GRANDSOUTH BANCORPORATION - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2022

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to _____

Commission File Number: 000-31937

GrandSouth Bancorporation

(Exact name of registrant as specified in its charter)


South Carolina	57-1104394
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

381 Halton Road,
Greenville, South Carolina	29607
(Address of principal executive offices)	(Zip Code)

(864) 770-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
None	None	None

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 o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated Filer x

Smaller reporting company x

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On May 2, 2022, 5,198,542 shares of the issuer’s common stock, no par value, were issued and outstanding.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

FORM 10-Q

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets – March 31, 2022 and December 31, 2021	3
	Consolidated Statements of Income – Three Months Ended March 31, 2022 and 2021	4
	Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2022 and 2021	5
	Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended March 31, 2022 and 2021	6
	Consolidated Statements of Cash Flows – Three Months Ended March 31, 2022 and 2021	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	43

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
	Signatures	46

Item 1. Financial Statements

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Balance Sheets


	(Unaudited)			(Audited)
(in thousands, except share data)	March 31, 2022			December 31, 2021
Assets

Cash and due from banks	$	3,784		$	2,522
Interest-earning deposits		154,566			120,602
Federal funds sold		888			977
Cash and cash equivalents		159,238			124,101

Investments - available for sale		123,167			111,962
Other investments, at cost		2,601			2,984
Loans receivable, net		936,190			933,475
Allowance for loan losses		(13,949	)		(13,723	)
Premises and equipment, net		17,745			17,783
Real estate owned		842			842
Accrued interest receivable		4,768			4,808
Bank owned life insurance		14,856			14,778
Net deferred tax asset		4,341			2,968
Goodwill		737			737
Other assets		2,716			3,007
Total assets	$	1,253,252		$	1,203,722

Liabilities and Shareholders’ Equity

Liabilities:
Deposits:
Noninterest-bearing	$	283,685		$	280,665
Interest-bearing		825,219			778,376
Total deposits		1,108,904			1,059,041
Federal Home Loan Bank advances		5,000			5,000
Junior subordinated notes		35,894			35,864
Accrued interest payable		609			383
Accrued expenses and other liabilities		6,414			6,029
Total liabilities		1,156,821			1,106,317

Commitments and contingencies (Notes 13 and 23)

Shareholders’ Equity:
Preferred stock - Series A - no par value; 287,895 shares authorized, 282,828 shares issued, and outstanding as of March 31, 2022 and December 31, 2021		—			—
Common stock - no par value; 20,000,000 shares authorized; 5,198,542 and 5,168,681 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively		—			—
Additional paid in capital		45,118			44,570
Retained earnings		55,047			51,649
Accumulated other comprehensive income		(3,734	)		1,186
Total shareholders’ equity		96,431			97,405

Total liabilities and shareholders’ equity	$	1,253,252		$	1,203,722

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Income (Unaudited)


	Three Months Ended March 31,
(in thousands, except per share data)	2022			2021
Interest income:
Interest and fees on loans	$	13,581		$	13,138
Taxable securities		466			268
Tax-exempt securities		69			70
Interest-earning deposits		40			19
Other		15			34
Total interest income		14,171			13,529

Interest expense:
Deposits		687			993
Federal Home Loan Bank advances		5			35
Junior subordinated notes		433			433
Other borrowings		—			—
Total interest expense		1,125			1,461
Net interest income		13,046			12,068
Provision for loan losses		308			242
Net interest income after provision for loan losses		12,738			11,826

Noninterest income:
Service charges on deposit accounts		334			268
Bank owned life insurance		78			92
Net gain on sale of premises and equipment		24			6
Other		189			209
Total noninterest income		625			575

Noninterest expenses:
Compensation and employee benefits		5,537			5,074
Net occupancy		586			564
Federal deposit insurance		116			153
Professional and advisory		230			309
Data processing		493			533
Marketing and advertising		70			44
Net cost of operation of real estate owned		23			110
Other		929			880
Total noninterest expenses		7,984			7,667
Income before taxes		5,379			4,734
Income tax expense		1,271			1,140

Net income		4,108			3,594
Preferred stock dividends		(38	)		(30	)
Net income applicable to common shareholders	$	4,070		$	3,564

Earnings per common share:
Basic	$	0.75		$	0.65
Diluted	$	0.72		$	0.65

Weighted average common shares outstanding:
Basic		5,182,493			5,201,787
Diluted		5,384,848			5,258,078

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended March 31,
(in thousands)	2022			2021
Net income	$	4,108		$	3,594
Other comprehensive income (loss):
Change in unrealized holding gains (losses) on securities available for sale		(6,292	)		(1,996	)
Income tax effect related to items of other comprehensive loss		1,372			434
Total other comprehensive loss, after tax		(4,920	)		(1,562	)
Comprehensive income (loss)	$	(812	)	$	2,032

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)


	Common Stock					Preferred Stock				Additional			Retained			Accumulated Other Comprehensive
(in thousands, except share and per share data)	Shares			Amount		Shares		Amount		Paid in Capital			Earnings			Income (Loss)			Total
Balances at December 31, 2021		5,168,681		$	—		282,828	$	—	$	44,570		$	51,649		$	1,186		$	97,405
Net income		—			—		—		—		—			4,108			—			4,108
Other comprehensive loss, net of tax		—			—		—		—		—			—			(4,920	)		(4,920	)
Stock compensation expense		—			—		—		—		130			—			—			130
Stock options exercised		29,861			—		—		—		418			—			—			418
Common stock dividend ($0.13 per share)		—			—		—		—		—			(672	)		—			(672	)
Preferred stock dividend ($0.1365 per share)		—			—		—		—		—			(38	)		—			(38	)
Balances at March 31, 2022		5,198,542		$	—		282,828	$	—	$	45,118		$	55,047		$	(3,734	)	$	96,431

Balances at December 31, 2020		5,271,971		$	—		287,895	$	—	$	46,645		$	37,721		$	2,159		$	86,525
Net income		—			—		—		—		—			3,594			—			3,594
Other comprehensive loss, net of tax		—			—		—		—		—			—			(1,562	)		(1,562	)
Stock compensation expense		—			—		—		—		155			—			—			155
Stock options exercised		36,656			—		—		—		460			—			—			460
Stock repurchase		(135,230	)		—		—		—		(2,392	)		—			—			(2,392	)
Common stock dividend ($0.10 per share)		—			—		—		—		—			(527	)		—			(527	)
Preferred stock dividend ($0.105 per share)		—			—		—		—		—			(30	)		—			(30	)
Balances at March 31, 2021		5,173,397		$	—		287,895	$	—	$	44,868		$	40,758		$	597		$	86,223

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)


	For the Three Months Ended March 31,
(in thousands)	2022			2021
Cash flows from operating activities:
Net income	$	4,108		$	3,594
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		360			734
Investment amortization, net		207			336
Provision for loan losses		308			242
Provision for real estate owned		—			87
Stock-based compensation expense		130			155
Income on bank owned life insurance, net		(78	)		(92	)
Gain on sale of fixed assets		(24	)		(6	)
Net change in operating assets and liabilities:
Accrued interest receivable		40			323
Other assets		291			249
Accrued interest payable		226			334
Other liabilities		385			299
Net cash provided by operating activities		5,953			6,255
Cash flows from investing activities:
Activity for investment securities available for sale:
Purchases		(20,730	)		(12,644	)
Maturities/calls and principal repayments		3,025			5,495
Net increase in loans		(2,901	)		(11,289	)
Proceeds from sale of fixed assets		38			9
Purchase of fixed assets		(202	)		(128	)
Purchase of other investments, at cost		(117	)		—
Redemption of other investments, at cost		500			776
Net cash used in investing activities		(20,387	)		(17,781	)
Cash flows from financing activities:
Net increase in deposits		49,863			44,077
Repurchase of common stock		—			(2,392	)
Cash received upon exercise of stock options		418			460
Dividends paid on common stock		(672	)		(527	)
Dividends paid on preferred stock		(38	)		(30	)
Net cash provided by financing activities		49,571			41,588
Net change in cash and cash equivalents		35,137			30,062
Cash and cash equivalents, beginning of period		124,101			63,025
Cash and cash equivalents, end of period	$	159,238		$	93,087

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings	$	863		$	1,093
Income taxes		154			—
Significant noncash investing and financing activities:
Investments to be settled	$	—		$	2,131

The accompanying notes are an integral part of the consolidated financial statements.

GRANDSOUTH BANCORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

GrandSouth Bancorporation (“we,” “us,” “our,” or the “Company”) was incorporated on September 7, 2000 for the purpose of becoming the holding company for GrandSouth Bank (the “Bank”). On October 2, 2000, pursuant to the Plan of Exchange, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company. The Company’s primary operation is its investment in the Bank. The Company also owns 100% of the common stock of GrandSouth Capital Trust I (the “Trust”), a Delaware statutory trust formed in 2006 to facilitate the issuance of trust preferred securities.

The Bank is a South Carolina state-chartered commercial bank that provides a full range of banking services. The Bank is insured and subject to the regulation of the Federal Deposit Insurance Corporation (“FDIC”) and is also subject to the regulation of the South Carolina State Board of Financial Institutions.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and the Bank. The accounts of the Trust are not consolidated with the Company. In consolidation all significant intercompany accounts and transactions have been eliminated.

Business Segments

Accounting Standards Codification (“ASC”) Topic 280-10, “Segment Reporting,” requires selected segment information of operating segments based on a management approach. The Company’s two reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning by management. Please refer to “Note 9 – Reportable Segments” for further information on the reporting for the Company’s two business segments.

Estimates

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change, in the near term, relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation of deferred tax assets.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Form 10-K for the year ended December 31, 2021, filed with the SEC on March 31, 2022 (the “2021 Form 10-K”). In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

Reclassification

Certain amounts in the prior year’s financial statements may have been reclassified to conform to the current year’s presentation. The reclassifications had no effect on our results of operations or financial condition as previously reported.

Recent Accounting Standards Updates

In September 2016, the FASB issued amendments to ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in the update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected thereby providing financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by the reporting entity. The amendments will be effective for the Company for reporting periods beginning after December 15, 2022. The Company has formed a cross-functional committee to provide corporate governance over the implementation of this update, has evaluated data sources and made process updates to capture additional relevant data, has identified a service provider to perform the calculation, and continues to attend seminars and forums specific to this update. The Company also engaged the service provider to assist with the implementation of the standard. While we continue to evaluate the impact the new guidance will have on our financial position and results of operations, we currently expect the new guidance may result in an increase to our allowance for credit losses given the change to estimated losses over the contractual life of the loan portfolio. The amount of any change to our allowance will depend, in part, upon the composition of our loan portfolio at the adoption date as well as economic conditions and loss forecasts at that date.

In August 2021, the FASB issued amendments to update SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments were effective upon issuance. These amendments did not have a material effect on the Company’s financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies did not or are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

NOTE 2. INVESTMENTS

The amortized cost and estimated fair values of available-for-sale (“AFS”) securities as of March 31, 2022 and December 31, 2021 are summarized as follows (in thousands):

	March 31, 2022
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. government agencies	$	27,449	$	—	$	(972	)	$	26,477
State and municipal obligations		25,971		79		(1,783	)		24,267
Mortgage-backed securities - agency		31,594		127		(1,555	)		30,166
Collateralized mortgage obligations - agency		25,530		15		(535	)		25,010
Asset-backed securities		2,451		—		(33	)		2,418
Corporate bonds		14,950		215		(336	)		14,829
Total	$	127,945	$	436	$	(5,214	)	$	123,167

	December 31, 2021
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. government agencies	$	9,479	$	—	$	(40	)	$	9,439
State and municipal obligations		26,011		959		(293	)		26,677
Mortgage-backed securities - agency		33,191		316		(89	)		33,418
Collateralized mortgage obligations - agency		26,968		535		(68	)		27,435
Asset-backed securities		2,599		—		(9	)		2,590
Corporate bonds		12,200		360		(157	)		12,403
Total	$	110,448	$	2,170	$	(656	)	$	111,962

Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):


	March 31, 2022
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government agencies	$	26,477	$	972	$	—	$	—	$	26,477	$	972
State and municipal obligations		17,857		1,111		3,137		672		20,994		1,783
Mortgage-backed securities - agency		23,237		1,555		—		—		23,237		1,555
Collateralized mortgage obligations - agency		15,974		509		3,318		26		19,292		535
Asset-backed securities		—		—		2,418		33		2,418		33
Corporate bonds		9,864		336		—		—		9,864		336
Total	$	93,409	$	4,483	$	8,873	$	731	$	102,282	$	5,214

	December 31, 2021
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

U.S. government agencies	$	9,439	$	40	$	—	$	—	$	9,439	$	40
State and municipal obligations		8,083		293		—		—		8,083		293
Mortgage-backed securities - agency		18,346		89		—		—		18,346		89
Collateralized mortgage obligations - agency		11,687		68		—		—		11,687		68
Asset-backed securities		—		—		2,590		9		2,590		9
Corporate bonds		4,793		157		—		—		4,793		157
Total	$	52,348	$	647	$	2,590	$	9	$	54,938	$	656

Information pertaining to the number of securities with gross unrealized losses is detailed in the table below as of the dates indicated:


	March 31, 2022
	Less Than 12 Months		More Than 12 Months		Total
U.S. government agencies		8		—		8
State and municipal obligations		20		3		23
Mortgage-backed securities - agency		13		—		13
Collateralized mortgage obligations - agency		9		2		11
Asset-backed securities		—		2		2
Corporate bonds		23		—		23
Total		73		7		80

	December 31, 2021
	Less Than 12 Months		More Than 12 Months		Total
U.S. government agencies		3		—		3
State and municipal obligations		8		—		8
Mortgage-backed securities - agency		7		—		7
Collateralized mortgage obligations - agency		5		—		5
Asset-backed securities		—		2		2
Corporate bonds		10		—		10
Total		33		2		35

Management of the Company believes all unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

There were no AFS investment security sales for the three months ended March 31, 2022 or 2021.

The amortized cost and estimated fair value of AFS investments in debt securities at March 31, 2022, by contractual maturity, are shown below (in thousands).

	March 31, 2022
	Amortized Cost		Fair Value
Over 1 year through 5 years	$	17,970	$	17,601
Over 5 years through 10 years	$	31,066	$	29,820
Over 10 years		19,334		18,152
Total securites other than asset-backed and mortgage-backed securities		68,370		65,573

Mortgage-backed securities		31,594		30,166
Collaterized mortgage obigations		25,530		25,010
Asset-backed securities		2,451		2,418
Total	$	127,945	$	123,167

Expected maturities may differ from contractual maturities when issuers and borrowers have the right to call or prepay the obligations.

There was $0.5 million of AFS securities pledged against deposits and borrowings at March 31, 2022 and December 31, 2021.

Other investments are comprised of the following and are recorded at cost which approximates fair value (in thousands):

Schedule of Other Investment

	March 31,		December 31,
	2022		2021
Federal Home Loan Bank stock	$	790	$	733
Investment in Trust Preferred Securities		247		247
Certificates of deposit		1,004		1,504
Other investments		560		500
Total other investments, at cost	$	2,601	$	2,984

Certificates of deposit totaling $0.3 million and $1.3 million were pledged against customer deposits at March 31, 2022 and December 31, 2021, respectively. Federal Home Loan Bank of Atlanta (“FHLB”) stock is used to collateralize advances with the FHLB.

NOTE 3. LOANS RECEIVABLE

Loans receivable are summarized in the table below as of the dates indicated (in thousands):

Schedule of Loans Receivable

	March 31,			December 31,
	2022			2021
Real estate loans:
One-to four-family residential	$	132,895		$	132,836
Commercial real estate		415,571			423,552
Home equity loans and lines of credit		20,155			21,568
Residential construction		37,260			38,881
Other construction and land		80,540			75,682
Total real estate loans		686,421			692,519
Commercial and industrial		243,860			234,355
Consumer		6,351			7,129
Total commercial and consumer		250,211			241,484
Loans receivable, gross		936,632			934,003
Net deferred loan fees		(442	)		(528	)
Loans receivable, net of deferred fees	$	936,190		$	933,475

Commercial loans includes PPP loans with recorded investments of $0.1 million and $1.3 million as of March 31, 2022 and December 31, 2021, respectively.

The Bank had $68.6 million and $46.6 million of loans pledged as collateral to secure funding with the FHLB at March 31, 2022 and December 31, 2021, respectively.

NOTE 4. ALLOWANCE FOR LOAN LOSSES

The changes in the allowance for loan losses by portfolio segment are presented in the following tables for the periods indicated (in thousands):


	Three Months Ended March 31, 2022
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction			Other Construction and Land		Commercial			Consumer			Total
Beginning balance	$	1,363		$	4,688		$	246		$	430		$	824	$	5,985		$	187		$	13,723
Provision		(22	)		(171	)		(19	)		(26	)		15		545			(14	)		308
Charge-offs		—			—			—			—			—		(347	)		—			(347	)
Recoveries		2			53			—			—			18		192			—			265
Ending balance	$	1,343		$	4,570		$	227		$	404		$	857	$	6,375		$	173		$	13,949

	Three Months Ended March 31, 2021
	One-to-four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction			Other Construction and Land		Commercial			Consumer			Total
Beginning balance	$	1,297		$	4,559		$	231		$	389		$	843	$	5,118		$	135		$	12,572
Provision		(13	)		(148	)		(24	)		(69	)		75		338			83			242
Charge-offs		(30	)		—			—			—			—		(106	)		—			(136	)
Recoveries		16			—			—			—			—		265			—			281
Ending balance	$	1,270		$	4,411		$	207		$	320		$	918	$	5,615		$	218		$	12,959

The allocation of the allowance for loan losses and the recorded investment in loans is presented in the following tables by portfolio segment and reserving methodology as of the dates indicated (in thousands):


	March 31, 2022
	One-to-four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
Allowance for loan losses
Individually evaluated for impairment	$	19	$	—	$	—	$	—	$	—	$	—	$	—	$	19
Collectively evaluated for impairment		1,324		4,570		227		404		857		6,375		173		13,930
Ending Balance	$	1,343	$	4,570	$	227	$	404	$	857	$	6,375	$	173	$	13,949

Loans receivable
Individually evaluated for impairment	$	624	$	2,264	$	—	$	—	$	—	$	—	$	—	$	2,888
Collectively evaluated for impairment		132,037		412,653		20,190		37,127		80,260		244,581		6,454		933,302
Loans and Leases Receivable, Gross	$	132,661	$	414,917	$	20,190	$	37,127	$	80,260	$	244,581	$	6,454	$	936,190


	December 31, 2021
	One-to-four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
Allowance for loan losses
Individually evaluated for impairment	$	20	$	—	$	—	$	—	$	—	$	—	$	—	$	20
Collectively evaluated for impairment		1,343		4,688		246		430		824		5,985		187		13,703
Ending Balance	$	1,363	$	4,688	$	246	$	430	$	824	$	5,985	$	187	$	13,723

Loans receivable
Individually evaluated for impairment	$	735	$	2,080	$	—	$	—	$	—	$	28	$	—	$	2,843
Collectively evaluated for impairment		131,870		420,797		21,601		38,750		75,349		235,028		7,237		930,632
Loans and Leases Receivable, Gross	$	132,605	$	422,877	$	21,601	$	38,750	$	75,349	$	235,056	$	7,237	$	933,475

Portfolio Quality Indicators

The Company’s loan portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. The Company’s internal credit risk grading system is based on experiences with similarly graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management analyzes the resulting information, as well as other external statistics and factors, to track loan performance.

The Company’s internally assigned grades pursuant to the Board-approved lending policy are as follows:

Pass (1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated.

Special Mention (6) – Potential weakness or identifiable weakness present without appropriate mitigating factors; however, loan continues to perform satisfactorily with no material delinquency noted. This may include some deterioration in repayment capacity and/or loan-to-value of securing collateral.

Substandard (7) – Significant weakness that remains unmitigated, most likely due to diminished repayment capacity, serious delinquency, and/or marginal performance based upon restructured loan terms.

Doubtful (8) – Significant weakness that remains unmitigated and collection in full is highly questionable or improbable.

Loss (9) – Collectability is unlikely resulting in immediate charge-off.

Description of Segment and Class Risks

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list is not exhaustive, it provides a description of the risks that management has determined are the most significant.

One-to-four family residential

We centrally underwrite each of our one-to-four family residential loans using credit scoring and analytical tools consistent with the Board-approved lending policy and internal procedures based upon industry best practices and regulatory directives. We also evaluate the value and marketability of the collateral. Common risks to each class of non-commercial loans, including one-to-four family residential, include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines in real estate values. Personal events such as death, disability or change in marital status also add risk to non-commercial loans.

Commercial real estate

Commercial mortgage loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans are secured by real property and possibly other business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Other commercial real estate loans consist primarily of loans secured by multifamily housing. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates.

Home equity and lines of credit

Home equity loans are often secured by first or second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken our collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines of credit in excess of the collateral value if there have been significant declines since origination.

Residential construction and other construction and land

Residential mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home construction is completed contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the collateral’s current market value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed the borrower’s financial ability to complete the project. Cost overruns can result in foreclosure of partially completed collateral with unrealized value and diminished marketability. Commercial construction and land development loans are dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and building lots. Deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers.

Commercial

We centrally underwrite each of our commercial loans, which includes agricultural loans and specialty floor-plan lending, based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We strive to gain a complete understanding of our borrower’s businesses, including the experience and background of the principals of such businesses. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, or other assets including accounts receivable and inventory, we gain an understanding of the likely value of the collateral and what level of strength it brings to the loan transaction. To the extent that the principals or other parties are obligated under the note or guaranty agreements, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including volatility or seasonality of cash flows, changing demand for products and services, personal events such as death, disability or change in marital status, and reductions in the value of our collateral. Common risks to specialty floor-plan lending includes adverse conditions in the automobile market and risks associated with declining values. The performance of agricultural loans is highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.

Consumer

The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, purchased student loans for which there is a 98% guarantee, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since the date of loan origination in excess of principal repayment.

The recorded investment in loans by portfolio segment and loan grade is presented in the following tables as of the dates indicated (in thousands):


	March 31, 2022
Loan Grade	One-to-Four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
1	$	—	$	—	$	—	$	—	$	—	$	440	$	180	$	620
2		—		239		—		—		—		248		—		487
3		7,052		38,141		3,433		—		5,091		12,528		49		66,294
4		104,561		306,711		14,728		32,712		62,286		94,721		4,970		620,689
5		18,551		65,303		1,729		4,415		12,883		132,953		1,168		237,002
6		1,828		1,871		300		—		—		3,199		21		7,219
7		669		2,652		—		—		—		492		66		3,879
Total	$	132,661	$	414,917	$	20,190	$	37,127	$	80,260	$	244,581	$	6,454	$	936,190

	December 31, 2021
Loan Grade	One-to-Four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
1	$	—	$	—	$	—	$	—	$	—	$	306	$	191	$	497
2		—		245		—		—		—		247		—		492
3		8,719		39,770		3,477		—		3,959		11,071		53		67,049
4		103,893		313,071		16,013		35,707		57,750		102,246		5,461		634,141
5		17,482		60,576		1,715		3,043		13,640		119,455		1,434		217,345
6		1,433		6,729		318		—		—		1,123		44		9,647
7		1,078		2,486		78		—		—		608		54		4,304
Total	$	132,605	$	422,877	$	21,601	$	38,750	$	75,349	$	235,056	$	7,237	$	933,475

Delinquency Analysis of Loans by Class

An aging analysis of the recorded investment of loans by portfolio segment, including loans on nonaccrual status as well as accruing TDRs and purchased student loans for which there is a 98% guarantee, is presented in the following tables as of the dates indicated (in thousands).


	March 31, 2022
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Loans Receivable
One-to-four family residential	$	—	$	—	$	50	$	50	$	132,611	$	132,661
Commercial real estate		34		—		—		34		414,883		414,917
Home equity and lines of credit		—		—		—		—		20,190		20,190
Residential construction		—		—		—		—		37,127		37,127
Other construction and land		—		—		—		—		80,260		80,260
Commercial		—		—		106		106		244,475		244,581
Consumer		54		—		267		321		6,133		6,454
Total	$	88	$	—	$	423	$	511	$	935,679	$	936,190


	December 31, 2021
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Loans Receivable
One-to-four family residential	$	—	$	—	$	50	$	50	$	132,555	$	132,605
Commercial real estate		—		—		—		—		422,877		422,877
Home equity and lines of credit		—		—		—		—		21,601		21,601
Residential construction		—		—		—		—		38,750		38,750
Other construction and land		—		—		—		—		75,349		75,349
Commercial		54		—		—		54		235,002		235,056
Consumer		—		—		590		590		6,647		7,237
Total	$	54	$	—	$	640	$	694	$	932,781	$	933,475

Impaired Loans

The following table presents recorded investments in loans considered to be impaired and related information on those impaired loans as of March 31, 2022 and December 31, 2021 (in thousands).

Schedule of Impaired Loans

	March 31, 2022						December 31, 2021
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans without a valuation allowance
One-to-four family residential	$	279	$	279	$	—	$	387	$	387	$	—
Commercial real estate		2,264		2,264		—		2,080		2,132		—
Commercial		—		—		—		28		28		—
		2,543		2,543		—		2,495		2,547		—

Loans with a valuation allowance
One-to-four family residential		345		345		19		348		348		20
		345		345		19		348		348		20

Total
One-to-four family residential		624		624		19		735		735		20
Commercial real estate		2,264		2,264		—		2,080		2,132		—
Commercial		—		—		—		28		28		—
	$	2,888	$	2,888	$	19	$	2,843	$	2,895	$	20

The average recorded investment in impaired loans by portfolio segment and interest income recognized on those impaired loans is presented in the following table for the periods indicated (in thousands):

	Three Months Ended March 31,
	2022				2021
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a valuation allowance
One-to-four family residential	$	279	$	3	$	284	$	3
Commercial real estate		2,296		30		1,738		22
Commercial		—		—		93		2
		2,575		33		2,115		27

Loans with a valuation allowance
One-to-four family residential		346		3		359		3
		346		3		359		3

Total
One-to-four family residential		625		6		643		6
Commercial real estate		2,296		30		1,738		22
Commercial		—		—		93		2
	$	2,921	$	36	$	2,474	$	30

Nonperforming Loans

The recorded investment of nonperforming loans by portfolio segment is presented in the table below as of the dates indicated (in thousands):

Schedule of Non-Performaing Loans

	March 31,		December 31,
	2022		2021
One-to-four family residential	$	50	$	107
Commercial real estate		132		767
Commercial		429		473
Consumer		14		2
Nonperforming loans	$	625	$	1,349

TDRs

The recorded investment in performing and nonperforming TDRs by portfolio segment is presented in the tables below as of the dates indicated (in thousands):

Schedule of TDR


	March 31, 2022
	Performing		Nonperforming		Total
	TDRs		TDRs		TDRs
One-to-four family residential	$	568	$	—	$	568
Commercial real estate		936		—		936
Commercial		199		102		301
Consumer		32		—		32
Total	$	1,735	$	102	$	1,837


	December 31, 2021
	Performing		Nonperforming		Total
	TDRs		TDRs		TDRs
One-to-four family residential	$	577	$	—	$	577
Commercial real estate		961		—		961
Commercial		205		110		315
Consumer		37		2		39
Total	$	1,780	$	112	$	1,892

Loan modifications that were deemed TDRs at the time of the modification are presented in the table below for the periods indicated (in thousands):

There were no loan modifications deemed TDRs for the three months ended March 31, 2022.

	Modification Type	Number of TDR Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Three months ended March 31, 2021
	Extended payment terms	1	$	357	$	357

There were no TDRs that defaulted during the three month period ending March 31, 2022 or 2021 and which were modified as TDRs within the previous 12 months.

NOTE 5. DEPOSITS

Deposit balances and interest expense by type of deposit are summarized as follows as of and for the periods indicated (in thousands):

Schedule of Deposits


	As of and for the Three Months Ended March 31,								As of and for the Year Ended December 31
	2022				2021				2021
	Balance		Interest Expense		Balance		Interest Expense		Balance		Interest Expense
Noninterest-bearing demand	$	283,685	$	—	$	236,554	$	—	$	280,665	$	—
Interest-bearing demand		63,004		24		68,542		43		52,479		167
Money Market		547,207		503		409,725		452		500,862		1,888
Savings		17,003		4		11,570		3		16,106		13
Time Deposits		198,005		156		264,166		495		208,929		1,192
Total deposits	$	1,108,904	$	687	$	990,557	$	993	$	1,059,041	$	3,260

NOTE 6. COMMITMENTS AND CONTINGENCIES

In the normal course of business, we make various commitments and incur certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit. At March 31, 2022, commitments to extend credit and standby letters of credit totaled $322.5 million. We do not anticipate any material losses as a result of these transactions.

During 2021, the Company entered into an agreement to fund capital contributions of up to $1 million with a financial technology company. As of March 31, 2022, $60 thousand of the commitment has been funded. The Company has accounted for its ownership in the financial technology company as an equity security in accordance with FASB ASC Subtopic 946-323. The funded balance is included in other investments, at cost on the accompanying consolidated balance sheets. The Company has unfunded commitments of $0.9 million related to this agreement as of March 31, 2022.

In the normal course of business, the Company is periodically involved in litigation and other matters. In the opinion of the Company’s management, none of the litigation and other matters are expected to have a material adverse effect on the accompanying consolidated financial statements.

NOTE 7. EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock as of the dates indicated (in thousands, except per share data):

Schedule of Earning per Share


	Three Months Ended March 31,
	2022			2021
Numerator:
Net income	$	4,108		$	3,594
Preferred stock dividends		(38	)		(30	)
Net income applicable to common equity		4,070			3,564
Undistributed earnings allocated to participating securities		(184	)		(167	)
Net income applicable to common shareholders	$	3,886		$	3,397

Denominator:
Basic - Total weighted-average basic shares outstandings		5,182,493			5,201,787
Stock options		202,355			56,291
Diluted - Total weighted-average diluted shares outstanding		5,384,848			5,258,078

Basic income per share	$	0.75		$	0.65
Diluted income per share	$	0.72		$	0.65

The Company excluded 92,500 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $25.14 from the computation of diluted earnings per share for the three months ended March 31, 2022 because of their antidilutive effect.

The Company excluded 367,000 potentially dilutive shares of common stock issuable upon exercise of stock options with a weighted average exercise price of $16.56 from the computation of diluted earnings per share for the three months ended March 31, 2021 because of their antidilutive effect.

NOTE 8. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income and changes in those components are presented in the tables below as of and for the years indicated (in thousands).


	Three Months Ended March 31, 2022
	AFS Securities			Total
Balance, beginning of period	$	1,186		$	1,186
Change in net unrealized holding gains on AFS securities		(6,292	)		(6,292	)
Income tax effect		1,372			1,372
Balance, end of period	$	(3,734	)	$	(3,734	)

	Three Months Ended March 31, 2021
	AFS Securities			Total
Balance, beginning of period	$	2,159		$	2,159
Change in net unrealized holding losses on AFS securities		(1,996	)		(1,996	)
Income tax effect		434			434
Balance, end of period	$	597		$	597

There were no line items in the Consolidated Statements of Income affected by amounts reclassified from accumulated other comprehensive income in the three months ended March 31, 2022 and 2021.

NOTE 9. REPORTABLE SEGMENTS

GrandSouth Bank conducts traditional banking operations (as GrandSouth Bank, or Core Bank) and offers specialty lending (as CarBucks). The Core Bank and CarBucks are GrandSouth’s primary reportable segments for management financial reporting. This business segment structure along primary lending products is consistent with the way management internally reviews financial information and allocates resources. Results for prior periods have been restated for comparability.

Segment information is shown in the tables below as of and for the periods indicated (in thousands).

Schedule of Reportable Segment


	As of and for the Three Months Ended March 31, 2022
	Core Bank			CarBucks		Other			Total
Interest income	$	8,329		$	5,306	$	536		$	14,171
Interest expense		203			489		433			1,125
Net interest income		8,126			4,817		103			13,046
Provision for loan losses		(324	)		632		—			308
Noninterest income		482			64		79			625
Noninterest expense		5,289			2,679		16			7,984
Net income before taxes		3,643			1,570		166			5,379
Income tax expense		904			371		(4	)		1,271
Net income	$	2,739		$	1,199	$	170		$	4,108

Total assets	$	1,006,678		$	108,229	$	138,345		$	1,253,252


	As of and for the Three Months Ended March 31, 2021
	Core Bank		CarBucks			Other			Total
Interest income	$	8,577	$	4,613		$	339		$	13,529
Interest expense		663		365			433			1,461
Net interest income		7,914		4,248			(94	)		12,068
Provision for loan losses		523		(281	)		—			242
Noninterest income		447		37			91			575
Noninterest expense		5,217		2,435			15			7,667
Net income before taxes		2,621		2,131			(18	)		4,734
Income tax expense		631		513			(4	)		1,140
Net income	$	1,990	$	1,618		$	(14	)	$	3,594

Total assets	$	923,955	$	78,756		$	132,637		$	1,135,348

Core Bank – The bank’s primary business is to provide traditional deposit and lending products and services to commercial and retail banking clients.

CarBucks – The banking division that provides specialty floor plan lending to small automobile dealers in over 20 states.

Other – Includes AFS securities portfolio, BOLI, parent company activities, net intercompany eliminations, and certain other activities not currently allocated to the aforementioned segments.

NOTE 10. FAIR VALUE DISCLOSURES

Overview

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs classified within Level 3 of the hierarchy).

Fair Value Hierarchy

Level 1 - Valuation is based on inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates, yield curves observable at commonly quoted intervals, and other market-corroborated inputs.

Level 3 - Valuation is generated from techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market-based parameters. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company evaluates fair value measurement inputs on an ongoing basis in order to determine if there is a change of sufficient significance to warrant a transfer between levels. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s valuation process.

Financial Assets and Financial Liabilities Measured on a Recurring Basis

The Company uses the following methods and assumptions in estimating the fair value of its financial assets and financial liabilities on a recurring basis:

Investment Securities Available-for-Sale

We obtain fair values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Also included in securities are corporate bonds which are valued using significant unobservable inputs and are classified as Level 2 or Level 3 based on market information available during the period.

Financial assets measured at fair value on a recurring basis segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value are presented below as of the dates indicated (in thousands):


	March 31, 2022
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government agencies	$	—	$	26,477	$	—	$	26,477
State and municipal obligations		—		24,267		—		24,267
Mortgage-backed securities - agency		—		30,166		—		30,166
Collateralized mortgage obligations - agency		—		25,010		—		25,010
Asset-backed securities		—		2,418		—		2,418
Corporate bonds		—		—		14,829		14,829
Total recurring assets at fair value	$	—	$	108,338	$	14,829	$	123,167

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
U.S. government agencies	$	—	$	9,439	$	—	$	9,439
State and municipal obligations		—		26,677		—		26,677
Mortgage-backed securities - agency		—		33,418		—		33,418
Collateralized mortgage obligations - agency		—		27,435		—		27,435
Asset-backed securities		—		2,590		—		2,590
Corporate bonds		—		—		12,403		12,403
Total recurring assets at fair value	$	—	$	99,559	$	12,403	$	111,962

There were no financial liabilities measured at fair value on a recurring basis as of March 31, 2022 or December 31, 2021.

The changes in assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value are presented in the following table for the years indicated (in thousands):


	Three Months Ended March 31,
	2022			2021

Balance at beginning of period	$	12,403		$	4,605
Corporate bond additions		2,750			500
Corporate bond fair value adjustments		(324	)		(12	)
Balance at end of period	$	14,829		$	5,093

Financial Assets Measured on a Nonrecurring Basis

The Company uses the following methods and assumptions in estimating the fair value of its financial assets on a nonrecurring basis:

Impaired Loans

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of collateral dependent impaired loans is estimated using the value of the collateral less selling costs if repayment is expected from liquidation of the collateral. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3. Impaired loans measured using the present value of expected future cash flows are not deemed to be measured at fair value.

Other Real Estate Owned

Other real estate owned, or REO, obtained in partial or total satisfaction of a loan is recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments. Fair value, when recorded, is generally based upon appraisals by approved, independent, state certified appraisers. Like impaired loans, appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. REO carried at fair value is classified as Level 3.

Nonfinancial assets measured at fair value on a nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value are presented below as of the dates indicated (in thousands):


	March 31, 2022
	Level 1		Level 2		Level 3		Total
Real estate owned:
Other construction and land	$	—	$	—	$	842	$	842
Total	$	—	$	—	$	842	$	842

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Collateral dependent impaired loans:
One-to four family residential	$	—	$	—	$	106	$	106
Commercial real estate		—		—		630		630
Commercial		—		—		28		28
Real estate owned:
Other construction and land		—		—		842		842
Total	$	—	$	—	$	1,606	$	1,606

There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2022 or December 31, 2021.

Impaired loans totaling $2.9 million at March 31, 2022 and $2.1 million at December 31, 2021 were measured using the present value of expected future cash flows. These impaired loans were not deemed to be measured at fair value on a nonrecurring basis.

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2022 and December 31, 2021.

			March 31, 2022	December 31, 2021
	Valuation Technique	Unobservable Input	General Range	General Range
Impaired loans	Discounted Appraisals	Collateral discounts	N/A	0% - 15%
Real estate owned	Discounted Appraisals	Collateral discounts and estimated selling cost	10% - 43%	10% - 43%
Corporate bonds	Discounted Cash Flows	Recent similar executed financing transactions	0% - 5%	0% - 4%

Fair Value of Financial Assets and Financial Liabilities

The estimated fair value of the Company’s financial assets and financial liabilities are summarized as follows at the dates indicated (in thousands):


			Fair Value Measurements at March 31, 2022
	Carrying
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	159,238	$	159,238	$	159,238	$	—	$	—
Securities available for sale		123,167		123,167		—		108,338		14,829
Loans receivable, net		936,190		911,608		—		—		911,608
Other investments, at cost		2,601		2,601		—		2,601		—
Accrued interest receivable		4,768		4,768		—		4,768		—
BOLI		14,856		14,856		—		14,856		—

Liabilities:
Demand deposits, money market and savings	$	910,899	$	910,899	$	—	$	910,899	$	—
Time deposits		198,005		197,474		—		197,474		—
Federal Home Loan Bank advances		5,000		5,148		—		5,148		—
Junior subordinated debentures		35,894		36,244		—		36,244		—
Accrued interest payable		609		609		—		609		—


			Fair Value Measurements at December 31, 2021
	Carrying
	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	124,101	$	124,101	$	124,101	$	—	$	—
Securities available for sale		111,962		111,962		—		99,559		12,403
Loans receivable, net		933,475		923,958		—		—		923,958
Other investments, at cost		2,984		2,984		—		2,984		—
Accrued interest receivable		4,808		4,808		—		4,808		—
BOLI		14,778		14,778		—		14,778		—

Liabilities:
Demand deposits, money market and savings	$	850,112	$	850,112	$	—	$	850,112	$	—
Time deposits		208,929		209,005		—		209,005		—
Federal Home Loan Bank advances		5,000		5,054		—		5,054		—
Junior subordinated debentures		35,864		36,113		—		36,113		—
Accrued interest payable		383		383		—		383		—

NOTE 11. SUBSEQUENT EVENTS

Management has evaluated the effects of events and transactions through the date of this filing that have occurred subsequent to March 31, 2022. The Company does not believe there were any material subsequent events during this period that require further recognition or disclosure in the unaudited consolidated financial statements included in this report other than the item noted below.

On April 18, 2022, the Company’s Board of Directors approved regular cash dividends of $0.13 per common share and $0.1365 per Series A preferred share payable on May 18, 2022 to shareholders of record on May 4, 2022.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1932 (the “Exchange Act”), which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “continue,” “seek,” “could,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The Company is under no duty to and does not undertake any obligation to update any forward-looking statements after the date of this Form 10-Q except as required by law.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

Changes in the interest rate environment which could reduce anticipated or actual margins;

Restrictions or conditions imposed by our regulators on our operations;

Increases in competitive pressure in the banking and financial services industries;

Changes in access to funding or increased regulatory requirements with regard to funding;

Changes in deposit flows;

Credit losses as a result of declining real estate values, increasing interest rates, increasing unemployment, changes in payment behavior or other factors;

Credit losses due to loan concentration;

Changes in the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;

Our ability to attract and retain key personnel;

The success and costs of our expansion into potential new markets;

Changes in political conditions or the legislative or regulatory environment, including governmental initiatives affecting the financial services industry, including as a result of the presidential administration and Democratic control of Congress;

Changes in economic conditions in the United States and the strength of the local economies in which we conduct our operations, including, but not limited to, due to the continuing negative impacts and disruptions resulting from the outbreak of COVID-19 on the economies and communities we serve, which may have an adverse impact on our business, operations and performance, and could have a negative impact on our credit portfolio, share price, borrowers, and on the economy as a whole, both domestically and globally;

Changes occurring in business conditions and inflation;

Increased cybersecurity risk, including potential business disruptions or financial losses;

Changes in technology;

The adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

Examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;

Changes in monetary and tax policies;

Risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;

The rate of delinquencies and amounts of loans charged-off;

The rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;

Our ability to maintain appropriate levels of capital and to comply with our capital ratio requirements;

Adverse changes in asset quality and resulting credit risk-related losses and expenses;

Changes in accounting policies, practices or guidelines;

Adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed; and

The potential effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, (including the potential continuing negative effects of COVID-19 on trade) supply chains disruptions in transportation, war or terrorist activities, essential utility outages or trade disputes and tariffs.

For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2022, (“2021 Form 10-K”).

Non-GAAP Measures

This Form 10-Q includes financial information determined by a method other than in accordance with generally accepted accounting principles (“GAAP”). This financial information includes the operating performance measure “Tangible book value per common share, outstanding”.

Management has included this non-GAAP measure because it believes this measure may provide useful supplemental information for evaluating the Company’s underlying performance trends. Further, management uses this measure in managing and evaluating the Company’s business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies.

Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2022 have remained unchanged from the disclosures presented in our 2021 Form 10-K. Refer to Note 1 in the notes to the consolidated financial statements included under Item 1 -“Financial Statements” of this Form 10-Q for more information about recent accounting updates.

Overview

GrandSouth Bancorporation (“we,” “us,” “our,” or the “Company”) was incorporated in 2000 under the laws of South Carolina and is a bank holding company registered under the Bank Holding Company Act of 1956. The Company’s primary purpose is to serve as the holding company for GrandSouth Bank (the “Bank”). On October 2, 2000, pursuant to a Plan of Exchange approved by the shareholders of the Bank, all of the outstanding shares of capital stock of the Bank were exchanged for shares of the Company, and the Company became the owner of all of the outstanding capital stock of the Bank. The Company presently engages in no business other than that of owning the Bank and has no employees.

The Company has one non-bank subsidiary, GrandSouth Capital Trust I (the “Trust”), a Delaware statutory trust, formed to facilitate the issuance of trust preferred securities. The GrandSouth Trust is not consolidated in the Company’s financial statements.

We provide a full range of financial services through offices located throughout South Carolina. We provide full-service retail and commercial banking products.

Our results of operations are significantly affected by general economic and competitive conditions in our market areas and nationally, as well as changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations and significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information included in this Form 10-Q and in our 2021 Form 10-K.

Discussion of Financial Condition

General

Total assets increased $49.5 million to $1.3 billion at March 31, 2022, or 4.11%, from December 31, 2021. This increase in assets was primarily due to increases in cash and cash equivalents of $35.1 million, investments available for sale (“AFS”) of $11.2 million, and loans of $2.7 million.

Total liabilities increased $50.5 million to $1.2 billion at March 31, 2022, or 4.57%, from December 31, 2021, due primarily to increases in total deposits of $49.9 million, which includes increases in interest-bearing deposits of $46.8 million.

Total shareholders’ equity decreased $1.0 million to $96.4 million, or 1.00%, from December 31, 2021, due to normal retention of earnings, exercise of stock options, and stock-based compensation partially offset by changes in the fair value of AFS investments and payment of dividends. Book Value per common share decreased $0.29 to $18.32 at March 31, 2022 from $18.61 at December 31, 2021. Tangible book value per common share, a non-GAAP measure, also decreased $0.29 to $18.18 at March 31, 2022 from $18.47 at December 31, 2021.

The following is a reconciliations of book value to book value per common share and book value to tangible book value per common share for the periods indicated:

	As Of
(in thousands, except share data)	March 31, 2022			December 31, 2021
Book Value (GAAP)	$	96,431		$	97,405
Book Value Attributable to Preferred Shares		(1,204	)		(1,204	)
Book Value Attributable to Common Shares		95,227			96,201
Outstanding common shares		5,198,542			5,168,681
Book Value Per Common Share	$	18.32		$	18.61

Book Value (GAAP)	$	96,431		$	97,405
Book Value Attributable to Preferred Shares		(1,204	)		(1,204	)
Book Value Attributable to Common Shares		95,227			96,201
Goodwill and intangibles		(737	)		(737	)
Book Value Attributable to Common Shares (Tangible)	$	94,490		$	95,464
Outstanding common shares		5,198,542			5,168,681
Tangible Book Value Per Common Share	$	18.18		$	18.47

Cash and Cash Equivalents

Total cash and cash equivalents increased $35.1 million to $159.2 million at March 31, 2022 from $124.1 million at December 31, 2021, primarily due to the increase in customer deposits. We continue to look for opportunities to re-invest excess cash in higher yielding assets, but will continue to hold adequate levels of liquid and short-term assets.

Investment Securities

Our investment securities portfolio is classified as AFS, which is carried at fair value. The following table shows the amortized cost and fair value for our AFS investment portfolio at the dates indicated (in thousands).

	March 31, 2022				December 31, 2021
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government agencies	$	27,449	$	26,477	$	9,479	$	9,439
State and municipal obligations		25,971		24,267		26,011		26,677
Mortgage-backed securities - agency		31,594		30,166		33,191		33,418
Collateralized mortgage obligations - agency		25,530		25,010		26,968		27,435
Asset-backed securities		2,451		2,418		2,599		2,590
Corporate bonds		14,950		14,829		12,200		12,403
	$	127,945	$	123,167	$	110,448	$	111,962

AFS investment securities increased $11.2 million, or 10.01%, to $123.2 million at March 31, 2022 from $112.0 million at December 31, 2021. We continue to look for opportunities to re-deploy funds from investment securities to higher yielding loans.

The composition and maturities of the available-for-sale investment securities portfolio at March 31, 2022 are summarized in the following table (in thousands). Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. The composition and maturity distribution of the securities portfolio is subject to change depending on rate sensitivity, capital, and liquidity needs. The weighted average yield was calculated using net income (interest accrual plus or minus accretion/amortization) divided by ending book value.

	Less than one year					More than one year through five years					More than five years through ten years					More than ten years					Total securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield
U.S. government agencies	$	—		—		$	17,970		0		$	9,479		1.37	%	$	—		0.00	%	$	27,449		1.47	%
State and municipal obligations		—		—		$	—		—		$	7,387		1.99	%	$	18,584		2.26	%		25,971		2.19	%
Mortgage-backed securities - agency		—		—			165		3.80	%		8,498		0.86	%		22,931		1.29	%		31,594		1.19	%
Collateralized mortgage obligations - agency		—		—			—		—			12,241		1.96	%		13,289		0.20	%		25,530		1.05	%
Asset-backed securities		—		—			—		—			590		0.43	%		1,861		0.79	%		2,451		0.71	%
Corporate bonds		—		—			—		—			14,200		3.98	%		750		4.92	%		14,950		4.03	%
Total securities available-for-sale	$	—		0.00	%	$	18,135		1.55	%	$	52,395		2.21	%	$	57,415		1.38	%	$	127,945		1.75	%

Loans

The following table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated (in thousands). Other construction and land loans include residential acquisition and development loans and loans on commercial undeveloped land and one-to-four family improved and unimproved lots. Commercial real estate loans include loans on non-residential owner-occupied and non-owner-occupied real estate, multi-family, and owner-occupied investment property. Commercial and industrial loans include unsecured commercial loans and commercial loans secured by business assets.

	March 31, 2022					December 31, 2021
	Balance			Percent		Balance			Percent
Real estate mortgage loans:
One-to four-family residential	$	132,895			14.19	$	132,836			14.22
Commercial real estate		415,571			44.37		423,552			45.36
Home equity loans and lines of credit		20,155			2.15		21,568			2.31
Residential construction		37,260			3.98		38,881			4.16
Other construction and land		80,540			8.60		75,682			8.10
Commercial		243,860			26.04		234,355			25.09
Consumer		6,351			0.67		7,129			0.76
Loans receivable, gross		936,632			100.00		934,003			100.00
Net deferred loan costs (fees)		(442	)				(528	)

Loans receivable, net of deferred fees	$	936,190				$	933,475

Commercial real estate loan balances contracted during the first quarter primarily due to significant paydowns of existing loans.

Included in commercial loans are PPP loans totaling $0.1 million and $1.3 million as of March 31, 2022 and December 31, 2021, respectively.

Delinquent Loans

When a loan becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. When a loan becomes 30 days or more past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and the Bank, the borrower is referred to the Bank’s Credit Administration staff to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined that restructuring is not a viable option, the Bank’s counsel is instructed to pursue foreclosure.

The accrual of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs first, unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction to the principal outstanding until the loan is returned to accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.

If a loan is modified in a troubled debt restructure (“TDR”), the loan is generally placed on non-accrual until there is a period of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive months, and the ultimate collectability of all amounts contractually due is not in doubt. For a discussion of TDRs, see the section entitled “Troubled Debt Restructurings” below.

The following table sets forth certain information with respect to our loan portfolio carrying balances of delinquencies at the dates indicated (in thousands). We had one loan with a balance of $50 thousand that was more than 90 days past due and still accruing interest as of March 31, 2022 that was not 98% guaranteed by the issuing agency. We had no loans 90 days or more past due that are still accruing interest as of December 31, 2021 that are not 98% guaranteed by the issuing agency.

	Delinquent loans
	30-59 Days			60-89 Days			90 Days and over			Total
March 31, 2022
One-to-four family residential	$	—		$	—		$	50		$	50
Commercial real estate		34			—			—			34
Commercial		—			—			106			106
Consumer		54			—			267			321
Total delinquent loans	$	88		$	—		$	423		$	511
% of total loans, net		0.01	%		0.00	%		0.05	%		0.05	%

December 31, 2021
One-to-four family residential	$	—		$	—		$	50		$	50
Commercial		54			—			—			54
Consumer		—			—			590			590
Total delinquent loans	$	54		$	—		$	640		$	694
% of total loans, net of deferred fees and costs		0.01	%		0.00	%		0.07	%		0.07	%

Total delinquencies as a percentage of loans decreased from 0.07% at December 31, 2021 to 0.05% at March 31, 2022. Delinquent loans decreased $0.2 million, or 26.37%, to $0.5 million at March 31, 2022 from $0.7 million at December 31, 2021. We continue to focus on collection efforts and favorable resolutions.

Nonperforming Assets

Nonperforming loans include all loans past due 90 days and over that are not 98% guaranteed by the issuing agency, certain impaired loans, and TDR loans that have not yet established a satisfactory period of payment performance (some of which may be contractually current). Nonperforming assets include nonperforming loans and other real estate owned (“REO”). The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated (in thousands).

	March 31,			December 31,
	2022			2021
Nonaccrual loans:
Real estate loans:
One-to-four family residential	$	—		$	107
Commercial		132			767
Commercial		429			473
Consumer		15			2
Loans 90 days past due:
Real estate loans:
One-to-four family residential		50			—
Consumer		2			—
Total nonperforming loans		628			1,349

REO:
Other construction and land		842			842
Total foreclosed real estate		842			842
Total nonperforming assets	$	1,470		$	2,191

TDRs still accruing	$	1,735		$	1,780

Ratios:
Nonperforming loans to total loans		0.07	%		0.14	%
Nonperforming assets to total assets		0.12	%		0.18	%

The decrease in nonperforming loans and nonperforming assets is the result of the successful resolution and disposal of nonperforming loans and nonperforming assets by means of restructure, foreclosure, deed in lieu of foreclosure and sales.

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession that we would not otherwise consider, for other than an insignificant period of time, the related loan is classified as a TDR. We strive to identify borrowers in financial difficulty early so that we may work with them to modify their loans before they reach nonaccrual status. Modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates, periods of interest-only payments, and principal deferments. A restructuring that results in only a delay in payments that is insignificant is not considered an economic concession. While unusual, there may be instances of forgiveness of loan principal. We individually evaluate all substandard loans that experience a modification of terms to determine if a TDR has occurred.

All TDRs over $200,000 are considered to be impaired loans and are reported as such for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and the ultimate collectability of all amounts contractually due is not in doubt. We may also remove a loan from TDR and impaired status if the loan is subsequently restructured and at the time of the subsequent restructuring the borrower is not experiencing financial difficulties and, under the terms of the subsequent restructuring agreement, no concession has been granted to the borrower.

Classification of Loans

The following table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified as “doubtful” or “loss” are charged off immediately (in thousands).

	March 31,			December 31,
	2022			2021
Classified loans:
Substandard	$	3,879		$	4,304
Doubtful		—			—
Loss		—			—
Total classified loans:		3,879			4,304
Special mention		7,219			9,647
Total criticized loans	$	11,098		$	13,951

Total classified loans as a % of total loans, net		0.41	%		0.46	%
Total criticized loans as a % of total loans, net		1.19	%		1.49	%

Management continues to dedicate resources to monitoring and resolving classified and criticized loans.

Allowance for Loan Losses

The allowance for loan losses reflects our estimates of probable losses inherent in our loan portfolio at the balance sheet date. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of our loans in light of historical experience, the nature and volume of our loan portfolio, adverse situations that may affect our borrowers’ abilities to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology for determining the allowance for loan losses has two main components: the evaluation of individual loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics.

A loan is considered impaired when it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan. We individually evaluate loans, or relationships, greater than $200,000 for impairment that are classified as nonaccrual, TDRs, or performing substandard loans. If the impaired loan is considered collateral dependent, a charge-off is taken based upon the appraised value of the property less an estimate of selling costs if foreclosure or sale of the property is anticipated. If the impaired loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted cash flows after consideration of modifications and the likelihood of future default and prepayment.

The allowance for homogenous loans consists of a base loss reserve and a qualitative reserve. The loss rates for the base loss reserve, segmented into seven loan categories, contain average net loss rates ranging from approximately 0.00% to 0.58%.

The qualitative reserve adjusts the weighted average loss rates utilized in the base loss reserve for trends in the following internal and external factors:

Changes in lending and loan review policies;

Economic conditions – including unemployment rates, federal macroeconomic data, housing prices and sales, and regional economic outlooks;

Changes in the nature and volume of the portfolio and in the terms of the loans;

Experience, ability, and depth of lending management;

Volume and severity of past due, nonaccrual, and classified loans;

Changes in the quality of the institution’s loan review system;

Collateral values;

Loan concentrations and loan growth; and

The effect of other external factors such as competition, legal and regulatory requirements on the level of estimated credit losses.

Qualitative reserve adjustment factors are decreased for favorable trends and increased for unfavorable trends. There is no certainty that our ALL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast.

The following table summarizes the net charge-off detail as a percentage of average loans by loan composition for the periods indicated (in thousands).

	Three Months Ended March 31,
	2022						2021
	Amount			Percent			Amount			Percent
Real Estate:
One-to-four family residential	$	(2	)		0.00	%	$	14			0.01	%
Commercial real estate		(52	)		-0.01	%		—			0.00	%
Home equity loans and lines of credit		—			0.00	%		—			0.00	%
Residential construction		—			0.00	%		—			0.00	%
Other construction and land		(19	)		-0.02	%		—			0.00	%
Commercial		155			0.05	%		(159	)		-0.06	%
Consumer		—			0.00	%		—			0.00	%
Total	$	82					$	(145	)

Ratios:
Net charge-offs to average loans outstanding					0.01	%					(0.02	)%
Allowance to nonperforming loans at period end (1)					2,221.18	%					3,531.06	%
Allowance to total loans at period end					1.49	%					1.46	%

(1)

At March 31, 2022, total nonperforming loans were comprised of nonaccrual loans and loans 90 days past due and still accruing.

Our allowance as a percentage of total loans increased to 1.49% at March 31, 2022 from 1.47% at December 31, 2021, and 1.46% at March 31, 2021, primarily as the result of loan growth in our more heavily reserved CarBucks segment.

We have continued to experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss rate used in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated from the calculation as time passes. Our coverage ratio of nonperforming loans increased to 2,221.18% at March 31, 2022 from 1,017.27% at December 31, 2021 primarily as the result of the decreased balance of nonperforming loans during the period.

Deposits

The following table presents deposits by category and percentage of total deposits as of the periods indicated (in thousands).

	March 31, 2022				December 31, 2021
	Balance		Percent		Balance		Percent
Noninterest-bearing demand	$	283,685		25.6	$	280,665		26.5
Interest-bearing demand		63,004		5.7		52,479		5.0
Money Market		547,207		49.3		500,862		47.3
Savings		17,003		1.5		16,106		1.5
Time Deposits		198,005		17.9		208,929		19.7
	$	1,108,904		100.0	$	1,059,041		100.0

At March 31, 2022 and December 31, 2021, we estimate that we have approximately $440.1 million and $393.8 million, respectively, in uninsured deposits including related interest accrued and unpaid. Since it is not reasonably practicable to provide a precise measure of uninsured deposits, these amounts are estimates and are based on the same methodologies and assumptions used for the Bank’s regulatory reporting requirements by the FDIC for the Call Report.

As indicated in the above table, deposit balances increased approximately $49.9 million, or 4.71%, for the three months ended March 31, 2022 compared to December 31, 2021. The increase in total deposits was mainly attributable to the $46.3 million, or 9.25%, increase in money market accounts and $10.5 million, or 20.06%, increase in interest-bearing demand accounts, partially offset by a $10.9 million, or 5.23%, decline in time deposits.

Discussion of Results of Operation

Comparison of the Three Months Ended March 31, 2022 and March 31, 2021.

General

Net income for the three months ended March 31, 2022 was $4.1 million, compared to $3.6 million for the same period in 2021. The increase in net income for the period was primarily the result of increases in net interest income and of $1.0 million, partially offset by an increase in noninterest expenses totaling $0.3 million.

Net Interest Income

Net interest income increased $1.0 million, or 8.10%, to $13.0 million for the three months ended March 31, 2022, compared to $12.1 million for the same period in 2021. The increase in net interest income was primarily due to a higher volume in loans (both Core Bank and CarBucks) and taxable investments, and decreases in costs on time deposits. This was partially offset by the decline in yields on our Core Bank loans and taxable investments during the period.

The following table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average tax-equivalent yields and cost for the periods indicated. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs that are amortized or accreted to interest income or expense.

	For the Three Months Ended March 31,
	2022								2021
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans, Core Bank⁽¹⁾	$	834,518		$	8,275		4.02	%	$	807,600		$	8,525		4.28	%
Loans, Carbucks⁽²⁾		108,282			5,306		19.87	%		87,319			4,613		21.43	%
Investments - taxable		107,903			466		1.75	%		101,326			268		1.07	%
Investments - tax exempt⁽³⁾		12,244			87		2.88	%		12,738			88		2.80	%
Federal funds sold and other interest earning deposits		115,281			40		0.14	%		57,178			19		0.13	%
Other investments, at cost		2,893			15		2.10	%		5,979			34		2.31	%

Total interest-earning assets		1,181,121			14,189		4.87	%		1,072,140			13,547		5.12	%

Noninterest-earning assets		34,294								36,795

Total assets	$	1,215,415							$	1,108,935

Interest-bearing liabilities:
Savings accounts	$	16,252		$	4		0.10	%	$	10,877		$	3		0.10	%
Time deposits		203,116			156		0.31	%		274,526			495		0.73	%
Money market accounts		519,485			503		0.39	%		400,168			452		0.46	%
Interest bearing transaction accounts		52,573			24		0.19	%		63,962			43		0.27	%
Total interest bearing deposits		791,426			687		0.35	%		749,533			993		0.54	%

FHLB advances		5,000			5		0.41	%		16,000			35		0.88	%
Junior subordinated debentures		35,876			433		4.89	%		35,757			433		4.91	%
Other borrowings		—			—		0.00	%		151			—		0.96	%

Total interest-bearing liabilities		832,302			1,125		0.55	%		801,441			1,461		0.74	%

Noninterest-bearing deposits		278,227								215,073

Other non interest bearing liabilities		6,210								5,759

Total liabilities		1,116,739								1,022,273
Total equity		98,676								86,662

Total liabilities and equity	$	1,215,415							$	1,108,935


Tax-equivalent net interest income				$	13,064							$	12,086


Net interest-earning assets⁽⁴⁾	$	348,819							$	270,699

Average interest-earning assets to interest-bearing liabilities		141.91	%							133.78	%

Tax-equivalent net interest rate spread⁽⁵⁾							4.32	%							4.39	%
Tax-equivalent net interest margin⁽⁶⁾							4.49	%							4.57	%

⁽¹⁾

Core Bank is the bank’s primary business to provide traditional deposit and lending products and services to commercial and retail banking clients.

⁽²⁾

Carbucks is the bank’s division that provides specialty floor plan lending to small automobile dealers in over 20 states.

⁽³⁾

Tax exempt investments are calculated giving effect to a 21% federal tax rate, or $18,000 and $19,000 for the three months ended March 31, 2022 and 2021, respectively.

⁽⁴⁾

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

⁽⁵⁾

Tax-equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.

⁽⁶⁾

Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the absolute values of changes due to rate and the changes due to volume.

	For the Three Months Ended March 31, 2022
	Compared to the Three Months Ended March 31, 2021
	Increase (decrease) due to:
(In thousands)	Volume			Rate			Total
Interest-earning assets:
Loans - Core Bank (1)	$	278		$	(528	)	$	(250	)
Loans - CarBucks (1)		1,046			(353	)		693
Investment - taxable		18			180			198
Investments - tax exempt (2)		(3	)		2			(1	)
Interest-earning deposits		20			1			21
Other investments, at cost		(16	)		(3	)		(19	)
Total interest-earning assets		1,343			(701	)		642

Interest-bearing liabilities:
Savings accounts		1			—			1
Time deposits		(106	)		(233	)		(339	)
Money market accounts		122			(71	)		51
Interest bearing transaction accounts		(7	)		(12	)		(19	)
FHLB advances		(17	)		(13	)		(30	)
Junior subordinated debentures		—			—			—
Other borrowings		—			—			—
Total interest-bearing liabilities		(7	)		(329	)		(336	)
Change in tax-equivalent net interest income	$	1,350		$	(372	)	$	978

(1)

Nonaccrual loans are included in the above analysis.

(2)

Interest income on tax exempt loans and investments are adjusted for based on a 21% federal tax rate.

Net interest income before provision for loan losses increased to $13.0 million for the three months ended March 31, 2022, compared to $12.1 million for the same period in 2021, due to improvements in volume, partially offset by unfavorable movements in interest rates.

The increase in tax-equivalent net interest income of $1.3 million related to volume was primarily the result of higher average loan (both Core Bank and CarBucks) which increased $47.9 million, and a $71.4 million decrease in average time deposits for the three months ended March 31, 2022 compared to the same period in 2021. The increase in average loan and taxable investment balances was partially offset by increases of $119.3 million in money market balances.

The decrease in tax-equivalent net interest income of $0.4 million related to rate was primarily the result of decreased costs on time deposits and decreased yields on Core Bank and CarBucks loans.

Our tax-equivalent net interest margin was 4.49% for the three months ended March 31, 2022, compared to 4.57% for the same period in 2021, a decrease of eight basis points. The decrease in net interest margin was primarily attributable to higher average loan balances combined with interest rate reductions on our cost of funds partially offset by reduced yields on our Core Bank and CarBucks loans.

Provision for Loan Losses

We recorded a provision for loan losses for the three months ended March 31, 2022 of $0.3 million due to organic loan growth and certain qualitative adjustments in response to shifts in used car demand which could impact our CarBucks portfolio. This compares to a $0.2 million provision for loan losses in for the same period in 2021. We are experiencing continued stabilization in asset quality, low charge-off amounts and a decline in the historical loss rates used in our allowance for loan losses model. In light of ongoing supply chain disruptions, labor shortages and the associated impact on monetary policy, there is a risk that loss rates could increase.

Noninterest Income

The following table summarizes the components of noninterest income and the corresponding changes between the three months ended March 31, 2022 and 2021 (in thousands):

	Three Months Ended March 31,
	2022		2021		Change
Service charges on deposit accounts	$	334	$	268	$	66
Bank owned life insurance		78		92		(14	)
Net gain on sale of premises and equipment		24		6		18
Other noninterest income		189		209		(20	)
Total noninterest income	$	625	$	575	$	50

Our noninterest income increased less than $0.1 million to $0.6 million in the three months ended March 31, 2022, compared to the same period in 2021 due primarily to increases in service charges on deposit accounts.

Noninterest Expense

The following table summarizes the components of noninterest expense and the corresponding change between the three months ended March 31, 2022 and 2021 (in thousands):

	Three Months Ended March 31,
	2022		2021		Change
Compensation and employee benefits	$	5,537	$	5,074	$	463
Net occupancy		586		564		22
Federal deposit insurance		116		153		(37	)
Professional and advisory		230		309		(79	)
Data processing		493		533		(40	)
Marketing and advertising		70		44		26
Net cost of operation of real estate owned		23		110		(87	)
Other noninterest expense		929		880		49
Total noninterest expenses	$	7,984	$	7,667	$	317

Our noninterest expense increased $0.3 million to $8.0 million in the three months ended March 31, 2022, compared to the same period in 2021, primarily as the result of increases in compensation and employee benefits of $0.5 million. This increase was partially offset by a $0.1 million decrease in the net cost of operation of real estate owned. The increase in compensation and employee benefits is primarily related to increased full-time equivalent employees combined with annual raises and increases in employee benefits, incentives and commissions. The decrease in the net cost of operation of real estate owned is primarily related to a decrease in writedowns of real estate owned.

Income Taxes

Income tax expense totaled $1.3 million for the three months ended March 31, 2022, compared to $1.1 million for the same period in 2021. Income tax expense benefited from tax-exempt income related to municipal bond investments and BOLI income resulting in effective tax rates of 23.6% and 24.1% for the three months ended March 31, 2022 and 2021, respectively.

We continue to have unutilized net operating losses for state income tax purposes and no material current tax receivables or liabilities.

Discussion of Segment Results

See Note 9, “Reportable Segments” in notes to the consolidated financial statements included under Item 1 -“Financial Statements” for additional disclosures related to our reportable business segments. Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the “Noninterest income” and “Noninterest expense” sections above.

Comparison of the Three Months Ended March 31, 2022 and 2021.

	As of and for the Three Months Ended March 31, 2022
	Core Bank			CarBucks			Other			Total
Interest income	$	8,329		$	5,306		$	536		$	14,171
Interest expense		203			489			433			1,125
Net interest income		8,126			4,817			103			13,046
Provision for loan losses		(324	)		632			—			308
Noninterest income		482			64			79			625
Noninterest expense		5,289			2,679			16			7,984
Net income before taxes		3,643			1,570			166			5,379
Income tax expense		904			371			(4	)		1,271
Net income	$	2,739		$	1,199		$	170		$	4,108

Total assets	$	1,006,678		$	108,229		$	138,345		$	1,253,252

	As of and for the Three Months Ended March 31, 2021
	Core Bank			CarBucks			Other			Total
Interest income	$	8,577		$	4,613		$	339		$	13,529
Interest expense		663			365			433			1,461
Net interest income		7,914			4,248			(94	)		12,068
Provision for loan losses		523			(281	)		—			242
Noninterest income		447			37			91			575
Noninterest expense		5,217			2,435			15			7,667
Net income before taxes		2,621			2,131			(18	)		4,734
Income tax expense		631			513			(4	)		1,140
Net income	$	1,990		$	1,618		$	(14	)	$	3,594

Total assets	$	924,723		$	78,756		$	132,869		$	1,136,348

Core Bank

Core Bank consists of commercial and consumer lending and full-service branches in its geographic region with its own management team. The branches provide a full range of traditional banking products as well as treasury services and merchant services.

Core Bank net income increased $0.8 million to $2.7 million for the three months ended March 31, 2022 compared to $2.0 million for the same period in 2021. Net interest income increased $0.2 million to $8.1 million for the three months ended March 31, 2022 from $7.9 million for the same period a year ago primarily due to increased loan volume and reduced funding costs, partially offset by a reduction in loan yield. Provision for loan losses decreased $0.8 million for the three months ended March 31, 2022 compared to 2021 due to lower net charge off activity and loan balance contraction during the first quarter of 2022 as opposed to loan balance growth during the first quarter of 2021. Noninterest expense increased $0.1 million to $5.3 million for the 2022 period compared to $5.2 million for the same period in 2021 due primarily to an increase in compensation and employee benefits expense in 2022.

CarBucks

CarBucks provides specialty floor plan inventory financing for more than 1,600 small automobile dealers in over 20 states. Credit lines are established for each approved dealer using the Company’s Board approved underwriting guidelines. Advances and repayments on credit lines averaging $0.1 million are vehicle specific. The inventory typically consists of over 12,000 floored used vehicles with an average price of $8,000 per unit, generally has an average 67-day turnover, and generates approximately $300 in financing fees per vehicle which is included in loan interest income.

CarBucks net income decreased $0.4 million to $1.2 million for the three months ended March 31, 2022 compared to $1.6 million for the same three-month period in 2021. Net interest income increased $0.6 million to $4.8 million for the 2022 period from $4.2 million for the same period a year ago primarily due to increased fees related to increases in inventory. Provision for loan losses increased $0.9 million for the three months ended March 31, 2022 compared to 2021 due to increased net charge offs and higher loan balance, partially offset by lower qualitative adjustments. Noninterest expense increased $0.2 million to $2.7 million for the 2022 period compared to $2.4 million for the same period in 2021 due primarily to an increase in compensation and employee benefits expense in 2022.

Other

Other includes parent company transactions, investment securities portfolio, BOLI, excess death benefits, net intercompany eliminations, and certain other activities not currently allocated to the aforementioned segments.

Other net income increased $0.2 million to $0.2 million for the three months ended March 31, 2022 compared to the same period in 2021 primarily due to increased interest income related to the Company’s taxable investments, partially offset by a decrease in BOLI income.

Liquidity and Capital Resources

Liquidity and Market Risk. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of Atlanta (“FHLB”), and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our ALCO, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We have not experienced any unusual pressure on our deposit balances or our liquidity position as a result of the COVID-19 pandemic. We believe that, as of March 31, 2022, we have enough sources of liquidity to satisfy our liquidity needs for the next twelve months and thereafter.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in FHLB and Federal Reserve Bank of Richmond (“FRB”) interest-earning deposits and investment securities and are also used to pay off short-term borrowings. At March 31, 2022, cash and cash equivalents totaled $159.2 million. Included in this total was $131.6 million held at the FRB, $1.2 million held at the FHLB, and $21.8 million held at correspondent banks in interest-earning accounts.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our consolidated statements of cash flows included in our unaudited consolidated financial statements of this From 10-Q. The following summarizes the most significant sources and uses of liquidity during the three months ended March 31, 2022 and 2021 (in thousands):

	Three Months Ended March 31,
	2022			2021
Investing activities:
Purchases of investments	$	(20,730	)	$	(12,644	)
Maturities and principal repayments of investments		3,025			5,495
Net increase in loans		(2,901	)		(11,289	)
Redemption of other investments, at cost		500			—

Financing activities:
Net increase in deposits	$	49,863		$	44,077
Repurchase of common stock		—			(2,392	)
Dividends paid on common stock		(672	)		—

In addition, because the Company is a separate entity from the Bank, it must provide for its own liquidity. The Company is responsible for payment of dividends declared on its common and preferred stock and interest and principal on any outstanding debt or trust preferred securities. The Company currently has internal capital resources to meet these obligations. While the Company has access to capital, the ultimate sources of its liquidity are dividends from the Bank and tax allocation agreements, which are limited by applicable law and regulations. The Bank paid no dividends to the Company in the three months ended March 31, 2022 or 2021.

At March 31, 2022, we had $322.5 million in outstanding commitments to extend credit through unused lines of credit and stand-by letters of credit.

Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates of deposit. Based on historical experience and current market interest rates, we anticipate that following their maturity we will retain a large portion of our retail certificates of deposit with maturities of one year or less as March 31, 2022.

In addition to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Our securities portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed securities (which allow borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise call options and borrowers to prepay higher-rate loans, producing higher than otherwise scheduled cash flows.

Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have a borrowing agreement with the FHLB. The following summarizes our borrowing capacity as of March 31, 2022 (in thousands):

	Total		Used		Unused
	Capacity		Capacity		Capacity
FHLB
Loan collateral capacity	$	356,037
Pledgeable marketable securities		122,667
FHLB totals		478,704	$	5,000	$	473,704
Fed funds lines		49,000		—		49,000
	$	527,704	$	5,000	$	522,704

Capital Resources. Shareholders’ equity decreased $1.0 million to $96.4 million at March 31, 2022 compared to $97.4 million at December 31, 2021. This decrease was primarily attributable to net income of $4.1 million, stock-based compensation of $0.1 million, and stock options exercised of $0.4 million offset by after-tax decreases in market value of AFS investment securities of $4.9 million and dividends declared of $0.7 million.

The tables below summarize the capital amounts and ratios of the Bank and the minimum regulatory requirements in accordance with Basel III and the prompt corrective action provisions at March 31, 2022 and December 31, 2021 (dollars in thousands).

	Actual					For Capital Adequacy Purposes (1)					To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2022:
Tier 1 Leverage Capital	$	127,808		10.52	%	$	48,575		>4.0	%	$	60,718		>5.0	%
Common Equity Tier 1 Capital	$	127,808		12.59	%	$	71,073		>7.0	%	$	65,996		>6.5	%
Tier 1 Risk-based Capital	$	127,808		12.59	%	$	86,303		>8.5	%	$	81,226		>8.0	%
Total Risk-based Capital	$	140,515		13.84	%	$	106,609		>10.5	%	$	101,533		>10.0	%

As of December 31, 2021:
Tier 1 Leverage Capital	$	123,344		10.21	%	$	48,317		>4.0	%	$	60,396		>5.0	%
Common Equity Tier 1 Capital	$	123,344		12.24	%	$	70,517		>7.0	%	$	65,480		>6.5	%
Tier 1 Risk-based Capital	$	123,344		12.24	%	$	85,628		>8.5	%	$	80,591		>8.0	%
Total Risk-based Capital	$	135,951		13.50	%	$	105,776		>10.5	%	$	100,739		>10.0	%

¹⁾

Includes capital conservation buffer of 2.50%.

The tables below summarize the capital amounts and ratios of the Company and the minimum⁽¹⁾regulatory requirements in accordance with Basel III at March 31, 2022, and December 31, 2021 (in thousands).

	Actual					For Capital Adequacy Purposes (2)
	Amount		Ratio			Amount		Ratio
As of March 31, 2022:
Tier I Leverage Capital	$	107,676		8.86	%	$	48,587		>4.0	%
Common Equity Tier 1 Capital	$	99,428		9.78	%	$	71,134		>7.0	%
Tier I Risk-based Capital	$	107,676		10.60	%	$	86,378		>8.5	%
Total Risk Based Capital	$	148,040		14.57	%	$	106,702		>10.5	%

As of December 31, 2021:
Tier I Leverage Capital	$	103,730		8.59	%	$	48,327		>4.0	%
Common Equity Tier 1 Capital	$	95,482		9.47	%	$	70,574		>7.0	%
Tier I Risk-based Capital	$	103,730		10.29	%	$	85,696		>8.5	%
Total Risk Based Capital	$	143,963		14.28	%	$	105,860		>10.5	%

(1)

Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the FRB (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

(2)

Includes capital conservation buffer of 2.50%.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2022. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of March 31, 2022, the end of the period covered by this Form 10-Q, the Company maintained effective disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

There have been no changes to the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In the ordinary course of operations, we are often involved in legal proceedings. In the opinion of management, neither the Company nor the Bank is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the quarter ended March 31, 2022.

Item 1A.

Risk Factors

There have been no material changes to the risk factors that we have previously disclosed in the “Risk Factors” section in our 2021 Form 10-K as filed with the SEC on March 31, 2022.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

(d) Exhibits. See Exhibit Index Below

Exhibit No.		Description
31.1		Certification of Chief Executive Officer of GrandSouth Bancorporation pursuant to Exchange Act Rule 13a-14(a).
31.2		Certification of Chief Financial Officer of GrandSouth Bancorporation pursuant to Exchange Act Rule 13a-14(a).
32.1		Certifications of the Chief Executive Officer and the Chief Financial Officer of GrandSouth Bancorporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Financial Statements filed in Inline XBRL format.
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 16, 2022	GrandSouth Bancorporation
	By:	/s/ John B. Garrett
	Name: John B. Garrett
	Title: Chief Financial Officer
	(Authorized Officer)