UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2008
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________.
File Number 000-31937
GRANDSOUTH BANCORPORATION
(Exact name of Registrant as specified in its Charter)
South Carolina 57-1104394
(State or Other Jurisdiction (IRS Employer Identification Number)
of Incorporation or Organization)
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381 Halton Road, Greenville, South Carolina 29607
(Address of Principal Executive Office, Zip Code)
Registrant's Telephone Number, Including Area Code: (864) 770-1000
Securities Registered Pursuant to Section 12(b) of the Exchange Act: None
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 "accelerated filer," "large 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 smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting common equity held by non-affiliates on
June 30, 2008, which was the last day of the Registrant's most recently
completed second fiscal quarter, based on the average of the bid and asked price
on the OTC Bulletin Board, was approximately $23,780,883. For purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
As of March 23, 2009, there were 3,573,695 shares of the Registrant's
Common Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Shareholders for the year ended December
31, 2008 - Parts I and II
(2) Portions of the Registrant's Proxy Statement for the 2009 Annual Meeting of
Shareholders - Part III
10-K CROSS REFERENCE INDEX
Part I Page
Item 1 Business ....................................................... 2
Item 1A Risk Factors ................................................... 10
Item 1B Unresolved Staff Comments ...................................... 13
Item 2 Description of Properties ...................................... 13
Item 3 Legal Proceedings .............................................. 13
Item 4 Submission of Matters to a Vote of Security Holders ............ 13
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities ........... 13
Item 6 Selected Financial Data ........................................ 14
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 14
Item 7A Quantitative and Qualitative Disclosures about
Market Risk .................................................. 14
Item 8 Financial Statements and Supplementary Data .................... 14
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ....................... 14
Item 9A(T) Controls and Procedures ...................................... 14
Item 9B Other Information .............................................. 15
Part III
Item 10 Directors, Executive Officers and Corporate Governance ......... 15
Item 11 Executive Compensation ......................................... 15
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................ 15
Item 13 Certain Relationships and Related Transactions, and
Director Independence ........................................ 16
Item 14 Principal Accountant Fees and Services ......................... 16
Item 15 Exhibits and Financial Statement Schedules ..................... 16
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CAUTIONARY NOTICE WITH RESPECT TO
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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 Compamy 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
forwarding-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 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 the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the value of
collateral securing loans;
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 cost and difficulty of implementing changes in technology or products;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions and
economic confidence;
o ability to weather the current economic downturn;
o loss of consumer or investor 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.
PART I
Item 1. Business.
General
The Company is a South Carolina corporation organized in 2000 under the
laws of South Carolina for the purpose of being a holding company for GrandSouth
Bank (the "Bank"). On October 2, 2000, pursuant to a Plan of Exchange approved
by the shareholders, all of the outstanding shares of capital stock of the Bank
were exchanged for shares of common stock of the Company and the Company became
the owner of all of the outstanding capital stock of the Bank. The Company
presently engages in no business other than that of owning the Bank and has no
employees.
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The Bank is a South Carolina state bank which was incorporated and
commenced operations as a commercial bank in 1998. The Bank operates from its
offices in Greenville, Fountain Inn and Anderson, South Carolina. The main
office is located at 381 Halton Road, in Greenville, South Carolina, and the
branch offices are located at 325 South Main Street, in Fountain Inn, South
Carolina and 1601 North Fant Street in Anderson, South Carolina.
The Bank offers a full array of commercial banking services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. Most of the Bank's deposits are attracted
from individuals and small businesses. The Bank does not offer trust services.
The Bank offers secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial, consumer and
residential purposes. Consumer loans include: car loans, home equity improvement
loans (secured by first and second mortgages), personal expenditure loans,
education loans, overdraft lines of credit, and the like. Commercial loans
include short term unsecured loans, short and intermediate term real estate
mortgage loans, loans secured by listed stocks, loans secured by equipment,
inventory, accounts receivable, and the like. Management believes that the
credit staff possesses knowledge of the community and lending skills sufficient
to enable the Bank to maintain a sufficient volume of high quality loans.
Management of the Bank believes that the loan portfolio is adequately
diversified. There are no significant concentrations of loans in any particular
individuals, industries or groups of related individuals or industries and the
Bank has no foreign loans. The loan portfolio consists primarily of mortgage
loans and extensions of credit to businesses and individuals in its service area
within Greenville and Anderson Counties, South Carolina. The economy of this
area is diversified and does not depend on any one industry or group of related
industries. Management has established loan policies and practices that include
general limitations on loan-to-collateral value for different types of
collateral, requirements for appraisals, obtaining and maintaining current
credit and financial information on borrowers, and credit approvals.
Other services offered by the Bank include safe deposit boxes, night
depository service, VISA(R) and MasterCard(R) charge cards, tax deposits, and
traveler's checks.
At December 31, 2008, the Bank employed 69 persons full-time. The
Company has no employees. Management of the Bank believes that its employee
relations are excellent.
Competition
As of June 30, 2008, the most recent date for which information is
available, the Bank competed in the Greenville County, South Carolina market
with 33 other banks and savings banks with 167 branch locations. Aggregate
deposits in the Greenville County market were approximately $10.1 billion. The
Bank had a 2.15% share of the Greenville County market as of that date. The Bank
also has an office in Anderson County, South Carolina, where, as of June 30,
2008, it competed with 20 other banks and savings banks with 63 branch
locations. Aggregate deposits in the Anderson County market were $2.3 billion.
The Bank had a 3.75% share of the market.
Banks generally compete with other financial institutions through the
savings products and services offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and personal concern with which services are offered. South
Carolina law permits statewide branching by banks and savings institutions, and
many financial institutions in the state have branch networks. Consequently,
commercial banking in South Carolina is highly competitive. Furthermore,
out-of-state banks may commence operations and compete in the Bank's primary
service area. Many large banking organizations, several of which are controlled
by out-of-state ownership, currently operate in the Bank's market area.
In the conduct of certain areas of its business, the Bank competes with
commercial banks, savings and loan associations, credit unions, consumer finance
companies, insurance companies, money market mutual funds and other financial
institutions, some of which are not subject to the same degree of regulation and
restriction imposed upon the Bank. Many of these competitors have substantially
greater resources and lending limits than the Bank and offer certain services,
such as international banking services and trust services, that the Bank does
not provide. Moreover, most of these competitors have more numerous branch
offices located throughout their market areas, a competitive advantage that the
Bank does not have to the same degree. Such competitors may also be in a
position to make more effective use of media advertising, support services, and
electronic technology than can the Bank.
The banking industry is significantly affected by prevailing economic
conditions as well as by government policies and regulations concerning, among
other things, monetary and fiscal affairs, the housing industry and financial
institutions. Deposits at banks are influenced by a number of economic factors,
including interest rates, competing instruments, levels of personal income and
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savings, and the extent to which interest on retirement savings accounts is tax
deferred. Lending activities are also influenced by a number of economic
factors, including demand for and supply of housing, conditions in the
construction industry, and availability of funds. Primary sources of funds for
lending activities include savings deposits, income from investments, loan
principal repayments, and proceeds from sales of loans to conventional
participating lenders.
Effects of Government Regulation
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Company and the
Bank.
General
As a bank holding company under the Bank Holding Company Act ("BHCA"),
the Company obtained the approval of the Board of Governors of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the
regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or engaging
in any other activity which the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The Company may engage in a broader range of activities if it becomes a
"financial holding company" pursuant to the Gramm-Leach-Bliley Act, which is
described below under the caption "Gramm-Leach-Bliley Act" The BHCA prohibits
the Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or from
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve. Additionally, the BHCA prohibits the Company
from engaging in or from acquiring ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be properly incident thereto. The BHCA generally does not place
territorial restrictions on the activities of such non-banking related
activities.
The Company is also subject to regulation and supervision by the South
Carolina State Board of Financial Institutions (the "State Board"). A South
Carolina bank holding company must provide the State Board with information with
respect to the financial condition, operations, management and inter-company
relationships of the holding company and its subsidiaries. The State Board also
may require such other information as is necessary to keep itself informed about
whether the provisions of South Carolina law and the regulations and orders
issued thereunder by the State Board have been complied with, and the State
Board may examine any bank holding company and its subsidiaries.
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the Federal Deposit Insurance
Corporation ("FDIC") insurance funds in the event the depository institution is
in danger of becoming insolvent or is insolvent. For example, under the policy
of the Federal Reserve, a bank holding company is required to serve as a source
of financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in
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circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by the
Deposit Insurance Fund of the FDIC as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the Deposit Insurance Fund.
The FDIC's claim for damages is superior to claims of shareholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision gives depositors a preference over general and subordinated creditors
and shareholders in the event a receiver is appointed to distribute the assets
of the Bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and State Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC have adopted risk-based and leverage capital adequacy guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks.
Failure to meet capital guidelines could subject the Bank to a variety
of enforcement remedies, ranging from, for example, a prohibition on the taking
of brokered deposits to the termination of deposit insurance by the FDIC or the
appointment of a receiver.
The risk-based capital standards of both the Federal Reserve and the
FDIC explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agencies as a
factor in evaluating a bank's capital adequacy. The Federal Reserve also has
issued additional capital guidelines for bank holding companies that engage in
certain trading activities.
Payment of Dividends
The Company is a legal entity separate and distinct from its bank
subsidiary. Most of the revenues of the Company are expected to result from
dividends paid to the Company by the Bank. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its shareholders.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions among the Company and its
affiliates, including the amount of the Bank's loans to or investments in
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its affiliates
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
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FDIC Insurance Assessments
The FDIC merged the Bank Insurance Fund and the Savings Association
Insurance Fund to form the Deposit Insurance Fund ("DIF") on March 31, 2006 in
accordance with the Federal Deposit Insurance Reform Act of 2005. The FDIC
maintains the DIF by assessing depository institutions an insurance premium. The
amount each institution is assessed is based upon statutory factors that include
the balance of insured deposits as well as the degree of risk the institution
poses to the insurance fund. The FDIC uses a risk-based premium system that
assesses higher rates on those institutions that pose greater risks to the DIF.
Since January 1, 2007, the FDIC has placed each institution in one of four risk
categories using a two-step process based first on capital ratios (the capital
group assignment) and then on other relevant information (the supervisory group
assignment). Effective January 1, 2007, rates range between 5 and 43 cents per
$100 in assessable deposits. As a result of the actual and predicted impact on
the DIF of bank failures in 2008 and 2009, however, the FDIC has altered its
methodology for computing assessments, beginning with assessments due in
September 2009 based on assessable deposits at June 30, 2009. Under the new
methodology, assessments will range between 7 and 77.5 cents per $100 in
assessable deposits. The FDIC has also proposed to make an additional "emergency
assessment" of 20 cents per $100 of assessable deposits held on June 30, 2009,
which will be payable in September 2009.
Regulation of the Bank
The Bank is subject to regulation and examination by the State Board.
In addition, the Bank is subject to various other state and federal laws and
regulations, including state usury laws, laws relating to fiduciaries, consumer
credit laws and laws relating to branch banking. The Bank's loan operations are
also subject to certain federal consumer credit laws and regulations promulgated
thereunder, including, but not limited to: the federal Truth-In-Lending Act,
governing disclosures of credit terms to consumer borrowers; the Home Mortgage
Disclosure Act, requiring financial institutions to provide certain information
concerning their mortgage lending; the Equal Credit Opportunity Act and the Fair
Housing Act, prohibiting discrimination on the basis of certain prohibited
factors in extending credit; and the Fair Debt Collection Act, governing the
manner in which consumer debts may be collected by collection agencies. The
deposit operations of the Bank are also subject to the Truth in Savings Act,
requiring certain disclosures about rates paid on savings accounts; the
Expedited Funds Availability Act, which deals with disclosure of the
availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services. The Bank is also subject to the
Fair Credit Reporting Act, governing the use and provision of information to
credit reporting agencies; the Bank Secrecy Act, dealing with, among other
things, the reporting of certain currency transactions; and the USA Patriot Act,
dealing with, among other things, requiring the establishment of anti-money
laundering programs including standards for verifying customer information at
account opening.
The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
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A bank that is "undercapitalized" becomes subject to provisions of the
FDIA: restricting payment of capital distributions and management fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital restoration plan; prohibiting the acceptance of employee
benefit plan deposits; restricting the growth of the bank's assets and requiring
prior approval of certain expansion proposals. A bank that is "significantly
undercapitalized" is also subject to restrictions on compensation paid to senior
management of the bank, and a bank that is "critically undercapitalized" is
further subject to restrictions on the activities of the bank and restrictions
on payments of subordinated debt of the bank. The purpose of these provisions is
to require banks with less than adequate capital to act quickly to restore their
capital and to have the FDIC move promptly to take over banks that are unwilling
or unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph. Management does not
believe that these regulations will have a material adverse effect on the
operations of the Bank.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 the Company and any other adequately capitalized bank holding company
located in South Carolina can acquire a bank located in any other state, and a
bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. Unless prohibited by state law, adequately capitalized and
managed bank holding companies are permitted to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate branches within a state continue to be subject to applicable state
branching laws. South Carolina law permits such interstate branching but not de
novo branching by an out-of-state bank.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (the "Act") makes it easier for affiliations
between banks, securities firms and insurance companies to take place, removed
Depression-era barriers that had separated banks and securities firms, and seeks
to protect the privacy of consumers' financial information.
Under provisions of the legislation and regulations adopted by
appropriate regulators, banks, securities firms and insurance companies are able
to structure new affiliations through a holding company structure or through a
financial subsidiary. The legislation creates a new type of bank holding company
called a "financial holding company" which has powers much more extensive than
those of standard holding companies. These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature; (2) incidental to activities that are financial in nature; or (3)
complementary to a financial activity and that do not impose a safety and
soundness risk. Significantly, the permitted financial activities for financial
holding companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last CRA examination.
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The legislation also creates another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission (the "SEC") and state insurance
regulators so that each type of activity is supervised by a regulator with
corresponding expertise. The Federal Reserve is intended to be an umbrella
supervisor with the authority to require a bank holding company or financial
holding company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.
The Act and the regulations adopted pursuant to the Act create
opportunities for the Company to offer expanded services to customers in the
future, though the Company has not yet determined what the nature of the
expanded services might be or when the Company might find it feasible to offer
them. The Act has increased competition from larger financial institutions that
are currently more capable than the Company of taking advantage of the
opportunity to provide a broader range of services. However, the Company
continues to believe that its commitment to providing high quality, personalized
service to customers will permit it to remain competitive in its market area.
Legislative Proposals
Proposed legislation which could significantly affect the business of
banking is introduced in Congress from time to time. For example, numerous bills
are pending in Congress and the South Carolina Legislature to provide various
forms of relief to homeowners from foreclosure of mortgages as a result of
publicity surrounding economic problems resulting from subprime mortgage lending
and the economic adjustments in national real estate markets. Management of the
Bank cannot predict the future course of such legislative proposals or their
impact on the Company and the Bank should they be adopted.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act was enacted in 2002, and mandated extensive
reforms and requirements for public companies. The SEC has adopted extensive
regulations pursuant to the requirements of the Sarbanes-Oxley Act. The
Sarbanes-Oxley Act and the SEC's regulations have increased the Company's cost
of doing business, particularly its fees for internal and external audit
services and legal services, and the law and regulations are expected to
continue to do so. However, the Company does not believe that it will be
affected by Sarbanes-Oxley and the regulations in ways that are materially
different or more onerous than those of other public companies of similar size
and in similar businesses.
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Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest
rate differentials. In general, the difference between the interest paid by a
bank on its deposits and its other borrowings, and the interest received by a
bank on its loans and securities holdings, constitutes the major portion of a
bank's earnings. Thus, the earnings and growth of the Company and the Bank are
subject to the influence of economic conditions generally, both domestic and
foreign, and also to the monetary and fiscal policies of the United States and
its agencies, particularly the Federal Reserve. The Federal Reserve regulates
the supply of money through various means, including open market dealings in
United States government securities, the discount rate at which banks may borrow
from the Federal Reserve, and the reserve requirements on deposits. The nature
and timing of any changes in such policies and their impact on the Company and
the Bank cannot be predicted.
Governmental Response to 2008 Financial Crisis
During the fourth quarter of 2008 and continuing into the first quarter
of 2009 the FDIC, the Federal Reserve, the Department of the Treasury and
Congress took a number of actions designed to alleviate or correct mounting
problems in the financial services industry. A number of these initiatives were
directly applicable to community banks.
Congress enacted the Emergency Economic Stabilization Act of 2008
which, among other things, temporarily increased the maximum amount of FDIC
deposit insurance from $100,000 to $250,000 and created a Troubled Assets Relief
Program ("TARP") administered by Treasury. In October, 2008, Treasury announced
a Capital Purchase Program ("CPP") under TARP to increase the capital of healthy
banks. Under the CPP, Treasury would purchase preferred stock with warrants from
qualified banks and bank holding companies in an amount up to 3% of the seller's
risk-weighed assets as of September 30, 2008. Institutions wishing to
participate in the CPP were required to file an application with their principal
federal regulators. The Company filed such an application and received
preliminary approval to sell preferred stock to the Treasury, and in January
2009 sold 9,450 shares of redeemable preferred stock with a redemption value of
$1,000 per share to the Treasury for $9 million. That transaction has imposed on
the Company a number of open-ended administrative burdens, including having to
permit Treasury to amend unilaterally the stock purchase agreement to comply
with subsequent changes in applicable federal statutes, restrictions on the
payment of dividends, and restrictions on executive compensation, including the
tax deductibility of such compensation. The burdens and restrictions will
continue as long as the Treasury owns the preferred stock.
The FDIC also implemented in October, 2008 a Temporary Liquidity
Guarantee Program consisting of a deposit insurance component pursuant to which
it undertook to provide deposit insurance in an unlimited amount for
non-interest bearing transaction accounts, and a debt guarantee component
pursuant to which it undertook to fully guarantee senior, unsecured debt issued
by banks or bank holding companies. Coverage of both components was automatic
until December 5, 2008, at which time covered institutions could opt out of one
or both of the components. Institutions not opting out would be charged fees for
their participation in the components. The Bank did not opt out of either
component.
An unfortunate consequence of the difficulties that have beset the
banking industry in the last year has been a large increase in bank failures,
which has led to substantial claims being made against the FDIC's Deposit
Insurance Fund. In order to increase the amount in the Deposit Insurance Fund to
reflect the increased risk of additional bank failures and insurance claims, the
FDIC has raised its assessments on banks for 2009 and has also proposed a
special one-time assessment of 20 cents per $100 of assessable deposits, to be
paid in September, 2009 based on deposits at June 30, 2009. There appears,
however, to be a possibility that the assessment will be reduced if Congress
authorizes the FDIC to borrow sufficient funds. Assuming that the special
assessment is imposed as proposed and without reduction, the additional cost to
the Bank in 2009 would be approximately $660,849.
Additional governmental efforts to ameliorate the problems afflicting
the banking industry have been adopted or proposed, or are being considered by
Congress and various governmental entities. The Company is presently unable to
predict the impact of any such changes, although it appears that they are likely
to increase operating expenses in the near term without creating completely
offsetting benefits.
Further Information
Further information about the business of the Company and the Bank is
set forth in this Form 10-K under Item 6 -"Management's Discussion and Analysis
or Plan of Operation."
9
Item 1A. Risk Factors
RISK FACTORS
Risks Related to Our Business
There can be no assurance that recent government actions will help
stabilize the U.S. financial system.
In response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, various branches and agencies of the U.S. government have put in
place laws, regulations and programs to address capital and liquidity issues in
the banking system. There can be no assurance, however, as to the actual impact
that such laws, regulations and programs will have on the financial markets,
including the extreme levels of volatility, liquidity and confidence issues, and
limited credit availability currently being experienced. The failure of such
laws, regulations and programs to help stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, access to credit or the trading price of our common stock.
Current levels of market volatility are unprecedented.
The volatility and disruption of financial and credit markets has reached
unprecedented levels for recent times. In some cases, the markets have produced
downward pressure on stock prices and credit availability for certain issuers
without regard to those issuers' underlying financial strength. If current
levels of market disruption and volatility continue or worsen, there can be no
assurance that we will not experience an adverse effect, which may be material,
on our ability to access capital and on our business, financial condition and
results of operations.
The soundness of other financial institutions could adversely affect
us.
Financial services institutions are interrelated as a result of trading,
clearing, counterparty, or other relationships. We have exposure to many
different industries and counterparties, and we routinely execute transactions
with counterparties in the financial services industry, including brokers,
dealers, commercial banks, investment banks, and government sponsored
enterprises. Many of these transactions expose us to credit risk in the event of
default of our counterparty. In addition, our credit risk may be exacerbated
when the collateral we hold cannot be realized or is liquidated at prices not
sufficient to recover the full amount of the loan or other obligation due us.
There is no assurance that any such losses would not materially and adversely
affect our results of operations or earnings.
Current market developments may adversely affect our industry, business
and results of operations.
Dramatic declines in the housing market during the prior year, with falling home
prices and increasing foreclosures and unemployment, have resulted in
significant write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to credit
default swaps and other derivative securities have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Reflecting concern about the stability
of the financial markets generally and the strength of counterparties, many
lenders and institutional investors have reduced, and in some cases, ceased to
provide funding to borrowers, including other financial institutions. The
resulting lack of available credit, lack of confidence in the financial sector,
increased volatility in the financial markets and reduced business activity
could materially and adversely, directly or indirectly, affect our business,
financial condition and results of operations.
Our growth strategy will require future increases in capital that we
may not be able to accomplish.
We are required by banking regulators to maintain various ratios of
capital to assets. As our assets grow we expect our capital ratios to decline
unless we can increase our earnings or raise sufficient new capital to keep pace
with asset growth. Our ability to raise additional capital, if needed, will
depend, among other things, on conditions in the capital markets at that time,
which are outside our control, and on our financial condition and performance.
If we are unable to limit a capital ratio decline by increasing our capital, we
will have to restrict our asset growth as we approach the minimum required
capital to asset ratios.
We may be unable to successfully manage our sustained growth.
Our future profitability will depend in part on our ability to manage
growth successfully. Our ability to manage growth successfully will depend on
our ability to maintain cost controls and asset quality while attracting
10
additional loans and deposits, as well as on factors beyond our control, such as
economic conditions and interest rate trends. If we grow too quickly and are not
able to control costs and maintain asset quality, growth could materially
adversely affect our financial performance.
We depend on the services of a number of key personnel, and a loss of
any of those personnel could disrupt our operations and result in reduced
revenues.
We are a relationship-driven organization. Our growth and development
to date have depended in large part on the efforts of our senior management
team. These senior officers have primary contact with our customers and are
extremely important in maintaining personalized relationships with our customer
base, which are key aspects of our business strategy, and in increasing our
market presence. The unexpected loss of services of one or more of these key
employees could have a material adverse effect on our operations and possibly
result in reduced revenues if we were unable to find suitable replacements
promptly.
If our loan customers do not pay us as they have contracted to, we may
experience losses.
Our principal revenue producing business is making loans. If our
customers do not repay the loans, we will suffer losses. Even though we maintain
an allowance for loan losses, the amount of the allowance may not be adequate to
cover the losses we experience. We attempt to mitigate this risk by a thorough
review of the creditworthiness of loan customers. Nevertheless, there is risk
that our credit evaluations will prove to be inaccurate due to changed
circumstances or otherwise.
Our business is concentrated in the Upstate area of South Carolina, and
a downturn in the economy of the area, a decline in area real estate values or
other events in our market area may adversely affect our business.
Substantially all of our business is located in the Upstate area of
South Carolina. As a result, our financial condition and results of operations
may be affected by changes in the Upstate economy. A prolonged period of
economic recession, a general decline in real estate values in our market area
or other adverse economic conditions in the Upstate and South Carolina may
result in decreases in demand for our services, increases in nonpayment of loans
and decreases in the value of collateral securing loans, which could have a
material adverse effect on our business, future prospects, financial condition
or results of operations.
We face strong competition from larger, more established competitors
which may adversely affect our ability to operate profitably.
We encounter strong competition from financial institutions operating
in the Upstate area of South Carolina. In the conduct of our business, we also
compete with credit unions, insurance companies, money market mutual funds and
other financial institutions, some of which are not subject to the same degree
of regulation as we are. Many of these competitors have substantially greater
resources and lending abilities than we have and offer services, such as
investment banking, trust and international banking services that we do not
provide. We believe that we have been able to, and will continue to be able to,
compete effectively with these institutions because of our experienced bankers
and personalized service, as well as through loan participations and other
strategies and techniques. However, we cannot promise that we are correct in our
belief. If we are wrong, our ability to operate profitably may be negatively
affected.
Technological changes affect our business, and we may have fewer
resources than many of our competitors to invest in technological improvements.
The financial services industry continues to undergo rapid
technological changes with frequent introductions of new technology-driven
products and services. In addition to enabling financial institutions to serve
clients better, the effective use of technology may increase efficiency and may
enable financial institutions to reduce costs. Our future success may depend, in
part, upon our ability to use technology to provide products and services that
provide convenience to customers and to create additional efficiencies in our
operations. We may need to make significant additional capital investments in
technology in the future, and we may not be able to effectively implement new
technology-driven products and services. Many of our competitors have
substantially greater resources to invest in technological improvements.
Our profitability and liquidity are affected by changes in interest
rates and economic conditions.
Our profitability depends upon our net interest income, which is the
difference between interest earned on our interest earning assets, such as loans
and investment securities, and interest expense on interest bearing liabilities,
such as deposits and borrowings. Our net interest income will be adversely
affected when market interest rates change such that the interest we pay on
deposits and borrowings increases faster than the interest earned on loans and
investments, or, conversely, when the interest earned on loans and investments
decreases faster than the interest we pay on deposits and borrowings. Interest
11
rates, and consequently our results of operations, are affected by general
economic conditions (domestic and foreign) and fiscal and monetary policies.
Monetary and fiscal policies may materially affect the level and direction of
interest rates. Beginning in June 2004 through June 2006, the Federal Reserve
raised rates 17 times for a total increase of 4.25%. Increases in interest rates
generally decrease the market values of interest earning investments and loans
held and therefore may adversely affect our liquidity and earnings. Increased
interest rates also generally affect the volume of mortgage loan originations,
the resale value of mortgage loans originated for resale, and the ability of
borrowers to perform under existing loans of all types. Since September 18,
2007, the Federal Reserve has decreased interest rates significantly. Decreases
in interest rates generally have the opposite effect on market values of
interest-bearing assets, the volume of mortgage loan originations, the resale
value of mortgage loans originated for resale, and the ability of borrowers to
perform under existing loans of all types from the effect of increases in
interests rates.
Risks Related to Our Common Stock
Our common stock has a limited trading market, which may make the
prompt execution of sale transactions difficult.
Although our common stock may be traded from time to time on an
individual basis, no active trading market has developed and none may develop in
the foreseeable future. Our common stock is not traded on any exchange.
Accordingly, if you wish to sell shares you may experience a delay or have to
sell them at a lower price in order to sell them promptly, if at all.
We may issue additional securities, which could affect the market price
of our common stock and dilute your ownership.
We may issue additional securities to raise additional capital, to
support growth, or to make acquisitions. Sales of a substantial number of shares
of our common stock, or the perception by the market that those sales could
occur, could cause the market price of our common stock to decline or could make
it more difficult for us to raise capital through the sale of common stock or to
use our common stock in future acquisitions.
We do not plan to pay cash dividends in the foreseeable future.
We have never paid cash dividends and do not plan to pay cash dividends
in the foreseeable future. We plan to use the funds that might otherwise be
available to pay dividends to expand our business.
Declaration and payment of dividends are within the discretion of our
board of directors. Our bank will be our most likely source of funds with which
to pay cash dividends. Our bank's declaration and payment of future dividends to
us are within the discretion of the bank's board of directors, and are dependent
upon its earnings, financial condition, its need to retain earnings for use in
the business and any other pertinent factors. The bank's payment of dividends is
also subject to various regulatory requirements.
Provisions in our articles of incorporation and South Carolina law may
discourage or prevent takeover attempts, and these provisions may have the
effect of reducing the market price for our stock.
Our articles of incorporation include several provisions that may have
the effect of discouraging or preventing hostile takeover attempts, and
therefore of making the removal of incumbent management difficult. In addition,
South Carolina law contains several provisions that may make it more difficult
for a third party to acquire control of us without the approval of our board of
directors, and may make it more difficult or expensive for a third party to
acquire a majority of our outstanding common stock. To the extent that these
provisions are effective in discouraging or preventing takeover attempts, they
may tend to reduce the market price for our stock.
Our common stock is not insured, so you could lose your total
investment.
Our common stock is not a deposit or savings account, and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Should our business fail you could lose your total investment.
12
Risks Related to Our Industry
We are subject to governmental regulation which could change and
increase our cost of doing business or have an adverse affect on our business.
We operate in a highly regulated industry and are subject to
examination, supervision and comprehensive regulation by various federal and
state agencies. Our compliance with the requirements of these agencies is costly
and may limit our growth and restrict certain of our activities, including
payment of dividends, mergers and acquisitions, investments, loans and interest
rates charged, and locations of offices. We are also subject to capitalization
guidelines established by federal authorities and our failure to meet those
guidelines could result, in an extreme case, in our bank's being placed in
receivership. We have also recently been subjected to some of the extensive and
expensive requirements imposed on public companies by the Sarbanes-Oxley Act of
2002 and related regulations.
The laws and regulations applicable to the banking industry could
change at any time, and we cannot predict the impact of these changes on our
business or profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding
companies, our cost of compliance could adversely affect our ability to operate
profitably.
We are susceptible to changes in monetary policy and other economic
factors which may adversely affect our ability to operate profitably.
Changes in governmental, economic and monetary policies may affect the
ability of our bank to attract deposits and make loans. The rates of interest
payable on deposits and chargeable on loans are affected by governmental
regulation and fiscal policy as well as by national, state and local economic
conditions. All of these matters are outside of our control and affect our
ability to operate profitably.
Item 1B. Unresolved Staff Comments
Not required for smaller reporting companies.
Item 2. Description of Property.
The Bank leases property at the intersection of Halton Road and Rocky
Slope Road in Greenville, South Carolina, where its main office facility is
located. The property is leased until 2021 for $1,000 per month for years one
through five, $1,322 per month for years six through fifteen, and $1,521 per
month for years sixteen through the end of the lease term. This facility, which
was completed in August 2002, is a 20,000 square foot, three story building. The
cost of building and furnishing the new facility totaled $2.9 million. The Bank
owns the property located at 1601 North Fant Street in Anderson, South Carolina,
where a branch office is located.
The Bank leases property at the corner of South Main Street and East
Knight Street in Fountain Inn where a branch office is located. The property is
leased until 2018 for $800 per month from Blake P. Garrett, Jr., Trustee, with
four five-year renewal options. Lease payments are subject to increase to
reflect increases in the Consumer Price Index. Blake P. Garrett, Jr., is the
brother of Mason Y. Garrett, Chairman of the Board of Directors of the Bank and
the Company. Blake P. Garrett, Jr., is trustee for a partnership which owns the
property.
Item 3. Legal Proceedings.
The Bank is from time to time a party to various legal proceedings
arising in the ordinary course of business, but management of the Bank is not
aware of any pending or threatened litigation or unasserted claims or
assessments that are expected to result in losses, if any, that would be
material to the Bank's business and operations.
Item 4. Submission of Matters to Vote of Security Holders.
Special Meeting of Shareholders
On December 22, 2008, the Company held a special meeting of
shareholders to vote 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 one
class, or one or more series within the class, as are set by the Board of
Directors. The amendment was approved at the special meeting and the voting
results were as follows:
Shares Voted For Shares Voted Against Abstentions Broker Non-Votes
---------------- -------------------- ----------- ----------------
2,477,331 13,777 399 -
|
13
PART II
The portions of the 2008 Annual Report to Shareholders incorporated by
reference into this Form 10-K are set forth in Exhibit 13 hereto.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
The information set forth under the caption "Market for Common Equity
and Related Stockholder Matters" and in Note 16 to the Company's Consolidated
Financial Statements in the Company's Annual Report to Shareholders for the year
ended December 31, 2008 (the "2008 Annual Report") is incorporated herein by
reference.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.
Sales of Unregistered Securities
The Company did not sell any equity securities during 2008 that were
not registered under the Securities Act of 1933.
Purchases of Equity Securities by the Company and Affiliated Purchasers
Neither the Company nor any "affiliated purchaser" as defined in 17
C.F.R. 240.10b-18(a)(3) purchased any shares or units of any class of the
Company's equity securities that is registered pursuant to Section 12 of the
Exchange Act during the fourth quarter of 2008. Accordingly, no disclosure is
required pursuant to 17 C.F.R. Section 229.703.
Item 6. Selected Financial Data.
Not required for smaller reporting companies.
Item 7. Management's Discussion and Analysis or Plan of Operation.
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operation" in the
Registrant's 2008 Annual Report to Shareholders is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements, including Notes thereto, and
Report of Independent Registered Public Accounting Firm thereon set forth in the
Registrant's 2008 Annual Report to Shareholders are incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 9A(T). Controls and Procedures.
Effectiveness of Disclosure 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 annual report, were
effective.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934 as amended (the "Exchange
Act"). The Company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of
America. The Company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records, that in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit the preparation of financial
statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the Company are made only in accordance with the
authorizations of the Company's management and directors; and (3) provide
14
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material impact on the financial statements.
Under the supervision and with the participation of management,
including the Chief Executive Officer and the Chief Financial Officer, the
Company conducted an evaluation of the effectiveness of its internal control
over financial reporting as of December 31, 2008 based on the criteria
established in a report entitled "Internal Control - Integrated Framework"
promulgated by the Committee of Sponsoring Organizations of the Treadway
Commission and the interpretive guidance issued by the Securities and Exchange
Commission in Release No. 34-55929. Based on this evaluation, management
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2008.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting because management's report was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this annual report.
Changes in Internal Control Over Financial Reporting
The Company is continually seeking to improve the efficiency and
effectiveness of its operations and of its internal controls. This results in
modifications to its processes throughout the Company. However, 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.
Item 9B. Other Information.
No information was required to be disclosed in a Form 8-K during the
fourth quarter of 2008 that was not so disclosed.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information set forth under the captions "Management of the Company
-- Directors" and "-- Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in registrant's definitive proxy statement filed
with the Securities and Exchange Commission for the 2009 Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated herein by reference.
Directors serve for a one year term, or until their successors are elected and
qualify to serve.
Code of Ethics
The Company has adopted a code of ethics (as defined by 17 C.F.R.
229.406) that applies to its principal executive officer and principal financial
officer. The Company will provide a copy of the code of ethics, free of charge,
to any person upon written request to J. B. Garrett, Corporate Secretary,
GrandSouth Bancorporation, Inc., 381 Halton Road, Greenville, South Carolina
29607.
Audit Committee
The Company has a separately designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934. The Audit Committee is comprised of Michael L. Gault, Baety O.
Gross, Jr., S. Hunter Howard, Jr., S. Blanton Phillips, and J. Calhoun Pruitt,
all of whom are non-employee directors. Each member of the Audit Committee is
independent as defined in the Nasdaq Rules. The Audit Committee is responsible
for appointment of the independent auditors and oversees the internal and
external audit function.
Audit Committee Financial Expert
The Company's board of directors has determined that the Company does
not have an "audit committee financial expert," as that term is defined by Item
407(d)(5) of Regulation S-K promulgated by the Securities and Exchange
Commission, serving on its Audit Committee. After reviewing the experience and
training of all of the Company's independent directors, the board of directors
has concluded that no independent director meets the SEC's very demanding
definition. Therefore, it would be necessary to find a qualified individual
willing to serve as a director and have that person elected by the shareholders
in order to have an "audit committee financial expert" serving on the Company's
Audit Committee. The Company's Board is, however, authorized to use consultants
to provide financial accounting expertise in any instance where members of the
15
Board believe such assistance would be useful. Accordingly, the Company does not
believe that it needs to have an "audit committee financial expert" on its
Audit Committee.
Item 11. Executive Compensation.
The information set forth under the captions "Management Compensation"
and "2008 Director Compensation" in the Proxy Statement is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
Equity Compensation Plan Information
The following table sets forth aggregated information as of December
31, 2008 about all of the Company's compensation plans (including individual
compensation arrangements) under which equity securities of the Company are
authorized for issuance:
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column(a))
(a) (b) (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation
plans approved by
security holders (1) 302,692 $7.90 553,336
Equity compensation
plans not approved
by security holders -0- -0- -0-
Total
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(1) Options issued and shares reserved pursuant to Registrant's amended 1998
Stock Option Plan. The number of shares subject to outstanding options,
exercise prices and number of shares remaining available for future
issuance of options have been restated to reflect the 5% stock dividends
declared in January 2003 and the 10% stock dividends declared in January
2004, February 2005 and July 2006.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
The information set forth under the caption "Certain Relationships and
Related Transactions" and "Governance Matters - Director Independence" in the
Proxy Statement is incorporated herein by reference. All members of the
Company's Audit Committee are independent as such term is defined by the Nasdaq
Global Market Marketplace Rules. All members of the Board of Directors served as
the Company's Compensation and Nominating Committees, and, as set forth under
"Governance Matters -- Director Independence" in the Proxy Statement, not all
members of the Board are independent as such term is defined by the Nasdaq
Global Market Marketplace Rules.
16
PART IV
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Independent Registered
Public Accounting Firm - Fees Paid to Independent Auditors" and "-- Board
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors" in the Proxy Statement is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules
(a)(1) and (2) Financial Statements and Financial Schedules
- Report of Independent Registered Public Accounting Firm.
- Consolidated Balance Sheets - December 31, 2008 and 2007
- Consolidated Statements of Income - Years ended December 31, 2008,
2007 and 2006
- Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income - Years ended December 31, 2008, 2007 and 2006
- Consolidated Statements of Cash Flows - Years ended December 31, 2008,
2007 and 2006
- Notes to Consolidated Financial Statements
(3) Description of Exhibits.
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of Registrant, as amended (1)(6)
3.2 Bylaws of Registrant (1)
4.1 Form of Common Stock Certificate (2)
4.2 Form of Stock Certificate for Series T Preferred Stock (6)
4.3 Form of Stock Certificate for Series W Preferred Stock (6)
4.4 Warrant for Purchase of Shares of Series W Preferred
Stock(6)
10.1 1998 Stock Option Plan, as amended (3)
10.2 Form of Stock Option Agreement (2)
10.3 Executive Supplemental Retirement Plan Executive
Agreement with Ronald K. Earnest, as amended in
compliance with I.R.C. Section 409A and related
regulations (4)
10.4 Noncompetition, Severance and Employment Agreement
between Registrant and Ronald K. Earnest, as amended in
compliance with I.R.C. Section 409A and related
regulations (4)
10.5 Amended and Restated Declaration of Trust of GrandSouth
Capital Trust I, dated as of May 10, 2006 (5)
10.6 Guarantee Agreement of GrandSouth Bancorporation, dated
as of May 10, 2006 (5)
10.7 Indenture between GrandSouth Bancorporation and
Wilmington Trust Company, dated as of May 10, 2007 (5)
10.8 Letter Agreement, dated January 9, 2009 between
GrandSouth Bancorporation and the United States Department
of the Treasury relating to issuance and sale of the Series
T and Series W preferred stock and warrant (6)
13 Portions of the Annual Report to Shareholders for the
Year Ended December 31, 2008
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLC
31.1 Rule 13a-14(a)/15d-14(a) Certifications
31.2 Rule 13a-14(a)/15d-14(a) Certifications
32 18 U.S.C. Section 1350 Certifications
-------------
|
(1) Incorporated by reference to exhibits to Form 8-A filed November 13, 2000.
(2) Incorporated by reference to exhibits to Form 10-KSB for the year ended
December 31, 2000.
(3) Incorporated by reference to Registrant's Proxy Statement for the 2005
Annual Meeting of Shareholders.
(4) Incorporated by reference to Registrant's Form 10-K for the year ended
December 31, 2007
(5) Incorporated by reference to Registrant's Form 10-QSB for the quarter ended
June 30, 2006.
(6) Incorporated by reference to Current Report on Form 8-K filed January 12,
2009
17
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GrandSouth Bancorporation
March 30, 2009 By: s/Mason Y. Garrett
--------------------------------------------------
Mason Y. Garrett
Chief Executive Officer
By: s/J. B. Garrett
--------------------------------------------------
J. B. Garrett
Senior Vice President
(Chief Financial and Principal Accounting
Officer)
|
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- ----
--------------------------------------- Director March __, 2009
Blanton S. Phillips
s/Ronald K. Earnest President, Chief Operating Officer, Director March 30, 2009
--------------------------------
Ronald K. Earnest
s/Harold E. Garrett Director March 30, 2009
--------------------------------
Harold E. Garrett
s/Mason Y. Garrett Chairman, Director March 30, 2009
--------------------------------
Mason Y. Garrett
s/Michael L. Gault Director March 30, 2009
--------------------------------
Michael L. Gault
s/Baety O. Gross Director March 30, 2009
--------------------------------
Baety O. Gross
-------------------------------- Director March __, 2009
S. Hunter Howard, Jr.
Director March __, 2009
--------------------------------
J. Calhoun Pruitt, Jr.
|
18
EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Incorporation of Registrant, as amended (1)(6)
3.2 Bylaws of Registrant (1)
4.1 Form of Common Stock Certificate (2)
4.2 Form of Stock Certificate for Series T Preferred Stock (6)
4.3 Form of Stock Certificate for Series W Preferred Stock (6)
4.4 Warrant for Purchase of Shares of Series W Preferred
Stock(6)
10.1 1998 Stock Option Plan, as amended (3)
10.2 Form of Stock Option Agreement (2)
10.3 Executive Supplemental Retirement Plan Executive
Agreement with Ronald K. Earnest, as amended in
compliance with I.R.C. Section 409A and related
regulations (4)
10.4 Noncompetition, Severance and Employment Agreement
between Registrant and Ronald K. Earnest, as amended in
compliance with I.R.C. Section 409A and related
regulations (4)
10.5 Amended and Restated Declaration of Trust of GrandSouth
Capital Trust I, dated as of May 10, 2006 (5)
10.6 Guarantee Agreement of GrandSouth Bancorporation, dated
as of May 10, 2006 (5)
10.7 Indenture between GrandSouth Bancorporation and
Wilmington Trust Company, dated as of May 10, 2007 (5)
10.8 Letter Agreement, dated January 9, 2009 between
GrandSouth Bancorporation and the United States Department
of the Treasury relating to issuance and sale of the Series
T and Series W preferred stock and warrant (6)
13 Portions of the Annual Report to Shareholders for the
Year Ended December 31, 2008
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLC
31.1 Rule 13a-14(a)/15d-14(a) Certifications
31.2 Rule 13a-14(a)/15d-14(a) Certifications
32 18 U.S.C. Section 1350 Certifications
-------------
|
(1) Incorporated by reference to exhibits to Form 8-A filed November 13, 2000.
(2) Incorporated by reference to exhibits to Form 10-KSB for the year ended
December 31, 2000.
(3) Incorporated by reference to Registrant's Proxy Statement for the 2005
Annual Meeting of Shareholders.
(4) Incorporated by reference to Registrant's Form 10-K for the year ended
December 31, 2007
(5) Incorporated by reference to Registrant's Form 10-QSB for the quarter ended
June 30, 2006.
(6) Incorporated by reference to Current Report on Form 8-K filed January 12,
2009
19
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