10-K 1 grandsth10k08.txt 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, 2007 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) 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) 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 29, 2007, 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 $29,999,723. For purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates. As of March 24, 2008, there were 3,381,488 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, 2007 - Parts I and II (2) Portions of the Registrant's Proxy Statement for the 2008 Annual Meeting of Shareholders - Part III 10-K CROSS REFERENCE INDEX Part I Page Item 1 Business ....................................................... 2 Item 1A Risk Factors ................................................... 9 Item 1B Unresolved Staff Comments ...................................... 9 Item 2 Properties ..................................................... 9 Item 3 Legal Proceedings .............................................. 9 Item 4 Submission of Matters to a Vote of Security Holders ............ 9 Part II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities ........... 9 Item 6 Selected Financial Data ........................................ 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .................................... 10 Item 7A Quantitative and Qualitative Disclosures about Market Risk .................................................. 10 Item 8 Financial Statements and Supplementary Data .................... 10 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ....................... 10 Item 9A(T) Controls and Procedures ...................................... 10 Item 9B Other Information .............................................. 11 Part III Item 10 Directors, Executive Officers and Corporate Governance ......... 11 Item 11 Executive Compensation ......................................... 11 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ................................ 11 Item 13 Certain Relationships and Related Transactions, and Director Independence ........................................ 12 Item 14 Principal Accountant Fees and Services ......................... 12 Item 15 Exhibits, Financial Statement Schedules ........................ 12 CAUTIONARY NOTICE WITH RESPECT TO FORWARD LOOKING STATEMENTS This report contains "forward-looking statements" within the meaning of the securities laws. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the 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 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 changes in technology or products may be more difficult or costly, or less effective, than anticipated; o the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence; and o other factors and information described in this report and in any of the other reports that we file with the Securities and Exchange Commission under the Securities Exchange Act of 1934. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The Company has no obligation, and does not undertake, to update, revise or correct any of the forward-looking statements after the date of this report. The Company has expressed its expectations, beliefs and projections in good faith and believes they have a reasonable basis. However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished. 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. 2 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 bank services. Deposit services include business and personal checking accounts, NOW accounts, savings accounts, money market accounts, various term certificates of deposit, IRA accounts, and other deposit services. Most of the Bank's deposits are attracted from individuals and small businesses. The Bank does not offer trust services. The Bank offers secured and unsecured, short-to-intermediate term loans, with floating and fixed interest rates for commercial, consumer and residential purposes. Consumer loans include: car loans, home equity improvement loans (secured by first and second mortgages), personal expenditure loans, education loans, overdraft lines of credit, and the like. Commercial loans include short term unsecured loans, short and intermediate term real estate mortgage loans, loans secured by listed stocks, loans secured by equipment, inventory, accounts receivable, and the like. Management believes that the credit staff possesses knowledge of the community and lending skills sufficient to enable the Bank to maintain a sufficient volume of high quality loans. Management of the Bank believes that the loan portfolio is adequately diversified. There are no significant concentrations of loans in any particular individuals, industries or groups of related individuals or industries and the Bank has no foreign loans. The loan portfolio consists primarily of mortgage loans and extensions of credit to businesses and individuals in its service area within Greenville County, South Carolina. The economy of this area is diversified and does not depend on any one industry or group of related industries. Management has established loan policies and practices that include 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, 2007, the Bank employed 68 persons full-time. The Company has no employees. Management of the Bank believes that its employee relations are excellent. Competition As of June 30, 2007, the most recent date for which information is available, the Bank competed in the Greenville County, South Carolina market with 28 other banks and savings banks with 154 branch locations. Aggregate deposits in the Greenville County market were approximately $9.5 billion. The Bank had a 2.24% 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, 2007, it competed with 18 other banks and savings banks with 63 branch locations. Aggregate deposits in the Anderson County market were $2.3 billion. The Bank had a 3.79% 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 3 savings, and the extent to which interest on retirement savings accounts is tax deferred. Lending activities are also influenced by a number of economic factors, including demand for and supply of housing, conditions in the construction industry, and availability of funds. Primary sources of funds for lending activities include savings deposits, income from investments, loan principal repayments, and proceeds from sales of loans to conventional participating lenders. Effect of Government Regulation Bank holding companies and banks are extensively regulated under federal and state law. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to such statutes and regulations. Any change in applicable law or regulation may have a material effect on the business of the Company and the Bank. General As a bank holding company under the Bank Holding Company Act ("BHCA"), the Company obtained the approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the regulations of the Federal Reserve. Under the BHCA, the Company's activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company may engage in a broader range of activities if it becomes a "financial holding company" pursuant to the Gramm-Leach-Bliley Act, which is described below under the caption "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 4 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. 5 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). Assessment rates range between 5 and 43 cents per $100 in assessable deposits. 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." 6 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 was amended, effective July 1, 1996, to permit 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"), which makes it easier for affiliations between banks, securities firms and insurance companies to take place, became effective in March 2000. The Act removes 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. 7 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 new 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 new regulations pursuant to the requirements of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act and the SEC's new 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 new SEC regulations in ways that are materially different or more onerous than those of other public companies of similar size and in similar businesses. 8 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. Further Information Further information about the business of the Company and the Bank is set forth in this Form 10-KSB under Item 6 -"Management's Discussion and Analysis or Plan of Operation." Item 1A. Risk Factors Not required for smaller reporting companies. 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. 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. No matters were submitted to a vote of security holders in the fourth quarter of 2007. PART II The portions of the 2007 Annual Report incorporated by reference into this Form 10-K are set forth in Exhibit 13 hereto. Item 5. Market for Common Equity and Related Stockholder Matters. 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, 2007 (the "2007 Annual Report") is incorporated herein by reference. 9 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 2007 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 2007. 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 2007 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 2007 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 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, 2007 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 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, 2007. 10 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 2007 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 SEC for the 2008 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 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 Board (the Company's entire Board of Directors functions as the 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 Board. The Company's Board is, however, authorized to use consultants to provide financial accounting expertise in any instance where members of the 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 Board. Item 11. Executive Compensation. The information set forth under the captions "Management Compensation" and "2007 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, 2007 about all of the Company's compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance: 11

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) 489,396 $6.04 366,632 Equity compensation plans not approved by security holders - - - _______ ____ _______ Total 489,396 $6.04 366,632

(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 serve 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. 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, 2007 and 2006 - Consolidated Statements of Income - Years ended December 31, 2007, 2006 and 2005 - Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income - Years ended December 31, 2007, 2006 and 2005 - Consolidated Statements of Cash Flows - Years ended December 31, 2007, 2006 and 2005 - Notes to Consolidated Financial Statements (3) Description of Exhibits. Exhibit No. Description ----------- ----------- 3.1 Articles of Incorporation of Registrant (1) 3.2 Bylaws of Registrant (1) 4.1 Form of Common Stock Certificate (2) 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 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 10.5 Amended and Restated Declaration of Trust of GrandSouth Capital Trust I, dated as of May 10, 2006 (4) 10.6 Guarantee Agreement of GrandSouth Bancorporation, dated as of May 10, 2006 (4) 12 10.7 Indenture between GrandSouth Bancorporation and Wilmington Trust Company, dated as of May 10, 2006 (4) 13 Portions of the Annual Report to Shareholders for the Year Ended December 31, 2007 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-QSB for the quarter ended June 30, 2006. 13 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 28, 2008 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 __, 2008 Blanton S. Phillips s/Ronald K. Earnest President, Chief Operating Officer, Director March 28, 2008 -------------------------------- Ronald K. Earnest s/Harold E. Garrett Director March 28, 2008 -------------------------------- Harold E. Garrett s/Mason Y. Garrett Chairman, Director March 28, 2008 -------------------------------- Mason Y. Garrett s/Michael L. Gault Director March 28, 2008 -------------------------------- Michael L. Gault s/Baety O. Gross Director March 28, 2008 -------------------------------- Baety O. Gross -------------------------------- Director March __, 2008 S. Hunter Howard, Jr. Director March __, 2008 -------------------------------- J. Calhoun Pruitt, Jr.

14 EXHIBIT INDEX Exhibit No. Description 3.1 Articles of Incorporation of Registrant (1) 3.2 Bylaws of Registrant (1) 4.1 Form of Common Stock Certificate (2) 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 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 10.5 Amended and Restated Declaration of Trust of GrandSouth Capital Trust I, dated as of May 10, 2006 (4) 10.6 Guarantee Agreement of GrandSouth Bancorporation, dated as of May 10, 2006 (4) 10.7 Indenture between GrandSouth Bancorporation and Wilmington Trust Company, dated as of May 10, 2006 (4) 13 Portions of the Annual Report to Shareholders for the Year Ended December 31, 2007 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-QSB for the quarter ended June 30, 2006. 15