FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30,2000
Commission File Number 000-31937
GrandSouth Bancorporation
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 57-1104394
---------------------------------- ---------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
327 Fairview Road
Simpsonville, South Carolina 29681
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(Address of principal executive offices)
(864) 962-8833
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, no par value,
1,873,129 Shares Outstanding on November 1, 2000
Transitional Small Business Format (Check one): Yes [ ] No [X]
<PAGE>
GRANDSOUTH BANCORPORATION
FORM 10-QSB
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.................................... 3
Consolidated Statements of Operations.......................... 4
Consolidated Statement of Changes in Shareholders' Equity...... 5
Consolidated Statement of Cash Flows........................... 6
Notes to Unaudited Consolidated Financial Statements........... 7
Item 2. Management's Discussion and Analysis........................... 8-12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................13-14
SIGNATURE ........................................................ 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
GrandSouth Bancorporation and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, December 31,
2000 1999
---- ----
(Dollars in thousands)
Assets
<S> <C> <C>
Cash and Due From Banks .............................................................. $ 1,738 $ 1,111
Federal funds sold ................................................................... 5,170 8,420
Investment securities ................................................................ 11,014 7,705
Loans ................................................................................ 66,244 62,890
Allowance for loan losses ......................................................... (1,298) (1,173)
-------- --------
Loans-net ...................................................................... 64,946 61,717
Property and equipment - net ......................................................... 909 961
Other assets ......................................................................... 1,785 1,064
-------- --------
Total Assets ................................................................... $ 85,562 $ 80,978
======== ========
Liabilities
Deposits
Noninterest bearing ............................................................... $ 3,553 $ 2,764
Interest bearing .................................................................. 73,260 70,225
-------- --------
Total deposits ................................................................. 76,813 72,989
Other Liabilities .................................................................... 708 237
-------- --------
Total Liabilities ................................................................. 77,521 73,226
Shareholders' equity
Common stock - $2.50 par value; 20,000,000 shares authorized;
issued - 1,873,129 ................................................................ 4,683 4,683
Additional paid-in capital ........................................................... 3,771 3,771
Accumulated Deficit .................................................................. (265) (534)
Accumulated other comprehensive loss ................................................. (148) (168)
-------- --------
Total shareholders' equity ........................................................ 8,041 7,752
Total liabilities and shareholders' equity ........................................ $ 85,562 $ 80,978
======== ========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
GrandSouth Bancorporation and Subsidiary
Consolidated Statement of Operations
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars in thousands, except per share data)
Interest income
<S> <C> <C> <C> <C>
Loans, including fees ................................... $ 1,698 $ 1,321 $ 4,919 $ 3,149
Investment securities ................................... 147 123 412 308
Federal funds sold ...................................... 136 129 343 340
---------- ---------- ---------- ----------
Totalinterestincome ................................. 1,981 1,573 5,674 3,797
Interest expense
Deposits and borrowings ................................. 1,138 832 3,143 1,977
---------- ---------- ---------- ----------
Net interest income ........................................ 843 741 2,531 1,820
Provision for loan losses .................................. 255 220 530 600
---------- ---------- ---------- ----------
Net interest income after provision ........................ 588 521 2,001 1,220
---------- ---------- ---------- ----------
Noninterest income
Service charges on deposit accounts ..................... 21 18 67 40
Other income ............................................ 3 73 16 79
---------- ---------- ---------- ----------
Totalnoninterestincome .............................. 23 91 83 119
---------- ---------- ---------- ----------
Noninterest expense
Salaries and employee benefits .......................... 309 299 951 748
Occupancy and equipment ................................. 49 51 153 163
Other expense ........................................... 213 157 555 397
---------- ---------- ---------- ----------
Totalnoninterestexpense ............................. 571 507 1659 1,308
---------- ---------- ---------- ----------
Income before income taxes ................................. 40 105 425 31
---------- ---------- ---------- ----------
Income tax expense ......................................... 15 17 156 5
---------- ---------- ---------- ----------
Net Income ................................................. $ 25 $ 88 $ 269 $ 26
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic ................................................. 1,873,129 1,873,129 1,873,129 1,873,129
Diluted ............................................... 1,919,796 1,873,129 1,919,796 1,873,129
Per share
Basic * ................................................. $ 0.01 $ 0.05 $ 0.14 $ 0.02
========== ========== ========== ==========
Diluted * ............................................... $ 0.01 $ 0.05 $ 0.14 $ 0.02
========== ========== ========== ==========
</TABLE>
--------
* 1999 earnings per share data has been adjusted to reflect 1999 10% stock
dividend.
See accompanying notes to financial statements.
4
<PAGE>
GrandSouth Bancorporation and Subsidiary
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Other Com-
Additional prehensive
Number of Paid-In Accumulated Income
Shares Amount Capital Deficit (Loss) Total
------ ------ ------- ------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ...................... 1,702,547 $ 4,257 $ 4,197 $ (621) $ (8) $ 7,825
Comprehensive Loss (net of income
tax)
Change in unrealized holding
losses on available-for-
sale securities, net of
income taxes ............................. (143) (143)
Net Income ..................................... 26 - 26
-------
Comprehensive Loss .............................. - - - - - (117)
--------- ------- ------- ------- ------- -------
Balance, September 30, 1999 ..................... 1,702,547 $ 4,257 $ 4,197 $ (595) $ (151) $ 7,708
========= ======= ======= ======= ======= =======
Balance, December 31, 1999 ...................... 1,873,129 $ 4,683 $ 3,771 $ (534) $ (168) $ 7,752
Comprehensive Income (net of
income tax)
Change in unrealized holding
losses on available-for-
sale securities, net of
income taxes ............................. 20 20
Net Income ...................................... 269 269
Comprehensive Income ............................ - - - - - 289
--------- ------- ------- ------- ------- -------
Balance, September 30, 2000 ..................... 1,873,129 $ 4,683 $ 3,771 $ (265) $ (148) $ 8,041
========= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
GrandSouth Bancorporation and Subsidiary
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
-----------------
September 30, September 30,
2000 1999
---- ----
(Dollars in thousands)
Operating Activities
<S> <C> <C>
Net income ....................................................................... $ 269 $ 26
Adjustments to reconcile net income to net
cash provided by operating activities
Deferred income tax payable ................................................. 156 5
Provision for loan losses ................................................... 530 600
Depreciation and amortization ............................................... 101 91
Increase in other assets .................................................... (887) (524)
Increase in other liabilities ............................................... 470 74
-------- --------
Net cash provided by operating activities ............................. 639 272
-------- --------
Investing activities
Decrease(Increase) in federal funds sold ......................................... 3,250 (1,910)
Purchase of available-for-sale securities ........................................ (3,272) (6,164)
Net increase in loans made to customers .......................................... (3,759) (32,557)
Purchases of property and equipment .............................................. (50) (187)
-------- --------
Net cash used by investing activities ................................. (3,831) (40,818)
-------- --------
Financing activities
Net increase in deposits ......................................................... 3,819 39,002
-------- --------
Increase(Decrease)in cash and cash equivalents ..................................... 627 (1,544)
-------- --------
Cash and cash equivalents, beginning of period ..................................... 1,111 14,694
-------- --------
Cash and cash equivalents, end of period ........................................... $ 1,738 $ 13,150
======== ========
Cash Paid for
Income Taxes ..................................................................... $ - $ -
======== ========
Interest ......................................................................... $ 2,766 $ 992
======== ========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
Notes to Unaudited Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-QSB and Item 310(b) of Regulation
S-B of the Securities and Exchange Commission. Accordingly, they do not contain
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the nine months and three months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, please
refer to the financial statements and footnotes thereto for the Company's fiscal
year ended December 31, 1999, contained in the Company's registration statement
on Form 10-KSB.
Note 2. 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 capital stock of
the Bank were exchanged for shares of common stock of the Company. The Company
presently engages in no business other than that of owning the Bank and has no
employees.
Note 3. Net Income Per Share
Net income per share is computed on the basis of the weighted average
number of common shares outstanding in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share."
The Company declared a 10% stock dividend during 1999. 170,282 new
shares were issued to stockholders of record on November 15, 1999. The record
date for this dividend was November 1, 1999. The weighted average number of
shares and all other share data have been restated for all periods presented to
reflect this stock dividend.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operations
Forward Looking Statements
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with 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. The
risks and uncertainties that may affect the operations, performances,
development and results of the Company's business include, but are not limited
to, the following: risks from changes in economic and industry conditions;
changes in interest rates; risks inherent in making loans including repayment
risks and value collateral; dependence on senior management; risks related to
year 2000 technology compliance of the Company and its customers; and
recently-enacted or proposed legislation. Statements contained in this filing
regarding the demand for the Company's products and services, changing economic
conditions, interest rates, consumer spending and numerous other factors may be
forward looking statements and are subject to uncertainties and risks.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of the Company.
This commentary should be read in conjunction with the financial statements and
the related notes and other statistical information in this report.
EARNINGS REVIEW - Comparison of the three months ended September 30, 2000 to the
three months ended September 30, 1999.
The Company's net income for the third quarter of 2000 was $ 25,315 compared to
net income of $ 88,170 for the third quarter of 1999. The income per share was $
0.01 for the third quarter of 2000 compared to income per share of $ 0.05 for
the third quarter of 1999. Prior year income per share has been restated for the
10% stock dividend in November, 1999.
The following is a brief discussion of the more significant components of net
income.
Net Interest Income
Net interest income represents the difference between interest received
or accrued on interest earning assets and interest paid or accrued on interest
bearing liabilities. The following presents, in tabular form, the main
components of interest earning assets and interest bearing liabilities for the
three-month periods ended September 30, 2000 and September 30, 1999:
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------
September 30, 2000 September 30, 1999
------------------ ------------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans ............................................ $66,617 $ 1,698 10.20% $51,290 $ 1,321 10.30%
Investment Securities ............................ 9,670 147 6.07% 8,422 123 5.84%
Federal funds sold ............................... 8,340 136 6.53% 10,064 129 5.12%
------- ------- ------- -------
Total earning assets ............................. 84,627 1,981 9.36% 69,776 1,573 9.02%
Interest bearing funds ........................... 75,370 1,138 6.04% 63,110 832 5.17%
------- ------- ------- -------
Total net non-interest bearing funds ............. 3,398 3,048
Net Yield on Earning Assets ...................... 84,627 843 3.99% 69,776 741 4.25%
</TABLE>
Non-interest Income
Non-interest income for the third quarter of 2000 was $ 23,320. Of this
total, $ 20,687 represented service fees on deposit accounts and $ 2,632 was
income from other fees charged. For the third quarter of 1999, non-interest
income totaled $ 90,815 and was comprised of $ 17,816 in service fees on deposit
accounts and $ 72,999 of other fees. $ 69,463 of the $ 72,999 of other fees for
1999 was generated from the sale of a loan.
Non-interest Expense
Non-interest expenses for the third quarter of 2000 were $ 571,417,
consisting primarily of salaries and employee benefits of $ 309,402 and other
operating expense of $213,010. Non-interest expenses for third quarter of 1999
were $ 506,942. This increase of $ 64,475 was primarily due to an increase of $
55,543 in other expense. The increase in other non-interest expenses was
primarily caused by an increase in data processing costs related to increased
transactions, increased cost in bank supervisory expenses, legal fees related to
the formation of the bank holding company and an increase in outside compliance
and accounting review services.
Provision for Loan Losses
A provision for loan losses of $ 255,000 was recorded during the third
quarter of 2000. The amount of the provision was primarily the result of growth
in the loan portfolio and management's assessment of the risks inherent in the
portfolio. Management's judgment as to the adequacy of the allowance is based
upon a number of assumptions about future events that it believes to be
reasonable, but which may or may not be accurate. Thus, there can be no
assurance that charge-offs in future periods will not be required.
EARNINGS REVIEW - Comparison of the nine months ended September 30, 2000 to the
nine months ended September 30, 1999.
The Company's net income for the first nine months of 2000 was $ 268,593
compared to net income of $ 25,796 for the first nine months of 1999. The income
per share was $ 0.14 for the nine months ended September 30,2000 compared to
income per share of $ 0.02 for the nine months ended September 30, 1999. Prior
year income per share has been restated for the 10% stock dividend in November,
1999.
9
<PAGE>
The following is a brief discussion of the more significant components of net
income or loss.
Net Interest Income
Net interest income represents the difference between interest received
or accrued on interest earning assets and interest paid or accrued on interest
bearing liabilities. The following presents, in tabular form, the main
components of interest earning assets and interest bearing liabilities for the
nine-month periods ended September 30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
September 30, 2000 September 30, 1999
------------------ ------------------
Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans ............................................ $65,573 $ 4,919 10.00% $40,855 $ 3,149 10.28%
Investment Securities ............................ 9,103 412 6.03% 6,958 308 5.90%
Federal funds sold ............................... 7,473 343 6.12% 9,444 340 4.80%
------- ------- ------- -------
Total earning assets ............................. 82,149 5,674 9.21% 57,257 3,797 8.84%
Interest bearing funds ........................... 72,785 3,143 5.76% 50,343 1,977 5.24%
------- ------- ------- -------
Total net non-interest bearing funds ............. 3,572 2,650
Net Yield on Earning Assets ...................... 82,149 2,531 4.11% 57,257 1,820 4.24%
</TABLE>
Non-interest Income
Non-interest income for the nine months ended September 30, 2000 was $
83,469. Of this total, $ 67,072 represented service fees on deposit accounts and
$ 16,397 was income from other fees charged. For the nine months ended September
30, 1999, non-interest income totaled $ 119,465 and was comprised of $ 40,180 in
service fees on deposit accounts and $ 79,285 of other fees. $ 69,463 of the $
79,285 of other fees for 1999 was generated from the sale of a loan.
Non-interest Expense
Non-interest expenses for the nine months ended September 30, 2000 were
$ 1,658,829, consisting primarily of salaries and employee benefits of $ 951,207
and other non-interest expenses of $ 554,834. Non-interest expenses for the nine
months ended September 30, 1999 were $ 1,308,986. This increase of $ 352,843 was
primarily due to an increase of $ 202,640 in salaries and benefits and an
increase of $ 157,009 in other non-interest expenses. The increase in salaries
and benefits results from the hiring of several key employees during the last
three quarters of 1999 and an increase in bonuses paid to employees during 2000.
The increase in other non-interest expenses was primarily caused by an increase
in data processing costs related to increased transactions, increased cost in
bank supervisory expenses, legal fees related to the formation of the bank
holding company and an increase in outside compliance and accounting review
services.
10
<PAGE>
Provision for Loan Losses
A provision for loan losses of $ 530,000 was recorded during the first
nine months of 2000. The amount of the provision was primarily the result of
growth in the loan portfolio and management's assessment of the risks inherent
in the portfolio. Management's judgment as to the adequacy of the allowance is
based upon a number of assumptions about future events that it believes to be
reasonable, but which may or may not be accurate. Thus, there can be no
assurance that charge-offs in future periods will not be required.
BALANCE SHEET REVIEW
Total assets increased by $4.6 million to $85.6 million during the nine
months ended September 30, 2000. The increase was generated primarily through a
$3.2 million increase in net loans. This growth in assets was funded by a $3.8
million increase in deposits. The growth in loans and deposits resulted from
favorable economic conditions in the Simpsonville and Fountain Inn markets in
South Carolina and the Company's marketing efforts.
Loans
Outstanding loans represented the largest component of earning assets
as of September 30, 2000 at $ 66,243,886, or 80.5%, of total earning assets.
Loans increased $4.06 million, or 6.5% since December 31, 1999. Loans at
December 31, 1999 represented 80.0% of total earning assets.
Allowance for Loan Losses
The allowance for loan losses at September 30, 2000 was $1,297,856, or
1.96% of loans outstanding, compared to an allowance of $1,173,000, or 1.87% at
December 31, 1999. The allowance for loan losses is based upon management's
continuing evaluation of the collectibility of loans. Because of the lack of
historical data available in a new Company, management's judgment has been based
on management's experience with other institutions in the Company's market area,
current economic conditions affecting the ability of borrowers to repay, the
volume of loans, the size of loans, the quality of collateral securing loans,
and other factors deserving recognition. As of September 30, 2000, the Company
had $ 2,056,890 in non-performing loans and net charge-offs of $ 405,144 since
inception. Of the $ 2,056,890 in non-performing loans, $ 1,639,159 is secured by
real estate.
Securities
Investment securities represented 13.6% of earning assets at September
30, 2000, and totaled $ 11,013,648, up $ 3,308,778 from the December 31, 1999
balance of $ 7,704,866.
The Company's primary source of funds for loans and investments is its
deposits. Deposits grew $ 3,827,099, or 5.2% since the yearend for a total of $
76,813,341 at September 30, 2000. During this period, the total number of
deposit accounts increased by 393 accounts to 2,932 accounts.
Liquidity
Liquidity management involves meeting cash flow requirements of the
Company. The Company's liquidity position is primarily dependent upon its need
to respond to short-term demand for funds caused by withdrawals from deposit
accounts and the funding of loans and upon the liquidity of its assets. The
Company's primary liquidity sources include cash and due from banks, federal
funds sold and securities available for sale as well as new deposits and loan
payments. The Company is also a member of the Federal Home Loan Bank system and
has the ability to borrow funds on a secured basis. At September 30, 2000 the
11
<PAGE>
Company had $ 825,000 in unused federal funds lines of credit with a
correspondent bank. The Company also has an agreement pursuant to which it can
borrow up to 10% of total company assets, but this credit may be limited at the
lender's discretion to the amount of pledge eligible investment securities
needed to secure the credit.
The Company believes its liquidity sources are adequate to meet its
operating needs and is not aware of any trends that may result in a significant
change in the Company's liquidity.
Capital Adequacy
The Federal Deposit Insurance Corporation has established risk-based
capital requirements. As of September 30, 2000, the Company exceeds the capital
levels that are to be maintained, as shown in the following table.
<TABLE>
<CAPTION>
Well Adequately
Capitalized Capitalized
Actual Requirement Requirement
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) ............... $9,082 12.7% $7,101 10.0% $5,681 8.0%
Tier 1 capital (to risk weighted assets) .............. $8,189 11.5% $4,261 6.0% $2,840 4.0%
Tier 1 capital (to average assets) .................... $8,189 9.7% $4,392 5.0% $3,513 4.0%
</TABLE>
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Company are primarily monetary in nature.
Therefore, interest rates have a more significant impact on the Company's
performance than do the effects of changes in the general rate of inflation and
changes in prices. In addition, interest rates do not necessarily move in the
same magnitude as the prices of goods and services. Management seeks to manage
the relationships between interest sensitive assets and liabilities in order to
protect against wide rate fluctuations, including those resulting from
inflation.
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 requires all derivatives are to be measured at
fair value and recognized in the balance sheets as assets or liabilities. This
statement's effective date was delayed by the issuance of SFAS 137 ("Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date SFAS No. 133 - an amendment of the SFAS No. 133") and is effective for
fiscal years and quarters beginning after June 15, 2000. Because the Company has
limited use of derivative transactions at this time, management does not expect
the adoption of this standard to have a significant impact on the Company.
12
<PAGE>
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. From
Item 601 of
Regulation S-B Description
-------------- -----------
2 Plan of Exchange between the Company and
GrandSouth Bank
27 Financial Data Schedule
(b) Reports on form 8-K. None.
13
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GrandSouth Bancorporation
Date November 14, 2000
-----------------
/s/J. B. Garrett
--------------------------------------------
J. B. Garrett, Principal Accounting 0fficer
