound on each subsequent Dividend Payment Date (i.e., no dividends shall accrue on other dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable quarterly in arrears on each Dividend Payment Date, commencing with the first such Dividend Payment Date to occur at least 20 calendar days after the Original Issue Date. In the event that any Dividend Payment Date would otherwise fall on a day that is not a Business Day, the dividend payment due on that date will be postponed to the next day that is a Business Day and no additional dividends will accrue as a result of that postponement. The period from and including any Dividend Payment Date to, but
UST Seq. No. 327
excluding, the next Dividend Payment Date is a "Dividend Period", provided that the initial Dividend Period shall be the period from and including the Original Issue Date to, but excluding, the next Dividend Payment Date.
Dividends that are payable on Designated Preferred Stock in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends payable on Designated Preferred Stock on any date prior to the end of a Dividend Period, and for the initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months, and actual days elapsed over a 30-day month.
Dividends that are payable on Designated Preferred Stock on any Dividend Payment Date will be payable to holders of record of Designated Preferred Stock as they appear on the stock register of the Issuer on the applicable record date, which shall be the 15th calendar day immediately preceding such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 nor less than 10 days prior to such Dividend Payment Date (each, a "Dividend Record Date"). Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day.
Holders of Designated Preferred Stock shall not be entitled to any dividends, whether payable in cash, securities or other property, other than dividends (if any) declared and payable on Designated Preferred Stock as specified in this Section 3 (subject to the other provisions of the Certificate of Designations).
(b) Priority of Dividends. So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than dividends payable solely in shares of Common Stock) or Parity Stock, subject to the immediately following paragraph in the case of Parity Stock and no Common Stock, Junior Stock or Parity Stock shall be, directly or indirectly, purchased. redeemed or otherwise acquired for consideration by the Issuer or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been or are contemporaneously declared and paid in full (or have been declared and a sum sufficient for the payment thereof has been set aside for the benefit of the holders of shares of Designated Preferred Stock on the applicable record date). The foregoing limitation shall not apply to (i) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice; (ii) the acquisition by the Issuer or any of its subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Issuer or any of its subsidiaries), including as trustees or custodians; and (iii) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case. solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock.
UST Seq. No. 327
When dividends are not paid (or declared and a sum sufficient for payment thereof set aside for the benefit of the holders thereof on the applicable record date) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period related to such Dividend Payment Date) in full upon Designated Preferred Stock and any shares of Parity Stock, all dividends declared on Designated Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of Designated Preferred Stock (including, if applicable as provided in Section 3(a) above, dividends on such amount) and all Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) (subject to their having been declared by the Board of Directors or a duly authorized committee of the Board of Directors out of legally available funds and including, in the case of Parity Stock that bears cumulative dividends, all accrued but unpaid dividends) bear to each other. If the Board of Directors or a duly authorized committee of the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Issuer will provide written notice to the holders of Designated Preferred Stock prior to such Dividend Payment Date.
Subject to the foregoing, and not otherwise, such dividends (payable in cash, securities or other property) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on any securities, including Common Stock and other Junior Stock, from time to time out of any funds legally available for such payment, and holders of Designated Preferred Stock shall not be entitled to participate in any such dividends.
Section 4. Liquidation Rights.
(a) Voluntary or Involuntary Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the Issuer, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the Issuer or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Issuer, subject to the rights of any creditors of the Issuer, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the Issuer ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount), whether or not declared, to the date of payment (such amounts collectively, the "Liquidation Preference").
(b) Partial Payment. If in any distribution described in Section 4(a) above the assets of the Issuer or proceeds thereof are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other
UST Seq. No. 327
stock of the Issuer ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled.
(c) Residual Distributions. If the Liquidation Preference has been paid in full to all holders of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Issuer ranking equally with Designated Preferred Stock as to such distribution has been paid in full, the holders of other stock of the Issuer shall be entitled to receive all remaining assets of the Issuer (or proceeds thereof) according to their respective rights and preferences.
(d) Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 4, the merger or consolidation of the Issuer with any other corporation or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Issuer, shall not constitute a liquidation, dissolution or winding up of the Issuer.
Section 5. Redemption.
(a) Optional Redemption. Except as provided below, the Designated
Preferred Stock may not be redeemed prior to the later of (i) the first Dividend
Payment Date falling on or after the third anniversary of the Original Issue
Date; and (ii) the date on which all outstanding shares of UST Preferred Stock
have been redeemed, purchased or otherwise acquired by the Issuer. On or after
the first Dividend Payment Date falling on or after the third anniversary of the
Original Issue Date, the Issuer, at its option, subject to the approval of the
Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time
and from time to time, out of funds legally available therefor, the shares of
Designated Preferred Stock at the time outstanding, upon notice given as
provided in Section 5(c) below, at a redemption price equal to the sum of (i)
the Liquidation Amount per share and (ii) except as otherwise provided below,
any accrued and unpaid dividends (including, if applicable as provided in
Section 3(a) above, dividends on such amount) (regardless of whether any
dividends are actually declared) to, but excluding, the date fixed for
redemption.
Notwithstanding the foregoing, prior to the first Dividend Payment Date
falling on or after the third anniversary of the Original Issue Date, the
Issuer, at its option, subject to the approval of the Appropriate Federal
Banking Agency and subject to the requirement that all outstanding shares of of
UST Preferred Stock shall previously have been redeemed, repurchased or
otherwise acquired by the Issuer, may redeem, in whole or in part, at any time
and from time to time, the shares of Designated Preferred Stock at the time
outstanding, upon notice given as provided in Section 5(c) below, at a
redemption price equal to the sum of (i) the Liquidation Amount per share and
(ii) except as otherwise provided below, any accrued and unpaid dividends
(including, if applicable as provided in Section 3(a) above, dividends on such
amount) (regardless of whether any dividends are actually declared) to, but
excluding, the date fixed for redemption; provided that (x) the Issuer (or any
successor by Business Combination) has received aggregate gross proceeds of not
less than the Minimum Amount (plus the "Minimum Amount" as defined in the
UST Seq. No. 327
relevant certificate of designations for each other outstanding series of preferred stock of such successor that was originally issued to the United States Department of the Treasury (the "Successor Preferred Stock") in connection with the Troubled Asset Relief Program Capital Purchase Program) from one or more Qualified Equity Offerings (including Qualified Equity Offerings of such successor), and (y) the aggregate redemption price of the Designated Preferred Stock (and any Successor Preferred Stock) redeemed pursuant to this paragraph may not exceed the aggregate net cash proceeds received by the Issuer (or any successor by Business Combination) from such Qualified Equity Offerings (including Qualified Equity Offerings of such successor).
The redemption price for any shares of Designated Preferred Stock shall
be payable on the redemption date to the holder of such shares against surrender
of the certificate(s) evidencing such shares to the Issuer or its agent. Any
declared but unpaid dividends payable on a redemption date that occurs
subsequent to the Dividend Record Date for a Dividend Period shall not be paid
to the holder entitled to receive the redemption price on the redemption date,
but rather shall be paid to the holder of record of the redeemed shares on such
Dividend Record Date relating to the Dividend Payment Date as provided in
Section 3 above.
(b) No Sinking Fund. The Designated Preferred Stock will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Designated Preferred Stock will have no right to require redemption or repurchase of any shares of Designated Preferred Stock.
(c) Notice of Redemption. Notice of every redemption of shares of Designated Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Issuer. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Designated Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Designated Preferred Stock. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Company or any other similar facility, notice of redemption may be given to the holders of Designated Preferred Stock at such time and in any manner permitted by such facility. Each notice of redemption given to a holder shall state: (1) the redemption date; (2) the number of shares of Designated Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; and (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.
(d) Partial Redemption. In case of any redemption of part of the shares of Designated Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board of Directors or a duly authorized committee thereof may determine to be fair and equitable. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which shares of Designated Preferred Stock shall be redeemed from time to time. If fewer than all the shares represented by any
UST Seq. No. 327
certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without charge to the holder thereof.
(e) Effectiveness of Redemption. If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been deposited by the Issuer, in trust for the pro rata benefit of the holders of the shares called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accrue on all shares so called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to the Issuer, after which time the holders of the shares so called for redemption shall look only to the Issuer for payment of the redemption price of such shares.
(f) Status of Redeemed Shares. Shares of Designated Preferred Stock that are redeemed, repurchased or otherwise acquired by the Issuer shall revert to authorized but unissued shares of Preferred Stock (provided that any such cancelled shares of Designated Preferred Stock may be reissued only as shares of any series of Preferred Stock other than Designated Preferred Stock).
Section 6. Conversion. Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.
Section 7. Voting Rights.
(a) General. The holders of Designated Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by law.
(b) Preferred Stock Directors. Whenever, at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly Dividend Periods or more, whether or not consecutive, the authorized number of directors of the Issuer shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors (hereinafter the "Preferred Directors" and each a "Preferred Director") to fill such newly created directorships at the Issuer's next annual meeting of stockholders (or at a special meeting called for that purpose prior to such next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been declared and paid in full at which time such right shall terminate with respect
UST Seq. No. 327
to the Designated Preferred Stock, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned; provided that it shall be a qualification for election for any Preferred Director that the election of such Preferred Director shall not cause the Issuer to violate any corporate governance requirements of any securities exchange or other trading facility on which securities of the Issuer may then be listed or traded that listed or traded companies must have a majority of independent directors. Upon any termination of the right of the holders of shares of Designated Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the Preferred Directors shall cease to be qualified as directors, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause, and any vacancy created thereby may be filled, only by the affirmative vote of the holders a majority of the shares of Designated Preferred Stock at the time outstanding voting separately as a class together with the holders of shares of Voting Parity Stock, to the extent the voting rights of such holders described above are then exercisable. If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred.
(c) Class Voting Rights as to Particular Matters. So long as any shares of Designated Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or by the Charter, the vote or consent of the holders of at least 66 2/3% of the shares of Designated Preferred Stock at the time outstanding, voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:
(i) Authorization of Senior Stock. Any amendment or alteration of the Certificate of Designations for the Designated Preferred Stock or the Charter to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Issuer ranking senior to Designated Preferred Stock with respect to either or both the payment of dividends and/or the distribution of assets on any liquidation, dissolution or winding up of the Issuer;
(ii) Amendment of Designated Preferred Stock. Any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter (including, unless no vote on such merger or consolidation is required by Section 7(c)(iii) below, any amendment, alteration or repeal by means of a merger, consolidation or otherwise) so as to adversely affect the rights, preferences, privileges or voting powers of the Designated Preferred Stock; or
(iii) Share Exchanges, Reclassifications. Mergers and Consolidations. Any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the Issuer with another corporation or other entity, unless in each case (x) the shares of Designated Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Issuer is not the surviving or resulting entity, are converted into or exchanged for preference
UST Seq. No. 327
securities of the surviving or resulting entity or its ultimate parent, and (y) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Designated Preferred Stock immediately prior to such consummation, taken as a whole;
provided, however, that for all purposes of this Section 7(c), any increase in the amount of the authorized Preferred Stock, including any increase in the authorized amount of Designated Preferred Stock necessary to satisfy preemptive or similar rights granted by the Issuer to other persons prior to the Signing Date, or the creation and issuance, or an increase in the authorized or issued amount, whether pursuant to preemptive or similar rights or otherwise, of any other series of Preferred Stock, or any securities convertible into or exchangeable or exercisable for any other series of Preferred Stock, ranking equally with and/or junior to Designated Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and the distribution of assets upon liquidation, dissolution or winding up of the Issuer will not be deemed to adversely affect the rights, preferences, privileges or voting powers, and shall not require the affirmative vote or consent of, the holders of outstanding shares of the Designated Preferred Stock.
(d) Changes after Provision for Redemption. No vote or consent of the holders of Designated Preferred Stock shall be required pursuant to Section 7(c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of the Designated Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been deposited in trust for such redemption, in each case pursuant to Section 5 above.
(e) Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Designated Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules of the Board of Directors or any duly authorized committee of the Board of Directors, in its discretion, may adopt from time to time, which rules and procedures shall conform to the requirements of the Charter, the Bylaws, and applicable law and the rules of any national securities exchange or other trading facility on which Designated Preferred Stock is listed or traded at the time.
Section 8. Record Holders. To the fullest extent permitted by applicable law, the Issuer and the transfer agent for Designated Preferred Stock may deem and treat the record holder of any share of Designated Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Issuer nor such transfer agent shall be affected by any notice to the contrary.
Section 9. Notices. All notices or communications in respect of Designated Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Charter or Bylaws or by applicable law. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The
UST Seq. No. 327
Depository Trust Company or any similar facility, such notices may be given to the holders of Designated Preferred Stock in any manner permitted by such facility.
Section 10. No Preemptive Rights. No share of Designated Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Issuer, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.
Section 11. Replacement Certificates. The Issuer shall replace any mutilated certificate at the holder's expense upon surrender of that certificate to the Issuer. The Issuer shall replace certificates that become destroyed, stolen or lost at the holder's expense upon delivery to the Issuer of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Issuer.
Section 12. Other Rights. The shares of Designated Preferred Stock shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.
* * * * * * * * *
UST Seq. No. 327
Exhibit 31.1
CERTIFICATIONS
I, Mason Y. Garrett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GrandSouth Bancorporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 15, 2009 /s/ Mason Y. Garrett
--------------------------
Mason Y. Garrett
Chief Executive Officer
|
Exhibit 31.2
CERTIFICATIONS
I, J. B. Garrett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of GrandSouth Bancorporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: May 15, 2009 /s/ J. B. Garrett
---------------------------
J. B. Garrett
Chief Financial Officer
|
Exhibit 32
Certifications Pursuant to 18 U.S.C. Section 1350
The undersigned, who are the chief executive officer and the chief financial officer of GrandSouth Bancorporation, hereby certify that, to the best of their knowledge, the accompanying Form 10-Q of the issuer fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer.
May 15, 2009
/s/ Mason Y. Garrett ------------------------------------------------ Mason Y. Garrett Chief Executive Officer /s/ J. B. Garrett ------------------------------------------------ J. B. Garrett Chief Financial Officer |