EXHIBIT 13

                            GRANDSOUTH BANCORPORATON

                   Portions of Annual Report to Shareholders
                           Incorporated by Reference
                             into December 31, 2006
                                  Form 10-KSB
























<PAGE>

                             BUSINESS OF THE COMPANY

         GrandSouth   Bancorporation   (the   "Company")  is  a  South  Carolina
corporation  organized in 2000 under the laws of South  Carolina for the purpose
of being a holding company for GrandSouth Bank (the "Bank"). On October 2, 2000,
pursuant  to a  Plan  of  Exchange  approved  by  the  shareholders,  all of the
outstanding  shares of capital  stock of the Bank were  exchanged  for shares of
common  stock of the  Company  and the  Company  became  the owner of all of the
outstanding  capital  stock of the Bank.  The  Company  presently  engages in no
business other than that of owning the Bank and has no employees.

         The Bank is a South Carolina  state bank,  which was  incorporated  and
commenced  operations as a commercial  bank in 1998.  The Bank operates from its
offices in  Greenville,  Fountain Inn and  Anderson,  South  Carolina.  The main
office is located at 381 Halton Road, in Greenville,  South Carolina. One branch
office is located at 325 South Main Street, in Fountain Inn, South Carolina; and
the other is at 1601 North Fant Street, Anderson, South Carolina.

         The Bank  offers a full  array of  commercial  bank  services.  Deposit
services include business and personal checking accounts, NOW accounts,  savings
accounts,  money market  accounts,  various term  certificates  of deposit,  IRA
accounts, and other deposit services.  Most of the Bank's deposits are attracted
from  individuals  and  small  businesses.  The  Bank  does not  offer  trust or
brokerage services.

         The Bank  offers  secured  and  unsecured,  short-to-intermediate  term
loans,  with  floating and fixed  interest  rates for  commercial,  consumer and
residential purposes. Consumer loans include: car loans, home equity improvement
loans  (secured  by first and second  mortgages),  personal  expenditure  loans,
education  loans,  overdraft  lines of credit,  and the like.  Commercial  loans
include short term  unsecured  loans,  short and  intermediate  term real estate
mortgage  loans,  loans  secured by listed  stocks,  loans secured by equipment,
inventory,  accounts  receivable,  and the like.  Management  believes  that the
credit staff possesses  knowledge of the community and lending skills sufficient
to enable the Bank to maintain a sufficient volume of high quality loans.

            MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

          The  Company's  common  stock  trades  over the counter and trades are
reported  on the OTC  Bulletin  Board (the  "OTCBB")  under the  symbol  "GRRB."
Although  trading in the  Company's  common stock is limited (only 35,555 shares
traded in 2006),  the following table shows the reported high and low bid prices
of the Company's  common stock reported by the OTCBB for the periods shown.  The
prices reported reflect inter-dealer prices,  without retail mark-up,  mark-down
or commission and may not represent  actual  transactions.  The prices have been
adjusted to reflect a 10% stock dividend declared in July 2006.

                                     Year Ended                Year Ended
                                  December 31, 2006         December 31, 2005
                                  -----------------         -----------------
                                 Low            High       Low            High
                                 ---            ----       ---            ----

First Quarter ..............    $10.91         $14.09     $7.09          $8.41

Second Quarter .............    $11.36         $13.86     $7.55          $8.64

Third Quarter ..............    $13.75         $17.00     $8.41          $9.32

Fourth Quarter .............    $16.00         $19.75     $8.41         $12.27

         As of March 1, 2007, there were  approximately 575 holders of record of
the  Company's  common  stock,  excluding  individual  participants  in security
position listings.

         In each of 2005 and 2006,  the  Company  paid cash  dividends  totaling
$0.08 per  share.  The  dividend  policy of the  Company  as well as the Bank is
subject to the  discretion of their  respective  Boards of Directors and depends
upon a number of factors, including earnings,  financial conditions,  cash needs
and   general   business   conditions,   as   well  as   applicable   regulatory
considerations.  South Carolina banking regulations  restrict the amount of cash
dividends  that can be paid to the  Company  by the Bank,  and all of the Bank's
cash  dividends  to the Company  are subject to the prior  approval of the South
Carolina Commissioner of Banking.


                                       1
<PAGE>

GrandSouth  Bancorporation  will  furnish  free of  charge a copy of the  Annual
Report on Form 10-KSB filed with the  Securities  and Exchange  Commission  upon
written  request to J. B. Garrett,  Senior Vice  President  and Chief  Financial
Officer, GrandSouth Bancorporation,  381 Halton Road, Greenville, South Carolina
29607.


                           FORWARD-LOOKING STATEMENTS

          This report contains  "forward-looking  statements" within the meaning
of the  securities  laws.  All  statements  that are not  historical  facts  are
"forward-looking  statements." You can identify these forward-looking statements
through  our  use of  words  such  as  "may,"  "will,"  "expect,"  "anticipate,"
"believe," "intend," "estimate," "project, " "continue," or other similar words.
Forward-looking statements include, but are not limited to, statements regarding
our future business prospects,  revenues,  working capital,  liquidity,  capital
needs, interest costs, income, business operations and proposed services.

         These  forward-looking  statements  are based on current  expectations,
estimates  and  projections  about  our  industry,   management's  beliefs,  and
assumptions made by management.  Such information includes,  without limitation,
discussions  as to estimates,  expectations,  beliefs,  plans,  strategies,  and
objectives  concerning  our future  financial and operating  performance.  These
statements  are not guarantees of future  performance  and are subject to risks,
uncertainties  and  assumptions  that are difficult to predict,  particularly in
light of the fact that we are a relatively  new company  with limited  operating
history. Therefore, actual results may differ materially from those expressed or
forecasted  in such  forward-looking  statements.  The risks  and  uncertainties
include, but are not limited to:

     o    our growth and our ability to maintain growth;

     o    governmental  monetary and fiscal policies, as well as legislative and
          regulatory changes;

     o    the effect of interest rate changes on our volume and  composition  of
          deposits,  loan  demand  and the  value  of our  loan  collateral  and
          securities;

     o    the effects of competition from other financial institutions operating
          in our market area and  elsewhere,  including  institutions  operating
          locally,  regionally,  nationally and  internationally,  together with
          competitors   that  offer  banking  products  and  services  by  mail,
          telephone, computer and/or the Internet;

     o    potential losses arising from failure of customers to repay loans;

     o    failure of assumptions  underlying the  establishment of our allowance
          for loan losses, including the value of collateral securing loans; and

     o    loss of consumer  confidence and economic  disruptions  resulting from
          terrorist activities.

          We  undertake  no  obligation   to  publicly   update  or  revise  any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report might not occur.


            MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

         This  discussion is intended to assist in  understanding  the financial
condition  and  results  of  operations  of the  Company,  and should be read in
conjunction  with the Company's  consolidated  financial  statements and related
notes contained elsewhere herein. Because the Bank is responsible for all of the
Company's operations,  the discussion will refer to the results of operations of
the Bank.  Dollars are in thousands except for per share data,  unless otherwise
noted.



                                       2
<PAGE>

Critical Accounting Policies and Estimates

         The Company has adopted various accounting  policies,  which govern the
application of accounting  principles generally accepted in the United States of
America  in  the  preparation  of  the  Company's  financial   statements.   The
significant accounting policies of the Company are described in the footnotes to
the consolidated financial statements.

         Certain   accounting   policies  involve   significant   judgments  and
assumptions by management, which have a material impact on the carrying value of
certain assets and liabilities.  Management  considers these accounting policies
to be critical  accounting  policies.  The  judgments  and  assumptions  used by
management  are based on  historical  experience  and other  factors,  which are
believed to be reasonable under the circumstances.  Because of the nature of the
judgments and  assumptions  made by  management,  however,  actual results could
differ from these judgments and estimates, which could have a material impact on
the carrying  values of assets and  liabilities and the results of operations of
the Company.

         The  Company  believes  the  allowance  for loan  losses is a  critical
accounting  estimate that requires the most significant  judgments and estimates
used in  preparation  of its  consolidated  financial  statements.  Refer to the
"Allowance  for Loan Losses"  section  below for a detailed  description  of the
Company's  estimation process and methodology  related to the allowance for loan
losses.

Financial Condition

         The major  components of the Company's  balance sheet are broken out in
the table below:

                                        December 31, 2006    December 31, 2005
                                        -----------------    -----------------
Total assets ............................   $300,310             $251,948
Loans, net ..............................    224,338              197,312
Investments and fed funds ...............     55,809               35,270
Cash and due from banks .................      6,145                6,628
Total liabilities .......................    280,840              235,820
Deposits ................................    268,923              221,661
FHLB advances ...........................         --                8,500
Other borrowings ........................      8,247                3,900

 Shareholders' equity ...................     19,470               16,128


         The 2006  increase  in net loans of $27,026 is the result of  continued
strong loan  demand,  especially  in the real estate  construction  sector.  The
increase of $20,539 in investment  securities,  other  investments,  and federal
funds sold is the result of the Company's  management of the liquidity  needs of
the  institution.  The  increase of $47,262 in deposits in 2006 is the result of
opening  a new  branch  office  and new  money  market  accounts  opened  at all
locations  during the period.  Deposit  growth has also been  stimulated  by the
introduction of bill pay through our internet  banking site  www.GrandSouth.com,
as  well  as the  introduction  of a new  cash  management  tool  which  enables
commercial  customers to scan their  deposits and receive  immediate  credit for
them.  The  growth in  deposits  has  enabled  the bank to  reduce  the need for
additional  Federal  Home Loan  Bank  ("FHLB")  advances  as the  existing  ones
matured.  The net increase of $4,347 in other borrowings is the result of paying
off an old line of credit of $3,900 and issuing junior  subordinated  debentures
in the amount of  $8,247.  Proceeds  from the  issuance  of junior  subordinated
debentures were also used to inject approximately $3 million of capital into the
Bank. The junior subordinated debenture agreement was executed during the second
quarter of 2006 in order to enhance the  Company's  Tier 1 and the Bank's  total
capital. See "Issuance of Junior Subordinated Debentures" below. The increase of
$3,342 in shareholders'  equity is the result of $3,260 in earnings generated by
the Company, an increase in accumulated other comprehensive  income of $223, $12
in proceeds from the exercise of stock options and $110 in capital  generated by
the  recognition of the expense of granting  stock options,  offset by dividends
declared of $258.

        The largest  component of total assets is loans,  which are discussed in
detail later in these sections: "Loan Portfolio," and "Credit Risk."



                                       3
<PAGE>

Issuance of Junior Subordinated Debentures

           On May 3, 2006,  the  Company  sponsored  the  creation of a Delaware
statutory trust, GrandSouth Capital Trust I (the "Trust"), and is the sole owner
of the $247 in common securities issued by the Trust. On May 10, 2006, the Trust
issued  $8,000  in  floating  rate  capital  securities.  The  proceeds  of this
issuance,  and the amount of the Company's  investment in the common securities,
were used to acquire  $8,247  principal  amount of the  Company's  floating rate
junior subordinated debt securities due 2036 ("Debentures").  The debentures are
prepayable  without  penalty  anytime  after  their  fifth  anniversary.   These
securities,  and the accrued interest  thereon,  now constitute the Trust's sole
assets. Under current Federal Reserve regulations, these securities are eligible
to be treated as Tier 1 capital by the Company.  Upon repayment or redemption of
the Debentures,  the Trust will use the proceeds of the transaction to redeem an
equivalent  amount of capital  securities  and common  securities.  The  Trust's
obligations under the capital securities are  unconditionally  guaranteed by the
Company. For further discussion, please see note 9 to the Company's consolidated
financial statements.


Earnings Performance

         The Company's income and expense items are highlighted in the following
table:

                                        December 31, 2006     December 31, 2005
                                        -----------------     -----------------
Net income ..............................    $ 3,260                $ 2,361
Earnings per share, basic(1) ............    $  0.97                $  0.83
Earnings per share, diluted(1)(2) .......    $  0.89                $  0.69

Net interest income (3) .................    $12,770                $ 9,623
Noninterest income (4) ..................        759                    580
Provision for loan losses ...............      1,110                  1,125
Noninterest expenses (5) ................      7,398                  5,562

     (1)  Basic and diluted  earnings  per share for 2005 have been  restated to
          reflect the 10% stock dividend declared in July 2006.
     (2)  Diluted  earnings per share reflect the effect of the assumed exercise
          of unexercised stock options outstanding, and for 2005, the conversion
          of subordinated debentures.
     (3)  Net  interest  income is the  difference  between  interest  earned on
          interest-earning   assets  and  interest   paid  on   interest-bearing
          liabilities.
     (4)  Noninterest   income  is  principally   service   charges,   fees  and
          commissions,  and gains on sales of investment  securities  and assets
          acquired in the settlement of loans.
     (5)  Noninterest  expenses  consist  principally  of salaries and benefits,
          occupancy and equipment expenses and data processing expenses.

Net Interest Income

         Net   interest   income   is  the   amount   of   interest   earned  on
interest-earning  assets (loans,  investment securities,  time deposits in other
banks  and  federal  funds  sold),   less  the  interest  expenses  incurred  on
interest-bearing liabilities (interest-bearing deposits and borrowed money), and
is the principal source of the Bank's earnings.  Net interest income is affected
by the level of interest rates,  volume and mix of  interest-earning  assets and
interest-bearing liabilities and the relative funding of these assets.

        During  the year  ended  December  31,  2006,  net  interest  income was
$12,770.  For the year ended December 31, 2005, net interest  income was $9,623.
This increase was primarily attributable to an increase in the volume of average
interest-earning  assets,  which  increased to $265,268 in 2006 from $217,014 in
2005. The average yield on  interest-earning  assets  increased to 8.90% in 2006
from  7.43% in 2005,  while the  average  cost of  interest-bearing  liabilities
increased  to  4.43%  in 2006  from  3.17% in  2005.  The net  yield on  average
interest-earning  assets  increased  to  4.81%  in  2006  from  4.43%  in  2005,
increasing the benefit of the increased volume of interest-earning assets.


                                       4
<PAGE>

          Distribution of Assets, Liabilities and Shareholders' Equity;
                    Interest Rates and Interest Differential

The table below  provides a detailed  analysis of the average yields and average
effective  rates on the  categories  of  interest  earning  assets and  interest
bearing liabilities for the years ended December 31, 2006, 2005 and 2004.

<TABLE>
<CAPTION>
                                          Year ended December 31, 2006   Year ended December 31, 2005   Year ended December 31, 2004
                                          ----------------------------   ----------------------------   ----------------------------
                                                     Interest                      Interest                      Interest
                                          Average   Income(1)/   Yields/  Average Income(1)/  Yields/    Average  Income/  Yields/
                                          Balances    Expense     Rates   Balances  Expense   Rates      Balances  Expense   Rates
                                          --------    -------     -----   --------  -------   -----      --------  -------   -----
Assets
<S>                                       <C>         <C>         <C>     <C>       <C>       <C>        <C>       <C>        <C>
Federal funds sold and interest
 bearing deposits ......................  $ 13,144    $   651     4.95%   $  9,253  $   311   3.36%      $  6,494  $    83    1.28%
Investment securities ..................    36,451      1,622     4.45      24,185      895   3.70         16,629      525    3.16
Loans (2) ..............................   215,673     21,338     9.89     183,576   14,917   8.13        162,044    9,901    6.11
                                          --------    -------             --------  -------              --------  -------
  Total interest earning assets ........   265,268     23,611     8.90     217,014   16,123   7.43        185,167   10,509    5.68
Cash and due from banks ................     4,087                           3,737                          2,504
Allowance for loan losses ..............    (2,831)                         (2,503)                        (2,214)
Premises and equipment .................     4,938                           3,979                          3,774
Other assets ...........................     8,508                           9,848                          5,445
                                          --------                        --------                       --------
  Total assets .........................  $279,970                        $232,075                       $194,676
                                          ========                        ========                       ========
Liabilities and shareholders' equity
          NOW accounts .................     2,934          8     0.27       3,022        7   0.23          2,849        8    0.28
          Savings ......................       656          3     0.46         765        4   0.52            813        4    0.49
          Money market accounts ........    66,774      2,805     4.20      53,837    1,419   2.64         59,190    1,209    2.04
          Time deposits ................   160,594      7,229     4.50     130,419    4,290   3.29         92,410    2,029    2.20
                                          --------    -------             --------  -------              --------  -------
  Interest bearing deposits ............   230,958     10,045     4.35     188,043    5,720   3.04        155,262    3,250    2.09
  FHLB advances ........................     6,905        301     4.36      11,392      459   4.03         11,498      425    3.70
  Other borrowings .....................     1,401        106     7.57       3,232      205   6.34          2,067       81    3.92
  Subordinated debentures ..............     5,267        389     7.39       2,460      116   4.72          3,500       79    2.26
                                          --------    -------             --------  -------              --------  -------
    Total interest bearing liabilities .   244,531     10,841     4.43     205,127    6,500   3.17        172,327    3,835    2.23
Noninterest bearing demand deposits ....    14,296                          12,107                          9,853
Other liabilities ......................     3,188                           1,965                          2,777
                                          --------                        --------                       --------
    Total liabilities ..................   262,015                         219,199                        184,957
Shareholders' equity ...................    17,955                          12,876                          9,719
                                          --------                        --------                       --------
  Total liabilities and
    shareholders' equity ...............  $279,970                        $232,075                       $194,676
                                          ========                        ========                       ========
Interest rate spread (3) ...............                          4.47                        4.26                            3.45
Net interest income and net
  interest margin (4) ..................              $12,770                       $ 9,623   4.43                 $ 6,674    3.60
                                                      =======                       =======                        =======
 .......................................                          4.81
Interest free funds supporting
  earning assets (5) ...................  $ 20,737                        $ 11,887                       $ 12,840
                                          ========                        ========                       ========
</TABLE>
(1)  Interest income on tax-exempt  securities  included in this category is not
     calculated  on a tax  equivalent  basis  because  the  adjustment  would be
     immaterial to the above analysis.
(2)  Nonaccrual   loans  are  included  in  average  loan   balances  for  yield
     computations.  The effect of foregone  interest income as a result of loans
     on  nonaccrual  was  not  considered  in  the  above  analysis,  but is not
     material.  All loans and deposits are  domestic.  Loan fees are included in
     the interest  income  computation,  but are not considered  material to the
     above analysis.
(3)  Total  interest  earnings  assets  yield  less the total  interest  bearing
     liabilities rate.
(4)  Net  interest  margin  is net  interest  income  divided  by total  average
     interest earning assets.
(5)  Total interest earnings assets less total interest bearing liabilities.



                                       5
<PAGE>

Rate/Volume Analysis of Net Interest Income

            The  effect of changes in  average  balances  (volume)  and rates on
interest  income,  interest  expense and net  interest  income,  for the periods
indicated,  is shown below.  The effect of a change in average  balance has been
determined  by applying the average rate in the earlier  period to the change in
average balance in the later period,  as compared with the earlier  period.  The
effect of a change in the  average  rate has been  determined  by  applying  the
average  balance in the earlier  period to the change in the average rate in the
later  period,  as compared  with the earlier  period.  The effect of changes in
volume/rate  has been determined by applying the amount of the change in average
rates to the amount of the change in average  volumes,  and  allocated to volume
and rate based on their proportions to the absolute value of each.

<TABLE>
<CAPTION>
                                                          Year ended December 31, 2006              Year Ended December 31, 2005
                                                                Compared to 2005                          Compared to 2004
                                                           Increase (Decrease) Due to                Increase (Decrease) Due to
                                                           --------------------------                --------------------------
                                                        Volume         Rate        Total         Volume        Rate           Total
                                                        ------         ----        -----         ------        ----           -----
Interest earned on:
<S>                                                    <C>           <C>          <C>           <C>           <C>           <C>
       Federal funds sold and
       interest earning  deposits ...............      $   131       $   209      $   340       $    36       $   192       $   228
       Investment securities (1) ................          454           273          727           239           131           370
       Gross Loans (2) ..........................        2,406         4,015        6,421         1,314         3,702         5,016
                                                       -------       -------      -------       -------       -------       -------

Total Interest Income ...........................        2,991         4,497        7,488         1,589         4,025         5,614
Interest paid on:
       Now Accounts .............................            -             1            1             -            (1)           (1)
       Savings accounts .........................           (1)            -           (1)            -             -             -
       Money Market accounts ....................          343         1,043        1,386          (109)          319           210
       Time deposits ............................          994         1,945        2,939           837         1,424         2,261
       FHLB advances ............................         (181)           23         (158)           (4)           38            34
       Other borrowings .........................         (117)           18          (99)           46            78           124
       Subordinated debentures ..................          132           141          273           (23)           60            37
                                                       -------       -------      -------       -------       -------       -------
Total Interest Expense ..........................        1,170         3,171        4,341           747         1,918         2,665

Change in Net Interest Income ...................      $ 1,821       $ 1,326      $ 3,147       $   842       $ 2,107       $ 2,949
                                                       =======       =======      =======       =======       =======       =======
</TABLE>

Notes to rate/volume table:

(1)    The changes in rate are not calculated on a fully tax-equivalent basis.
(2)    Interest income on nonaccruing  loans is recognized on a cash basis. Loan
       income  includes  loan fees,  which are  immaterial  to the  calculation.
       Volume  changes are  calculated  using average loan balances that include
       nonaccrual loans as well.

         During 2007,  management  expects that  short-term  interest rates will
remain flat.  Therefore,  any  improvements  in net interest income for 2007 are
expected to be the result of  increases  in the volume and changes in the mix of
interest-earning assets and interest-bearing liabilities.  Management expects to
continue to use  aggressive  marketing  strategies to increase the Bank's market
share for both  deposits and quality loans within the  Greenville  and Anderson,
South Carolina areas.  These  strategies  involve offering  attractive  interest
rates and continuing  the Bank's  commitment to providing  outstanding  customer
service.

Interest Rate Sensitivity

         Management  of  interest  rate  sensitivity  includes  the  timing  and
magnitude of repricing  assets  compared to liabilities and is an important part
of asset/liability  management. It is the objective of interest rate sensitivity
management to generate stable growth in net interest income,  and to control the
risks  associated  with interest rate movement.  Management  constantly  reviews
interest rate risk  exposure in  conjunction  with the expected  movement in the
interest rate  environment so that  adjustments in interest rate sensitivity can
be timely made.

                                       6
<PAGE>

         The  table,  "Interest  Sensitivity  Analysis,"  indicates  that,  on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive assets,  resulting in a liability  sensitive  position at December 31,
2006 of $75,979 for a cumulative gap ratio of (26.7)%.

         When  interest-sensitive  assets exceed interest sensitive  liabilities
for a specific repricing period, a positive interest sensitive gap results.  The
gap is negative when interest  sensitive  liabilities  exceed interest sensitive
assets.  For a bank with a negative gap, such as the Bank, rising interest rates
would be expected to have a negative  effect on net interest  income and falling
rates would be expected to have the opposite effect. However, gap analysis, such
as the  table  below,  does  not  take  into  account  actions  by a bank or its
customers during periods of changing rates, which could significantly change the
effects of rate changes than would otherwise be expected.

         The table below  reflects the balances of interest  earning  assets and
interest  bearing  liabilities  at the  earlier of their  repricing  or maturity
dates.  Amounts  of fixed  rate  loans are  reflected  at the  earlier  of their
contractual  maturity  date or the  date at  which  the  loans  may be  repriced
contractually. Loans are listed gross, but excluding loans in nonaccrual status.
Interest  bearing  liabilities  with no contractual  maturity,  such as interest
bearing transaction accounts and savings deposits, are reflected in the earliest
repricing  interval due to contractual  arrangements  which give  management the
opportunity  to vary the rates  paid on these  deposits  within a thirty  day or
shorter period.  However, the Bank is under no obligation to vary the rates paid
on those  deposits  within  any  given  period.  Fixed  rate time  deposits  are
reflected at their contractual maturity dates.  Subordinated  debentures reprice
every three months.

                          Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                                       December 31, 2006
                                                                                       -----------------
                                                                      Within    Over 3 to 12       Over 12    Nonaccrual
                                                                     3 Months       Months         Months        Loans       Total
                                                                     --------       ------         ------        -----       -----

Interest-earning assets
<S>                                                                 <C>               <C>             <C>         <C>      <C>
   Federal funds sold and interest earning deposits ............    $  16,069         $   -           $  -        $   -    $  16,069
   Investment securities .......................................        3,514         4,958         33,678            -       42,150
   Gross loans .................................................      111,823        20,095         94,009          834      226,761
                                                                    ---------     ---------      ---------    ---------    ---------

        Total interest earning assets ..........................      131,406        25,053        127,687          834      284,980
Interest bearing liabilities
   Interest bearing deposits
      Transaction accounts .....................................        3,224             -              -            -        3,224
      Savings and money market accounts ........................       83,109             -              -            -       83,109
      Time deposits over $100M .................................       13,815        48,569         13,826            -       76,210
      Other time deposits ......................................       10,707        64,767         15,691            -       91,165
                                                                    ---------     ---------      ---------    ---------    ---------
        Total interest bearing deposits ........................      110,855       113,336         29,517            -      253,708

   Subordinated debentures .....................................        8,247             -              -            -        8,247
                                                                    ---------     ---------      ---------    ---------    ---------
        Total interest bearing liabilities .....................    $ 119,102     $ 113,336      $  29,517        $   -    $ 261,955

Period interest sensitive gap ..................................    $  12,304     $ (88,283)
Cumulative interest sensitive gap ..............................    $  12,304     $ (75,979)

Gap ratio as a percentage of earning assets ....................          4.3%        (31.0)%
Cumulative gap ratio as a percentage of earning assets .........          4.3%        (26.7)%
</TABLE>



                                       7
<PAGE>

Provision for Loan Losses

         The allowance for loan losses,  established  through charges to expense
in the form of a provision for loan losses, accounts for loan losses inherent in
the Bank's loan  portfolio.  Loan losses or  recoveries  are charged or credited
directly to the  allowance.  The level of the allowance for loan losses is based
on  management's  judgment as to the amount  required  to maintain an  allowance
adequate to provide for estimated  inherent  losses in the loan  portfolio.  The
Bank provided $1,110 and $1,125 to the allowance during the years ended December
31, 2006 and 2005,  respectively.  The decrease in the provision for loan losses
for 2006 versus  2005 was the result of a  significant  decrease  in  nonaccrual
loans.  The  significant   decrease  in  nonaccrual  loans  corresponds  to  the
significant  increase in charge-offs in 2006 which were anticipated in 2005. See
"Allowance for Loan Losses" for further  information about factors considered by
management in setting the amount of the allowance.

Other Income

         In 2006,  the Bank had other  income of $759  compared to $580 in 2005.
The  increase was  primarily  the result of a gain of $119 on the sale of assets
previously  acquired by the bank in settlement of a loan.  This increase is also
attributable  to a 25%  increase in service  charges on deposit  accounts  which
directly correlates to the 21% increase in deposit accounts.

Other Expenses

         Salaries and employee  benefits  totaled $4,628 and $3,095 for 2006 and
2005,  respectively.  The increase  was  primarily  due to the  expansion of the
commercial loan department and the addition of staff for the Anderson branch. At
December 31, 2006, the bank had 66 full-time equivalent  employees,  compared to
54 at December 31, 2005. Data processing expenses grew 21% as a direct result of
the increased number of accounts serviced and the new products offered.

Income Taxes

         During the years ended  December 31, 2006 and 2005,  the Bank  recorded
income tax expense of $1,761 and $1,155,  respectively.  The Bank  accounts  for
income taxes under SFAS No. 109, "Accounting for Income Taxes." Certain items of
income and expense (principally  provision for loan losses and depreciation) are
included in one reporting period for financial  accounting  purposes and another
for income tax purposes.

Investment Portfolio

         As of December 31, 2006,  the Bank's  investment  portfolio,  excluding
investments required for membership in the FHLB, comprised  approximately 14% of
total  assets.  The  following  table  summarizes  the  book  value  amounts  of
securities   held  by  the  Bank  at   December   31,   2006,   2005  and  2004.
(Available-for-sale  securities  are  carried  at  estimated  fair  value on the
balance  sheet.  These  fair  values  are  disclosed  in detail in Note 3 to the
consolidated  financial statements.) The Bank had no held-to-maturity or trading
securities at December 31, 2006, 2005 or 2004.

Investment Securities Portfolio Composition

<TABLE>
<CAPTION>
                                                                December 31, 2006      December 31, 2005         December 31, 2004
                                                                      Book                   Book                    Book
                                                                     Value                   Value                   Value
                                                                     -----                   -----                   -----
<S>                                                                 <C>                     <C>                    <C>
Government-sponsored enterprises ........................           $22,500                 $14,498                $ 7,496
State and Municipals ....................................             3,332                     463                     --
Mortgage-backed .........................................            16,023                  13,772                  8,924
                                                                    -------                 -------                -------
                                                                    $41,855                 $28,733                $16,420
                                                                    =======                 =======                =======
</TABLE>

         Government-sponsored  enterprises include FHLB bonds, Federal Home Loan
Mortgage  Corporation  ("FHLMC") bonds,  Federal National  Mortgage  Association
("FNMA")  bonds and an FHLB  structured  note.  The Bank also holds stock in the
FHLB.  This stock was recorded at a cost of $504 at December 31, 2006,  and $798
at December 31, 2005,  and has no quoted  market value.  However,  redemption of
this stock has  historically  been at par value.  The  decrease in stock held at
December 31, 2006 corresponds to the repayment of FHLB advances during 2006.

         The following table presents  maturities and weighted average yields of
debt  securities  available for sale at December 31, 2006. All of the securities
are stated at estimated fair value.  The tax equivalent  yields are based on the
amortized cost of the investment securities and a 34% effective tax rate.

                                       8
<PAGE>

Investment Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                            December 31, 2006
                                                            -----------------
                                                          Fair    Tax Equivalent
                                                          Value        Yield
                                                          -----        -----
Government-sponsored enterprises
<S>                                                      <C>           <C>
Due within one year ..................................   $ 7,967       3.84%
Due from one to five years ...........................    12,474       4.98%
Due from five to ten years ...........................     2,028       5.80%
Due after ten years ..................................         -          -

State and municipals
Due within one year ..................................         -          -
Due from one to five years ...........................         -          -
Due from five to ten years ...........................         -          -
Due after ten years ..................................     3,339       5.81%

Mortgage backed
Due within one year ..................................         -          -
Due from one to five years ...........................     2,989       4.71%
Due from five to ten years ...........................     7,819       4.14%
Due after ten years ..................................     5,030       5.76%
                                                         ------
                                   Total .............   $41,646       4.78%
                                                         =======
</TABLE>

Tax Exempt Investment Securities

         During  2006,  due  primarily  to the opening of the  Anderson  branch,
deposits  have grown faster than loans  resulting  in excess funds  available to
invest in federal funds sold and additional investment  securities.  The Company
has been  investing in all categories of current  investment  securities and has
made an effort to increase the municipal  portfolio to take advantage of the tax
savings  associated  with these  investment  securities.  In 2006, the extent of
recognition  of  exemption  from  taxation   associated  with  these  investment
securities amounted to $23.

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no  significant  concentrations  of  loans  to any  particular  individuals,
industry or group of related individuals or industries, and there are no foreign
loans.  The amount of loans  outstanding at December 31, 2006,  2005, 2004, 2003
and 2002 is shown in the following table according to type of loan:

                                 Types of Loans

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                         ------------
                                                             2006            2005            2004            2003            2002
                                                             ----            ----            ----            ----            ----
<S>                                                       <C>             <C>             <C>             <C>             <C>
Commercial, financial and agricultural .............      $  35,783       $  41,915       $  33,644       $  30,500       $  45,122
Real estate - construction .........................         65,096          39,895          39,170          15,814          13,627
Real estate - mortgage .............................        120,673         110,694          96,984          94,391          44,840
Installment loans to individuals ...................          5,209           7,858           6,660           9,691           7,350
                                                          ---------       ---------       ---------       ---------       ---------
    Total loans ....................................        226,761         200,362         176,458         150,396         110,939
Less allowance for loan losses .....................         (2,423)         (3,050)         (2,293)         (2,345)         (1,395)
                                                          ---------       ---------       ---------       ---------       ---------
                                                          $ 224,338       $ 197,312       $ 174,165       $ 148,051       $ 109,544
                                                          =========       =========       =========       =========       =========
</TABLE>


                                       9
<PAGE>

Credit Risk

         A certain  degree  of risk is  inherent  in the  extension  of  credit.
Management has established loan and credit policies designed to control both the
types and  amounts of risks  assumed and to  ultimately  minimize  losses.  Such
policies include limitations on  loan-to-collateral  values for various types of
collateral,  requirements for appraisals of real estate collateral, problem loan
management  practices and collection  procedures,  and nonaccrual and charge-off
guidelines.

Commercial, Financial and Agricultural  Loans

         Commercial,  financial and agricultural loans primarily represent loans
made to businesses,  and may be made on either a secured or an unsecured  basis.
When taken,  collateral  usually  consists of liens on  receivables,  equipment,
inventories,  furniture and  fixtures.  Unsecured  business  loans are generally
short-term with emphasis on repayment  strengths and low  debt-to-worth  ratios.
Commercial  lending involves  significant risk because repayment usually depends
on the cash flows  generated  by a  borrower's  business,  and the debt  service
capacity of a business  can  deteriorate  because of  downturns  in national and
local economic  conditions.  To control risk,  initial and continuing  financial
analysis of a borrower's financial information is required.

Real Estate -- construction Loans

         Real estate  construction  loans  generally  consist of  financing  the
construction of 1-4 family  dwellings and nonfarm,  nonresidential  real estate.
Generally,  loan-to-cost  ratios  are  limited to 80% and the Bank  reviews  the
financial ability of the borrower to meet the guidelines of permanent  financing
prior to the advancement of the construction loan proceeds.

Real Estate -- mortgage Loans

         Loans secured by real estate  mortgages  (residential  and  commercial)
comprised 53% of the Bank's loan  portfolio at December 31, 2006 compared to 55%
at December 31, 2005.  The repayment of both  residential  and  commercial  real
estate  loans  is  dependent  primarily  on the  income  and  cash  flows of the
borrowers,  with the real estate serving as a secondary or liquidation source of
repayment.

         Residential real estate loans, which make up $45,306 of the $120,673 at
December 31, 2006, consist mainly of first and second mortgages on single-family
homes,  with some  multifamily  loans.  Loan-to-value  ratios  ("LTV") for these
instruments are generally limited to 80%.  Occasionally  loans with greater than
100% LTV will be originated to refinance  previously unsecured consumer debt, on
the  assumption  that it is better to have some  collateral  than none. The Bank
does not require private mortgage  insurance (PMI) on loans with greater than an
80% LTV. The Bank  monitors key factors on loans,  including  LTV,  with monthly
reports  reviewed by senior  management.  At December 31, 2006, the Bank had six
loans in this category amounting to $1,080 in loans with LTV greater than 100%.

         The Bank offers a variety of  fixed-rate  residential  real estate loan
products. Generally, the residential loans that are kept in-house are fixed-rate
balloons with  maturities  up to 5 years.  The  underwriting  for these loans is
performed  in-house  within an  officer's  lending  authority.  These  loans are
re-negotiated near the end of the term.  Conventional,  adjustable-rate-mortgage
products can be originated  by the Bank in the  secondary  market in the name of
another  financial  institution.  Because  these  loans are  closed in the other
bank's name,  they are not recorded on the Bank's  books.  The Bank  receives an
origination fee for its role in the process.

         Nonfarm,  nonresidential  loans (i.e.,  commercial real estate mortgage
loans) are secured by business  and  commercial  properties  with LTV  generally
limited to 80%.  These loans  consist of $75,367 of the  $120,673 in real estate
loans  reported at December  31, 2006.  At December 31, 2006,  the Bank had five
loans in this category amounting to $2,030 in loans with LTV greater than 100%.


                                       10
<PAGE>

Maturity and Interest Sensitivities of Loans to Changes in Interest Rates

         The  following  table  sets  forth  the  maturity  distribution  of the
Company's    commercial,    financial   and   agricultural    loans   and   real
estate-construction  loans at December 31, 2006,  as well as the amount of fixed
and variable rate loans due after one year.

<TABLE>
<CAPTION>
                                                                                                   December 31, 2006
                                                                                                   -----------------
                                                                                   Due in One   Due After One    Due After
                                                                                      Year         Through         Five
                                                                                     Or Less      Five Years       Years      Total
                                                                                     -------      ----------       -----      -----

<S>                                                                                  <C>           <C>           <C>         <C>
Commercial, financial and industrial ...........................................     $20,409       $ 8,165       $ 7,209     $35,783
Real estate - construction .....................................................      31,245        30,332         3,519      65,096

Total amount of above loans that are fixed rate and due after one year .........                                             $22,594

Total amount of above loans that are variable rate and due after one year ......                                             $26,631
</TABLE>

Nonperforming Loans; Other Problem Assets

         Generally,  when a loan is 90 days past due as to interest or principal
or there is serious doubt as to  collectibility,  the accrual of interest income
is discontinued. When the collectibility of a significant amount of principal is
in serious doubt,  the principal  balance is reduced to the estimated fair value
of collateral  by charge-off to the allowance for loan losses of the  difference
between book value and estimated fair value and any subsequent  collections  are
credited first to the remaining  principal balance and then to the allowance for
loan losses as a recovery of the amount  charged-off.  A nonaccrual  loan is not
returned to accrual  status  unless  principal  and interest are current and the
borrower has demonstrated the ability to continue making payments as agreed.

         At  December  31,  2006  and  2005,  the  Bank  had  $834  and  $2,551,
respectively,   of  nonaccrual   loans.  The  decrease  in  2006  was  primarily
attributable to the charge-offs of over $2,000 in previously  non-accruing loans
and the Bank's  acquiring an asset in the  settlement of a  non-accrual  loan of
$149.  Gross  interest  income  that would have been  recorded  with  respect to
nonaccrual loans in 2006 and 2005 under the original terms of the loans was $318
and $96,  respectively.  No interest income on nonaccrual  loans was included in
net income for the years ended  December 31, 2006 or 2005.  At December 31, 2006
and  2005,  there  were no loans  that  were 90 days or more  past due and still
accruing interest, and no restructured loans.

         Included in the $2,551 of  nonaccrual  loans at December  31, 2005 were
$1,660 in loans to one customer for which the Company specifically reserved $500
in anticipation of charge-offs.  At the filing of the 2005 Annual Report on Form
10-K,  the Company  believed  that the business  was still a going  concern with
enough  cash flow to  service  the debt or was  saleable  and  would net  enough
proceeds to pay off the remainder of the loans. However,  events occurred during
2006 that were not  foreseeable  at the filing of the 2005 report.  These events
included  the  business   losing  its  biggest   customer  which  accounted  for
approximately  65% of its sales.  Based on these events,  the Bank realized full
collectibility  was not  probable,  and  charged-off  $1,360 of these loans.  At
December 31,  2006, a balance of $216 remains on the Bank's books in  nonaccrual
status and is considered  "impaired" in accordance with SFAS No. 114 (See Note 1
to the Consolidated  Financial  Statements).  Management has not charged-off the
remainder  of the loans due to the fact  that the fair  value of the  collateral
involved meets or exceeds the present value of expected future cash flows.


                                       11
<PAGE>

Nonaccrual, Past Due and Restructured Loans

         Nonperforming assets are shown in the following table:

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                                        -----------------------
                                                                   2006           2005          2004           2003            2002
                                                                   ----           ----          ----           ----            ----
<S>                                                              <C>            <C>            <C>            <C>            <C>
Accruing loans which are contractually past
due 90 days or more as to principal or
interest payments .......................................        $    -         $    -         $    -         $  393         $    -

Loans accounted for on a non-accrual basis:
   Commercial, financial and agricultural ...............           435            329              -             56              7
   Real estate - construction ...........................             -              -             10             16              -
   Real estate - mortgage ...............................           378          2,210          1,394          1,052            789
   Installment loans to individuals .....................            21             12             93            107             59
                                                                 ------         ------         ------         ------         ------

      Total non-accrual loans ...........................           834          2,551          1,497          1,231            855

Troubled debt restructurings ............................             -              -              -              -              -
                                                                 ------         ------         ------         ------         ------

      Total nonperforming loans .........................           834          2,551          1,497          1,624            855

Other nonperforming assets ..............................           149            630            881            411            243
                                                                 ------         ------         ------         ------         ------

      Total nonperforming assets ........................        $  983         $3,181         $2,378         $2,035         $1,098
                                                                 ======         ======         ======         ======         ======

Nonperforming assets to total assets ....................          0.33%          1.26%          1.14%          1.18%          0.78%

Percentage of nonperforming assets to
    total loans and other nonperforming
    assets ..............................................          0.43%          1.58%          1.34%          1.35%          0.99%
</TABLE>

Potential Problem Loans

         Management  has  identified  and maintains a list of potential  problem
loans.  Management  monitors this list closely and  maintains  dialogue with the
borrowers to determine if and when circumstances arise to either remove the loan
from this list or set up a specific reserve for it. These are loans that are not
included in nonaccrual loan listings, or loan listings that are past due 90 days
or more and still accruing.  A loan is added to the potential  problem list when
management  becomes  aware of  information  about  possible  credit  problems of
borrowers  that causes  serious  doubts as to the ability of such  borrowers  to
comply with the current loan repayment terms. At December 31, 2006, loans in the
amount of $1,050 were  determined by management to be potential  problem  loans.
Management  is unable to determine  the  potential  impact of these loans at the
present time.

Assets Acquired in Settlement of Loans

         At  December  31,  2006  and  2005,  the Bank had  assets  acquired  in
settlements  of loans of  approximately  $149 and $630,  respectively.  For both
years,  those amounts  represented  100% of real estate owned.  One property was
sold in 2006 and one  property was  acquired in 2006.  The Company  recognized a
gain of $119 on the sale of the former property.  Real estate owned is initially
recorded at the lower of net loan principal balance or its estimated fair market
value less estimated  selling  costs.  The estimated fair value is determined by
appraisal  at the time of  acquisition,  and written  down  periodically  if the
appraised value is deemed not to be realizable.


                                       12
<PAGE>

Allowance for Loan Losses

         The  allowance  for  loan  losses  is  based  on  management's  ongoing
evaluation of the loan portfolio and reflects an amount,  which in  management's
opinion,  is adequate to absorb probable losses in the existing  portfolio.  All
loan losses are charged to the allowance and all  recoveries are credited to the
allowance. Additions to the allowance for loan losses are provided by charges to
operations  based on various factors which, in  management's  judgment,  deserve
current  recognition in estimating losses. Such factors considered by management
include the market value of the underlying collateral, growth and composition of
credit  risk  within  the loan  portfolio,  loss  experience,  review of problem
assets,   delinquency  trends,  and  local  and  regional  economic  conditions.
Management  evaluates the carrying value of loans quarterly and the allowance is
adjusted  accordingly.  While management uses the best information  available to
make  evaluations,  future  adjustments  to the  allowance  may be  necessary if
economic conditions differ substantially from the assumptions used in making the
evaluation.  The allowance for loan losses is subject to periodic  evaluation by
various  regulatory  authorities  and may be  subject to  adjustment  upon their
examination.

         The  adequacy of the  allowance is analyzed on a quarterly  basis.  For
purposes  of  this  analysis,  adequacy  is  defined  as a  level  of  resources
appropriate  to absorb  probable  losses  inherent  in the loan  portfolio.  The
methodology   employed  for  this  analysis   considers   historical  loan  loss
experience,  the results of loan reviews, current economic conditions, and other
qualitative  and  quantitative  factors that warrant  current  consideration  in
determining an adequate allowance.

         The evaluation of the allowance is segregated into general  allocations
and specific allocations.  For general allocations,  the portfolio is segregated
into  risk-similar  segments for which historical loss ratios are calculated and
adjusted for identified trends or changes in current portfolio  characteristics.
Historical loss ratios are calculated by risk grade.  The resulting  percentages
are then applied to the dollar amounts of the loans in each segment to arrive at
each segment's probable loss levels.

         Certain  nonperforming  loans are individually  assessed for impairment
under SFAS 114, "Accounting by Creditors for Impairment of a Loan," and assigned
specific  allocations.  Other identified high-risk loans or credit relationships
based on internal  risk  ratings are also  individually  assessed  and  assigned
specific allocations.

         The general  allocation  also includes a component for probable  losses
inherent in the  portfolio,  based on  management's  analysis  that is not fully
captured  elsewhere  in the  allowance.  This  component  serves to address  the
inherent  estimation and imprecision  risk in the methodology as well as address
management's  evaluation of various factors or conditions not otherwise directly
measured in the evaluation of the general and specific allocations. Such factors
or conditions may include  evaluation of current  general  economic and business
conditions; geographic, collateral or other concentrations;  system, procedural,
policy or  underwriting  changes;  experience of lending  staff;  entry into new
markets or new  product  offerings;  and  results  from  internal  and  external
portfolio examinations.

         Assessing  the adequacy of the  allowance  is a process  that  requires
considerable judgment.  Management's  methodology and judgments are based on the
information  currently available and includes numerous assumptions about current
events, which are believed reasonable,  but which may or may not be valid. Thus,
there can be no assurance that loan losses in future periods will not exceed the
current  allowance  amount or that future increases in the allowance will not be
required.  No assurance can be given that management's ongoing evaluation of the
loan  portfolio  in light of changing  economic  conditions  and other  relevant
circumstances  will not require  significant  future additions to the allowance,
thus  adversely  affecting  the  operating  results of the  Company.  Management
believes  that the current  level of the  allowance for loan losses is presently
adequate considering the composition of the loan portfolio, the portfolio's loss
experience,  delinquency trends,  current regional and local economic conditions
and other factors.

         The allowance is also subject to  examination  and adequacy  testing by
regulatory  agencies,  whom may consider such factors as the methodology used to
determine  adequacy  and the  size  of the  allowance  relative  to that of peer
institutions,  and other adequacy tests. In addition,  such regulatory  agencies
could require management to adjust the allowance based on information  available
to them at the time of their examination.

         The following table, "Summary of Loan Loss Experience," summarizes loan
balances at the end of each period indicated,  averages for each period, changes
in the allowance  arising from charge-offs and recoveries by loan category,  and
additions  to the  allowance  which have been  charged to  expense  through  the
provision for loan losses.


                                       13
<PAGE>

                         Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,
                                                                                         ------------------------
                                                                     2006         2005          2004          2003           2002
                                                                     ----         ----          ----          ----           ----
<S>                                                              <C>           <C>           <C>           <C>           <C>
Total gross loans outstanding at end of period ...............   $ 226,761     $ 200,362     $ 176,458     $ 150,396     $ 110,939
Average amount of loans outstanding, gross ...................     215,673       183,576       162,044       130,448        99,820
                                                                 ---------     ---------     ---------     ---------     ---------
Balance of allowance for loan losses -
    At beginning of the period ...............................       3,050         2,293         2,345         1,395         1,176
                                                                 ---------     ---------     ---------     ---------     ---------
Charge offs:
    Commercial, financial and agricultural ...................        (787)         (123)         (135)          (90)          (25)
    Real estate -- construction ..............................           -             -             -           (82)            -
    Real estate -- mortgage ..................................      (1,375)         (347)         (466)         (120)         (529)
    Installment loans to individuals .........................         (17)          (13)         (475)          (97)          (54)
                                                                 ---------     ---------     ---------     ---------     ---------
           Total charge-offs .................................      (2,179)         (483)       (1,076)         (389)         (608)
                                                                 ---------     ---------     ---------     ---------     ---------

Recoveries of loans previously charged-off:
    Commercial, financial and agricultural ...................         342            25             -             -            16
    Real estate -- construction ..............................           -             -             -             -             -
    Real estate -- mortgage ..................................          54            76             1             -             6
    Installment loans to individuals .........................          46            14            23             -             -
                                                                 ---------     ---------     ---------     ---------     ---------
          Total recoveries ...................................         442           115            24             -            22
                                                                 ---------     ---------     ---------     ---------     ---------

           Net charge-offs ...................................      (1,737)         (368)       (1,052)         (389)         (586)

Additions to allowance for loan losses during period .........       1,110         1,125         1,000         1,339           805
                                                                 ---------     ---------     ---------     ---------     ---------

Balance of allowance for loan losses-ending of the period ....   $   2,423     $   3,050     $   2,293     $   2,345     $   1,395
                                                                 =========     =========     =========     =========     =========

Ratios
   Net charge-offs during period to average
       loans outstanding during period .......................        0.81%         0.20%         0.65%         0.30%         0.59%
    Allowance for loan losses to loans at end of period ......        1.07          1.52          1.30          1.56          1.26
    Net charge-offs to allowance for loan losses .............        71.7          12.1          45.9          16.6          42.0
</TABLE>

Allocation of the Allowance for Loan Losses

         Below is an allocation of the allowance for loan losses at December 31,
2006 and 2005.

<TABLE>
<CAPTION>
                                                                                                   December 31, 2006
                                                                                                   -----------------
        Balance at End of Period Applicable to:                                                        Percent of
                                                                                                       Allocated        Percent of
                                                                                                      Allowance to     loans in each
                                                                                 Allowance               Total          category to
                                                                                 Allocation            Allowance        total loans
                                                                                 ----------            ---------        -----------
<S>                                                                               <C>                      <C>                <C>
Commercial, financial and agricultural ............................               $  884                   37%                16%
Real estate -- construction .......................................                  228                    9%                29%
Real estate -- mortgage ...........................................                  790                   33%                53%
Installment loans to individuals ..................................                   33                    1%                 2%
Unallocated .......................................................                  488                   20%                 -
                                                                                  ------               ------             ------
      Total .......................................................               $2,423                  100%               100%
                                                                                  ======               ======             ======
</TABLE>


                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                                                                   December 31, 2005
                                                                                                   -----------------
        Balance at End of Period Applicable to:                                                        Percent of
                                                                                                       Allocated        Percent of
                                                                                                      Allowance to     loans in each
                                                                                 Allowance               Total          category to
                                                                                 Allocation            Allowance        total loans
                                                                                 ----------            ---------        -----------
<S>                                                                               <C>                      <C>                <C>
Commercial, financial and agricultural ............................               $1,104                   36%                21%
Real estate -- construction .......................................                  100                    3%                20%
Real estate -- mortgage ...........................................                  624                   21%                55%
Installment loans to individuals ..................................                   26                    1%                 4%
Unallocated .......................................................                1,196                   39%                 -
                                                                                  ------               ------             ------
      Total .......................................................               $3,050                  100%               100%
                                                                                  ======               ======             ======
</TABLE>

Deposits

         The amounts and  composition  of total deposits as of December 31, 2006
and 2005 were as follows:

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                              ------------
                                                                                  2005                              2006
                                                                                  ----                              ----
                                                                       Amount          Percent            Amount           Percent
                                                                       ------          -------            ------           -------
<S>                                                                  <C>               <C>               <C>               <C>
Noninterest bearing demand ...............................           $ 15,215            5.7%            $ 12,321            5.6%
Interest bearing demand ..................................              3,224            1.2                2,941            1.3
Money market accounts ....................................             82,538           30.7               50,905           23.0
Savings ..................................................                571            0.2                  751            0.3
Time certificates of deposit, less than $100,000 .........             91,165           33.9               80,064           36.1
Time certificates of deposit, $100,000 or more ...........             76,210           28.3               74,679           33.7
                                                                     --------          -----             --------          -----
                                                                     $268,923          100.0%            $221,661          100.0%
                                                                     ========          =====             ========          =====
</TABLE>

At December 31, 2006 the scheduled maturities of time certificates of deposit of
$100,000 or more are:

        Three months or less .......................................     $13,815
        Over three through six months ..............................      15,665
        Over six through twelve months .............................      32,904
        Over twelve months .........................................      13,826
                                                                         -------

                                                                         $76,210
                                                                         =======

Return on Equity and Assets

         The following  table shows the return on assets (net income  divided by
average  assets),  return on equity  (net  income  divided by  average  equity),
dividend  payout ratio  (dividends  declared per share divided by net income per
share),  and equity to assets ratio  (average  equity  divided by average  total
assets) for the years ended  December  31,  2006,  2005 and 2004.  The  dividend
payout  ratios for 2005 and 2004 have been  restated  to  reflect  the 10% stock
dividend declared in July 2006.

                                                        December 31,
                                                        ------------
                                              2006          2005          2004
                                              ----          ----          ----

Return on average assets .............        1.16%         1.02%         0.68%
Return on average equity .............       18.16%        18.34%        13.57%
Dividend payout ratio ................        8.25%         9.64%        16.00%
Average equity to average
  assets ratio .......................        6.41%         5.55%         4.99%


                                       15
<PAGE>

Liquidity

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loan  originations and deposit  withdrawals in the most timely and
economical manner. Some liquidity is ensured by maintaining assets, which may be
immediately  converted  into cash at minimal  cost  (amounts  due from banks and
federal funds sold).  Asset  liquidity is also provided from funds from maturing
loans .  However,  the most  manageable  sources of  liquidity  are  composed of
liabilities, with the primary focus on liquidity management being the ability to
obtain  deposits  within the Bank's service area.  Core deposits (total deposits
less time deposits greater than $100,000 and less brokered  deposits)  provide a
relatively  stable  funding  base,  and were  equal to 59% of  total  assets  at
December 31, 2006. The Bank is a member of the FHLB of Atlanta and, as such, has
the ability to borrow  against  the  security of its  investment  portfolio  and
qualifying  mortgage loans. The unused borrowing  capacity  currently  available
from the FHLB,  which at December 31, 2006 was  approximately  $45,047,  assumes
that the Bank's $504  investment in FHLB stock will also be used as  collateral.
The Bank believes that it could obtain  additional  borrowing  capacity from the
FHLB by identifying additional qualifying collateral that could be pledged.

         The  Company  also has $9,400  available  through  lines of credit with
other banks as an additional source of liquidity  funding.  Management  believes
that the Company's  overall liquidity sources are adequate to meet its operating
needs in the ordinary course of business.

Short-Term Borrowings

The  short-term  borrowings  of the  Company  consist of Federal  Home Loan Bank
advances.  Information on the balances  outstanding for each period reported and
interest rates are disclosed in the table below.

<TABLE>
<CAPTION>
                                                                                               For the Years Ended
                                                                                               -------------------
                                                                          December 31, 2006     December 31, 2005  December 31, 2004
                                                                          -----------------     -----------------  -----------------
<S>                                                                            <C>                 <C>                 <C>
Outstanding at end of period ...........................................       $     -             $ 8,500             $13,500
Weighted average rate, end of period ...................................            -%                4.34%               3.67%
Maximum amount outstanding at any month end ............................       $ 8,500             $16,500             $15,500
Average amount outstanding during the period ...........................       $ 6,905             $11,392             $11,498
Weighted average rate, during the period ...............................          4.36%               4.03%               3.70%
</TABLE>

Off-Balance Sheet Arrangements

         The Company,  through the  operations  of the Bank,  makes  contractual
commitments to extend credit in the ordinary course of its business  activities.
These instruments  represent  unfunded  commitments,  not outstanding  balances,
therefore,  the risk associated with these financial  instruments is referred to
as "off-balance  sheet risk." The Bank's financial  instruments with off-balance
sheet risk consist of 1) commitments to extend credit and 2) standby  letters of
credit.  Both involve elements of credit and interest rate risk not reflected on
the  balance  sheet.  We use the same credit and  collateral  policies in making
these commitments as we do for on-balance sheet instruments.

         Commitments  to extend  credit are legally  binding  agreements to lend
money to customers of the Bank at  predetermined  interest rates for a specified
period of time. At December 31, 2006, the Bank had issued  commitments to extend
credit of $71,053  through  various  types of lending.  Commitments  at variable
rates of  interest  totaled  $42,875  and  commitments  at fixed  rates  totaled
$28,178.  The  commitments  generally  expire  over one  year.  Past  experience
indicates  that many of these  commitments  to extend credit will expire unused.
However,  as described in "Liquidity," the Company believes that it has adequate
sources of liquidity to fund commitments that are drawn upon by the borrower.

         In  addition  to  commitments  to extend  credit,  the Bank also issues
standby  letters of credit which are  assurances to a third party that they will
not  suffer  a loss  if the  Bank's  customer  fails  to  meet  its  contractual
obligation to the third party.  If these standby letters of credit are utilized,
they become loans on the Bank's books.  Standby letters of credit totaled $1,318
at December 31,  2006.  Past  experience  indicates  that many of these  standby
letters of credit will expire unused.  However,  through its various  sources of
liquidity,  the Bank believes that it will have the necessary  resources to meet
these obligations should the need arise.

         Neither the Company nor its subsidiary is involved in other off-balance
sheet  contractual  relationships,  unconsolidated  related  entities  that have
off-balance  sheet  arrangements or transactions  that could result in liquidity
needs or other commitments or significantly  impact earnings.  Obligations under
noncancelable  operating lease agreements totaled approximately $333 at December
31, 2006.  These  obligations are payable over several years as shown in Note 10
to the Company's consolidated financial statements.


                                       16
<PAGE>

Capital Resources

         Shareholders'  equity  increased  $3,342  during 2006.  The increase in
shareholders'  equity  is the  result of $3,260  in  earnings  generated  by the
Company, an increase in accumulated other  comprehensive  income of $223, $12 in
proceeds from the exercise of stock options and $110 in capital generated by the
recognition  of the  expense of  granting  stock  options,  offset by  dividends
declared  of $258.  The  unrealized  losses  on  investment  securities  are not
considered  to be other than  temporary  because the Company has the ability and
intent to hold the  securities  until  such time as the  value  recovers  or the
securities mature.

         The  Company and the Bank are subject to  regulatory  capital  adequacy
standards.  Under these standards,  financial institutions and holding companies
are  required to maintain  certain  minimum  ratios of capital to  risk-weighted
assets and average total  assets.  Under the  provisions of the Federal  Deposit
Insurance  Corporation  Improvements Act of 1991, federal financial  institution
regulatory  authorities are required to implement  prescribed "prompt corrective
actions"  upon the  deterioration  of the  capital  position  of a bank.  If the
capital  position of an  institution  falls below certain  levels,  increasingly
stringent regulatory corrective actions are mandated.

         It is  management's  objective to maintain the capital levels such that
the Bank will continue to be considered well capitalized.  However, no assurance
can be given that this objective will be achieved.  The Company anticipates that
it will  maintain  capital at levels that will allow the Company and the Bank to
qualify as being  adequately  capitalized  as defined by  regulation,  and as of
December 31, 2006,  the Company and the Bank exceed the capital  levels that are
required to be maintained.

         Company and Bank capital  ratios at December 31, 2006 are  presented in
the following  table,  compared with the "well  capitalized"  and minimum ratios
under the Federal Reserve and FDIC regulatory definitions and guidelines:

<TABLE>
<CAPTION>
                                                                                                             To be well capitalized
                                                                                       For capital           under prompt corrective
                                                                                    adequacy purposes           action provisions
                                                                 Actual                  Minimum                     Minimum
                                                                 ------                  -------                     -------
                                                         Amount         Ratio      Amount         Ratio     Amount      Ratio
                                                         ------         -----      ------         -----     ------      -----
Company (consolidated):
As of December 31, 2006
<S>                                                     <C>             <C>       <C>             <C>
Total capital (to risk weighted assets) ..........      $30,031         12.3%     $19,576         8.0%         N/A       N/A
Tier 1 capital (to risk weighted assets) .........       26,079         10.7        9,788         4.0          N/A       N/A
Tier 1 capital (to average assets) ...............       26,079          9.3       11,199         4.0          N/A       N/A

As of December 31, 2005
Total capital (to risk weighted assets) ..........      $18,374          8.8%     $16,787         8.0%         N/A       N/A
Tier 1 capital (to risk weighted assets) .........       15,747          7.5        8,393         4.0          N/A       N/A
Tier 1 capital (to average assets) ...............       15,747          6.7        9,416         4.0          N/A       N/A

Bank:
As of December 31, 2006
Total capital (to risk weighted assets) ..........      $27,623         11.3%     $19,555         8.0%     $24,443      10.0%
Tier 1 capital (to risk weighted assets) .........       25,200         10.3        9,777         4.0       14,666       6.0
Tier 1 capital (to average assets) ...............       25,200          8.5       11,812         4.0       14,765       5.0

As of December 31, 2005
Total capital (to risk weighted assets) ..........      $21,145         10.1%     $16,778         8.0%     $20,972      10.0%
Tier 1 capital (to risk weighted assets) .........       18,518          8.8        8,389         4.0       12,583       6.0
Tier 1 capital (to average assets) ...............       18,518          8.0        9,230         4.0       11,538       5.0
</TABLE>


                                       17
<PAGE>

Inflation

         Since the assets and  liabilities  of a bank are primarily  monetary in
nature (payable in fixed,  determinable  amounts),  the performance of a bank is
affected  more by changes in interest  rates than by inflation.  Interest  rates
generally increase as the rate of inflation increases,  but the magnitude of the
change in rates may not be the same.

         While the effect of inflation  on banks is normally not as  significant
as is its influence on those  businesses,  which have large investments in plant
and inventories, it does have an effect. During periods of high inflation, there
are  normally  corresponding  increases  in the money  supply,  and  banks  will
normally experience  above-average  growth in assets,  loans and deposits.  Also
general  increases in the prices of goods and services  will result in increased
operating expenses.

Recently Issued Accounting Standards

        Recently issued accounting standards and pronouncements are discussed in
Note 1, Summary of Significant Accounting Policies and Activities, in our Report
on  consolidated   financial   statements  included  herein.   Other  accounting
standards,  which  have been  issued or  proposed  by the  Financial  Accounting
Standards  Board  ("FASB") that do not require  adoption until a future date are
not expected to have a material impact on the consolidated  financial statements
upon adoption.



                                       18
<PAGE>








                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY

                   REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004




                                       19
<PAGE>











             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors
GrandSouth Bancorporation and Subsidiary
Greenville, South Carolina


         We  have  audited  the  accompanying  consolidated  balance  sheets  of
GrandSouth  Bancorporation  and Subsidiary as of December 31, 2006 and 2005, and
the  related  consolidated  statements  of  income,   shareholders'  equity  and
comprehensive  income,  and cash flows for each of the three years in the period
ended  December  31,  2006.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

         We conducted our audits in accordance  with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable  assurance about whether the
consolidated  financial statements are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the  consolidated  financial  statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall consolidated  financial statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material  respects,  the financial position of GrandSouth
Bancorporation  and  Subsidiary as of December 31, 2006 and 2005 and the results
of their  operations  and their  cash  flows for each of the three  years in the
period  ended  December 31,  2006,  in  conformity  with  accounting  principles
generally accepted in the United States of America.


                                                s/Elliott Davis, LLC



Greenville, South Carolina
March 21, 2007




                                       20
<PAGE>


                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                                 DECEMBER 31,
                                                                                                                 ------------
                                                                                                           2006               2005
                                                                                                           ----               ----
                                                          ASSETS
<S>                                                                                                    <C>                <C>
Cash and due from banks ......................................................................         $   6,145          $   6,628
Federal funds sold ...........................................................................            13,659              6,312
                                                                                                       ---------          ---------

           Cash and cash equivalents .........................................................            19,804             12,940

Investment securities available for sale .....................................................            41,646             28,160
Other investments, at cost ...................................................................               504                798
Loans, net ...................................................................................           224,338            197,312
Premises and equipment, net ..................................................................             5,120              4,380
Bank owned life insurance ....................................................................             4,576              4,408
Assets acquired in settlement of loans .......................................................               149                630
Other assets .................................................................................             4,173              3,320
                                                                                                       ---------          ---------

           Total assets ......................................................................         $ 300,310          $ 251,948
                                                                                                       =========          =========

                                           LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits
     Noninterest bearing .....................................................................         $  15,215          $  12,321
     Interest bearing ........................................................................           253,708            209,340
                                                                                                       ---------          ---------

           Total deposits ....................................................................           268,923            221,661

Federal Home Loan Bank advances ..............................................................                 -              8,500
Other borrowings .............................................................................                 -              3,900
Junior subordinated debentures ...............................................................             8,247                  -
Other liabilities ............................................................................             3,670              1,759
                                                                                                       ---------          ---------

           Total liabilities .................................................................           280,840            235,820
                                                                                                       ---------          ---------

COMMITMENTS AND CONTINGENCIES - Notes 10 and 14

SHAREHOLDERS' EQUITY
     Common stock, no par value, 20,000,000 shares authorized,
        3,373,846 and 3,065,726 shares issued and outstanding
        at December 31, 2006 and 2005 respectively ...........................................            19,054             14,340
     Retained earnings .......................................................................               554              2,149
     Accumulated other comprehensive loss ....................................................              (138)              (361)
                                                                                                       ---------          ---------

           Total shareholders' equity ........................................................            19,470             16,128
                                                                                                       ---------          ---------

           Total liabilities and shareholders' equity ........................................         $ 300,310          $ 251,948
                                                                                                       =========          =========
</TABLE>


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



                                       21
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
                  (Dollars in thousands except per share data)

<TABLE>
<CAPTION>
                                                                                               For the years ended December 31,
                                                                                               --------------------------------
                                                                                            2006             2005            2004
                                                                                            ----             ----            ----
INTEREST INCOME
<S>                                                                                        <C>              <C>              <C>
   Loans and fees on loans ......................................................          $21,338          $14,917          $ 9,901
   Investment securities ........................................................            1,622              895              525
   Other ........................................................................              651              311               83
                                                                                           -------          -------          -------

        Total interest income ...................................................           23,611           16,123           10,509
                                                                                           -------          -------          -------

INTEREST EXPENSE
   Deposits .....................................................................           10,045            5,720            3,250
   Federal Home Loan Bank advances and other borrowings .........................              407              664              506
   Subordinated debentures ......................................................              389              116               79
                                                                                           -------          -------          -------

        Total interest expense ..................................................           10,841            6,500            3,835
                                                                                           -------          -------          -------

        Net interest income .....................................................           12,770            9,623            6,674

PROVISION FOR LOAN LOSSES .......................................................            1,110            1,125            1,000
                                                                                           -------          -------          -------

        Net interest income after provision for
           loan losses ..........................................................           11,660            8,498            5,674
                                                                                           -------          -------          -------

NONINTEREST INCOME
   Service fees on deposit accounts .............................................              388              311              266
   Gain on sale of investment securities available for sale .....................                -               18                -
   Gain on sale of assets acquired in the settlement of loans ...................              119                -                -
   Other ........................................................................              252              251              135
                                                                                           -------          -------          -------

        Total noninterest income ................................................              759              580              401
                                                                                           -------          -------          -------

NONINTEREST EXPENSES
   Salaries and employee benefits ...............................................            4,628            3,095            2,163
   Data processing ..............................................................              408              336              321
   Insurance ....................................................................              411              200               85
   Net occupancy and expenses of premises and equipment .........................              796              647              668
   Printing, postage and supplies ...............................................              222              140               97
   Professional services ........................................................              347              332              225
   Miscellaneous loan expense ...................................................              153              483              136
   Other operating ..............................................................              433              329              292
                                                                                           -------          -------          -------

        Total noninterest expenses ..............................................            7,398            5,562            3,987
                                                                                           -------          -------          -------

        Income before income taxes ..............................................            5,021            3,516            2,088

INCOME TAX PROVISION ............................................................            1,761            1,155              769
                                                                                           -------          -------          -------

        Net income ..............................................................          $ 3,260          $ 2,361          $ 1,319
                                                                                           =======          =======          =======
</TABLE>

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


                                       22
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY

                  CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
                  (Dollars in thousands except per share data)

<TABLE>
<CAPTION>
                                                                                         For the years ended December 31,
                                                                                         --------------------------------
                                                                                 2006                 2005                2004
                                                                                 ----                 ----                ----
NET INCOME PER COMMON SHARE*
<S>                                                                       <C>                    <C>                   <C>
     Basic .......................................................        $          0.97        $         0.83        $        0.50
                                                                          ===============        ==============        =============

     Diluted .....................................................        $          0.89        $         0.69        $        0.39
                                                                          ===============        ==============        =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING*
     Basic .......................................................              3,372,065             2,840,528            2,620,593
                                                                          ===============        ==============        =============

     Diluted .....................................................              3,653,849             3,540,885            3,520,614
                                                                          ===============        ==============        =============
</TABLE>

*Net  income per  common  share and  weighted  average  number of common  shares
outstanding  for 2005 and 2004 have been  restated  to reflect  the ten  percent
stock dividend declared in July 2006.

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


                                       23
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY

    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
              For the years ended December 31, 2006, 2005 and 2004
                    (Dollars in thousands except share data)

<TABLE>
<CAPTION>
                                                                Common stock                          Accumulated
                                                                ------------                             other            Total
                                                                                         Retained      comprehensive   shareholders'
                                                            Shares         Amount        earnings      income (loss)      equity
                                                            ------         ------        --------      -------------      ------
<S>                                                        <C>           <C>               <C>         <C>            <C>
Balance, December 31, 2003 ...........................     2,165,970     $    9,695        $     -     $      (54)    $    9,641
                                                                                                                      ----------
     Net income ......................................             -              -          1,319              -          1,319
     Other comprehensive income -
       Unrealized holding gain on
       investment securities (net of
       income tax expense of $5) .....................             -              -              -             11             11
                                                                                                                      ----------

     Comprehensive income ............................             -              -              -              -          1,330
     Cash in lieu of fractional shares ...............          (191)            (1)            (1)
     Cash dividend ($.08) per share ..................             -              -           (173)             -           (173)
     Stock dividend (10%) ............................       216,578          1,146         (1,146)             -              -
                                                          ----------     ----------     ----------     ----------     ----------

Balance, December 31, 2004 ...........................     2,382,357         10,840              -            (43)        10,797
                                                                                                                      ----------
     Net income ......................................             -              -          2,361              -          2,361
     Other comprehensive income -
       Unrealized holding losses on
       investment securities (net of
       income tax benefit of $180) ...................             -              -              -           (307)          (307)

     Less reclassification adjustment for
     gains included in net income (net of
     income tax expense of $7) .......................                                                        (11)           (11)
                                                                                                                      ----------
     Comprehensive income ............................             -              -              -              -          2,043
     Conversion of subordinated debentures into
     common stock ....................................       683,581          3,500              -              -          3,500
     Cash in lieu of fractional shares ...............          (212)             -             (2)             -             (2)
     Cash dividend ($.08) per share ..................             -              -           (210)             -           (210)
                                                          ----------     ----------     ----------     ----------     ----------

Balance, December 31, 2005 ...........................     3,065,726         14,340          2,149           (361)        16,128
                                                                                                                      ----------
     Net income ......................................             -              -          3,260              -          3,260
     Other comprehensive income -
       Unrealized holding gains on
       investment securities (net of
       income tax effect of $141) ....................             -              -              -            223            223
                                                                                                                      ----------

     Comprehensive income ............................             -              -              -              -          3,483
     Stock based compensation ........................             -            110              -              -            110
     Stock dividend (10%) ............................       306,573          4,592         (4,592)             -              -
     Cash in lieu of fractional shares ...............          (407)             -             (5)             -             (5)
     Exercise of stock options .......................         1,954             12              -              -             12
     Cash dividend ($.08) per share ..................             -              -           (258)             -           (258)
                                                          ----------     ----------     ----------     ----------     ----------

Balance, December 31, 2006 ...........................     3,373,846     $   19,054     $      554     $     (138)    $   19,470
                                                          ==========     ==========     ==========     ==========     ==========
</TABLE>

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


                                       24
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                              For the years ended December 31,
                                                                                              --------------------------------
                                                                                           2006             2005              2004
                                                                                           ----             ----              ----
OPERATING ACTIVITIES
<S>                                                                                      <C>              <C>              <C>
     Net income .................................................................        $  3,260         $  2,361         $  1,319
     Adjustments to reconcile net income to net cash
        provided by operating activities
        Deferred income tax expense (benefit) ...................................             273             (361)              55
        Provision for possible loan losses ......................................           1,110            1,125            1,000
        Depreciation of premises and equipment ..................................             388              329              385
        Net amortization (accretion) of investment securities
          available for sale ....................................................              (6)              19              114
        Gain on sale of investment securities available for sale ................               -              (18)               -
        Gain on sale of property and equipment ..................................             (14)              (1)              (4)
        (Gain) loss on sale of assets acquired in settlement of loans ...........            (119)               1               13
        Accretion of bank owned life insurance ..................................            (168)            (161)               -
        Stock based compensation ................................................             110                -                -
        Write-down of assets acquired in settlement of loans ....................              15              251               68
     Changes in operating assets and liabilities:
        Increase in other assets ................................................          (1,018)            (232)            (534)
        Increase in other liabilities ...........................................           1,903              185              233
                                                                                         --------         --------         --------

              Net cash provided by operating activities .........................           5,734            3,498            2,649
                                                                                         --------         --------         --------

INVESTING ACTIVITIES
     Origination of loans, net ..................................................         (28,300)         (24,582)         (28,271)
     Purchase of investment securities available for sale .......................         (21,338)         (16,046)         (11,027)
     Proceeds from principal paydowns on investment securities
           available for sale ...................................................           3,222            2,769            2,908
     Proceeds from sales of investment securities available for
           sale .................................................................               -              962            5,500
     Proceeds from maturity and calls of investment securities
           available for sale ...................................................           5,000                -                -
     Redemption (purchase) of Federal Home Loan Bank stock ......................             294              157             (375)
     Purchase of bank owned life insurance ......................................               -                -           (3,357)
     Increase in cash surrender value of life insurance .........................               -                -              (63)
     Investment in capital trust ................................................            (247)               -                -
     Proceeds from sale of assets acquired in settlement of loans ...............             749              309              606
     Cash equivalents acquired, net of payment for purchase
           acquisition ..........................................................               -             (737)               -
     Proceeds from sale of premises and equipment ...............................              37               22               16
     Purchase of premises and equipment .........................................          (1,151)          (1,101)            (132)
                                                                                         --------         --------         --------

              Net cash used for investing activities ............................         (41,734)         (38,247)         (34,195)
                                                                                         --------         --------         --------

FINANCING ACTIVITIES
      Increase in deposits, net .................................................          47,262           45,515           29,637
      Proceeds from Federal Home Loan Bank advances .............................               -           11,000            5,000
      Repayment of Federal Home Loan Bank advances ..............................          (8,500)         (16,000)          (3,100)
      Proceeds from issuance of junior subordinated debentures ..................           8,247                -                -
      Proceeds from other borrowings ............................................             100            3,900            2,500
      Repayment of other borrowings .............................................          (4,000)          (2,500)               -
      Proceeds from exercise of stock options ...................................              12                -                -
      Dividends paid ............................................................            (252)            (192)            (130)
      Cash paid in lieu of fractional shares ....................................              (5)              (2)              (1)
                                                                                         --------         --------         --------

              Net cash provided by financing activities .........................          42,864           41,721           33,906
                                                                                         --------         --------         --------

              Net  increase in cash and cash equivalents ........................           6,864            6,972            2,360
</TABLE>


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


                                       25
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                            For the years ended December 31,
                                                                                            --------------------------------
                                                                                       2006             2005               2004
                                                                                       ----             ----               ----

<S>                                                                                 <C>              <C>               <C>
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................           12,940             5,968           3,608
                                                                                    ----------       -----------       ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ......................................       $   19,804       $    12,940       $   5,968
                                                                                    ==========       ===========       =========

SUPPLEMENTAL INFORMATION
      Cash paid for:
         Income taxes .......................................................       $    1,548       $     1,225       $     238
                                                                                    ==========       ===========       =========

         Interest ...........................................................       $   10,671       $     6,632       $   3,811
                                                                                    ==========       ===========       =========

SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES

    Change in unrealized gain (loss) on investment securities
    available for sale, before tax ..........................................       $      364              (505)      $      16
                                                                                    ==========       ===========       =========
    Loans charged-off, net of recoveries ....................................       $    1,737       $       368       $   1,052
                                                                                    ==========       ===========       =========
    Loans transferred to assets acquired in settlement of loans .............       $      164       $       310       $   1,157
                                                                                    ==========       ===========       =========
    Dividends declared, but unpaid ..........................................       $       67       $        61       $      43
                                                                                    ==========       ===========       =========
    Subordinated debentures converted into common stock .....................       $        -       $     3,500    $          -
                                                                                    ==========       ===========       =========
    Stock dividend ..........................................................       $    4,592                 -       $   1,146
                                                                                    ==========       ===========       =========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

                                                                     (Continued)

                                       26
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

         GrandSouth   Bancorporation   (the   "Company")  is  a  South  Carolina
corporation  organized  in 2000 for the  purpose of being a holding  company for
GrandSouth Bank (the "Bank"). On October 2, 2000, pursuant to a Plan of Exchange
approved by the shareholders,  all of the outstanding  shares of $2.50 par value
common stock of the Bank were  exchanged for shares of no par value common stock
of the Company.  The Company presently engages in no business other than that of
owning the Bank,  has no employees,  and operates as one business  segment.  The
Company is regulated by the Federal Reserve Board.  The  consolidated  financial
statements  include the  accounts of the Company and the Bank.  All  significant
intercompany  accounts and transactions  have been eliminated in  consolidation.
The GrandSouth Capital Trust 1 (see note 9) is an unconsolidated subsidiary.

         The Bank was  incorporated  in 1998 and  operates  as a South  Carolina
chartered  bank providing  full banking  services to its customers.  The Bank is
subject  to  regulation  by  the  South   Carolina   State  Board  of  Financial
Institutions and the Federal Deposit Insurance Corporation.

   Basis of presentation
     The  accounting  and reporting  policies  conform to accounting  principles
     generally accepted in the United States of America and to general practices
     in the banking industry. The Company uses the accrual basis of accounting.

   Reclassifications
     Certain prior year amounts have been reclassified to conform to the current
     presentation. These reclassifications have no effect on previously reported
     shareholders' equity, comprehensive income, or net income.

   Acquisition
     In May 2005, the Company  acquired an  auto-financing  business with assets
     valued  at  $3,236  and  recorded  $737 in  goodwill.  This  auto-financing
     business had $2,413 in specialty commercial lines of credit with the Bank.

   Estimates
     The  preparation of  consolidated  financial  statements in conformity with
     accounting  principles  generally  accepted in the United States of America
     requires  management  to make  estimates  and  assumptions  that affect the
     reported  amounts of assets and  liabilities  and  disclosure of contingent
     assets  and  liabilities  as of  the  date  of the  consolidated  financial
     statements  and the  reported  amount of income  and  expenses  during  the
     reporting periods. Actual results could differ from those estimates.

   Concentrations of credit risk
     The Company makes loans to  individuals  and small  businesses  for various
     personal and commercial  purposes  primarily in the upstate region of South
     Carolina.  The Company's loan portfolio is not concentrated in loans to any
     single borrower or in a relatively small number of borrowers. Additionally,
     management  is not  aware of any  concentrations  of loans  to  classes  of
     borrowers  or  industries  that would be  similarly  affected  by  economic
     conditions.

     In addition to monitoring  potential  concentrations of loans to particular
     borrowers  or groups  of  borrowers,  industries  and  geographic  regions,
     Management monitors exposure to credit risk that could arise from potential
     concentrations of lending products and practices such as loans that subject
     borrowers  to  substantial  payment  increases  (e.g.   principal  deferral
     periods,  loans with initial  interest-only  periods,  etc), and loans with
     high loan-to-value ratios. Additionally,  there are industry practices that
     could  subject  the  Company  to  increased  credit  risk  should  economic
     conditions  change  over the  course of a loan's  life.  For  example,  the
     Company  makes  variable  rate loans  and  fixed rate  principal-amortizing


                                       27
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

     loans  with  maturities  prior to the loan being  fully paid (i.e.  balloon
     payment loans).  These loans are  underwritten  and monitored to manage the
     associated risks.  Management has determined that there is no concentration
     of credit risk associated with its lending policies or practices.

     The Company's  investment  portfolio consists principally of obligations of
     the United States of America,  its agencies or its corporations and general
     obligation municipal securities. In the opinion of management,  there is no
     concentration  of credit  risk in its  investment  portfolio.  The  Company
     places its deposits and  correspondent  accounts with and sells its federal
     funds  to  high  quality  institutions.  Management  believes  credit  risk
     associated with correspondent accounts is not significant.

   Investment securities
     The Bank accounts for investment securities in accordance with Statement of
     Financial  Accounting  Standards ("SFAS") No. 115,  "Accounting for Certain
     Investments  in  Debt  and  Equity   Securities."  The  statement  requires
     investments  in equity and debt  securities  to be  classified  into one of
     three categories:

     1.   Available for sale:  These are  securities  that are not classified as
          either held to maturity or as trading securities. These securities are
          reported at fair market value which is determined  using quoted market
          prices. Unrealized gains and losses are reported, net of income taxes,
          as separate  components of  shareholders'  equity  (accumulated  other
          comprehensive  income  (loss)).  Gains or  losses on  dispositions  of
          securities  are based on the  difference  between the net proceeds and
          the  adjusted  carrying  amounts  of the  securities  sold  using  the
          specific  identification method.  Premiums and discounts are amortized
          into interest income by a method that approximates a level yield.

     2.   Held to  maturity:  These  are  securities  that the  Company  has the
          ability and intent to hold until maturity. These securities are stated
          at cost,  adjusted for  amortization  of premiums and the accretion of
          discounts.  Premiums and discounts are amortized into interest  income
          by a method that  approximates a level yield.  The Company has no held
          to maturity securities.

     3.   Trading: These are securities that are bought and held principally for
          the  purpose of selling in the near  future.  Trading  securities  are
          reported at fair market value, and related unrealized gains and losses
          are  recognized  in the income  statement.  The Company has no trading
          securities.

   Loans and interest income on loans
     Loans are stated at the principal  balance  outstanding.  The allowance for
     possible  loan  losses is  deducted  from total  loans in the  consolidated
     balance sheets.  Interest income is recognized on an accrual basis over the
     term of the loan based on the principal amount outstanding.

     Loans are generally placed on non-accrual status when principal or interest
     becomes  ninety days past due, or when payment in full is not  anticipated.
     When a loan is placed  on  non-accrual  status,  interest  accrued  but not
     received is generally  reversed against interest income.  If collectibility
     is in  doubt,  cash  receipts  on  non-accrual  loans are not  recorded  as
     interest income,  but are used to reduce principal.  Loans are not returned
     to  accrual  status  until the  borrower  demonstrates  the  ability to pay
     principal and interest.  Loans on non-accrual status as well as real estate
     acquired  through  foreclosure  or deed  taken in lieu of  foreclosure  are
     included in non-performing assets.


                                       28
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

   Allowance for loan losses
     The provision  for loan losses  charged to operating  expense  reflects the
     amount deemed appropriate by management to establish an adequate reserve to
     meet  the  present  estimated  loss  characteristics  of the  current  loan
     portfolio.   Management's   estimate  is  based  on  periodic  and  regular
     evaluation of individual  loans,  the overall risk  characteristics  of the
     various portfolio segments, past experience with losses, and prevailing and
     anticipated   economic   conditions.   Loans  that  are  determined  to  be
     uncollectible are charged against the allowance.  Provision for loan losses
     and recoveries on loans previously charged off are added to the allowance.

     The Company  accounts for impaired  loans in accordance  with SFAS No. 114,
     "Accounting by Creditors for Impairment of a Loan." This standard  requires
     that all  lenders  value  loans at the loan's  fair value if it is probable
     that the lender will be unable to collect all amounts due  according to the
     terms of the loan  agreement.  Fair value may be determined  based upon the
     present  value  of  expected  cash  flows,  market  price of the  loan,  if
     available,  or value of the underlying collateral.  Expected cash flows are
     required to be discounted at the loan's effective interest rate.

     Under  SFAS No.  114,  as  amended  by SFAS  No.  118,  when  the  ultimate
     collectibility  of an  impaired  loan's  principal  is in doubt,  wholly or
     partially,  all cash receipts are applied to  principal.  Once the reported
     principal  balance  has been  reduced to zero,  future  cash  receipts  are
     applied to  interest  income,  to the  extent  that any  interest  has been
     foregone.  Further cash  receipts are recorded as recoveries of any amounts
     previously charged off.

     A loan is also considered  impaired if its terms are modified in a troubled
     debt  restructuring.  For these accruing  impaired loans, cash receipts are
     typically  applied to principal and interest  receivable in accordance with
     the terms of the restructured loan agreement. Interest income is recognized
     on these loans using the accrual method of accounting.

   Premises and equipment
     Premises and equipment are stated at cost, net of accumulated depreciation.
     Depreciation is computed using the straight-line  method over the estimated
     useful lives of the related assets.  Maintenance and repairs are charged to
     operations, while major improvements are capitalized. Upon retirement, sale
     or other  disposition of premises and equipment,  the cost and  accumulated
     depreciation are eliminated from the accounts, and gain or loss is included
     in income from operations.

   Assets acquired in settlement of loans
     Assets acquired in settlement of loans include real estate acquired through
     foreclosure or deed taken in lieu of foreclosure,  and repossessed  assets.
     These assets are  recorded at the lower of the carrying  value of the loans
     or the estimated fair value of the related asset, net of estimated  selling
     costs.  The excess  carrying value, if any, is charged to the allowance for
     possible loan losses upon transfer.  If further  reduction in value occurs,
     charges are included in income from operations.

   Goodwill
     Goodwill is included in other assets and is evaluated for  impairment on at
     least an annual basis by comparing the fair value of its reporting units to
     their related  carrying  value.  If the carrying  value of a reporting unit
     exceeds its fair value,  the Company  determines  whether the implied  fair
     value of the goodwill,  using a discounted cash flow analysis,  exceeds the
     carrying  value of the  goodwill.  If the  carrying  value of the  goodwill
     exceeds the  implied  fair value of the  goodwill,  an  impairment  loss is
     recorded in an amount  equal to that excess.  To date,  the Company has not
     had to record any impairment of its goodwill.


                                       29
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

   Income taxes
     The  financial  statements  have been prepared on the accrual  basis.  When
     income and  expenses are  recognized  in  different  periods for  financial
     reporting  purposes versus for purposes of computing income taxes currently
     payable,  deferred  taxes are provided on such temporary  differences.  The
     Company  accounts  for  income  taxes in  accordance  with  SFAS  No.  109,
     "Accounting for Income Taxes." Under SFAS No. 109,  deferred tax assets and
     liabilities  are recognized  for the expected  future tax  consequences  of
     events that have been recognized in the financial statements or tax return.
     Deferred  tax assets and  liabilities  are  measured  using the enacted tax
     rates  expected  to apply to  taxable  income in the  years in which  those
     temporary differences are expected to be realized or settled.

   Advertising and public relations expense
     Advertising,   promotional,   and  other  business  development  costs  are
     generally expensed as incurred.  External costs incurred in producing media
     advertising  are  expensed  the first  time the  advertising  takes  place.
     External  costs  relating to direct  mailings are expensed in the period in
     which the direct mailings are sent.

   Net income per common share
     Net  income  per  common  share is  computed  on the basis of the  weighted
     average  number of common shares  outstanding  in accordance  with SFAS No.
     128, "Earnings per Share." The treasury stock method is used to compute the
     effect of stock  options and  convertible  subordinated  debentures  on the
     weighted  average number of common shares  outstanding for diluted earnings
     per share.  On January 22, 2004,  February 28, 2005 and July 19, 2006,  the
     Company declared ten percent stock  dividends.  Per share and share amounts
     have been retroactively  restated since the Company's 2005 Annual Report on
     Form 10-KSB to reflect the stock dividend  declared in 2006. The 2005 stock
     dividend was reflected in the 2004 financial statements.

   Statement of cash flows
     For purposes of reporting cash flows, cash and cash equivalents are defined
     as those  amounts  included in the  balance  sheet  caption  "Cash and cash
     equivalents."  Cash and cash equivalents have an original maturity of three
     months or less.

   Fair values of financial instruments
     SFAS No. 107,  "Disclosures About Fair Value of Financial  Instruments," as
     amended by SFAS No. 119, requires  disclosure of fair value information for
     financial  instruments,  whether  or not  recognized  in  the  consolidated
     balance sheet,  when it is practicable to estimate the fair value. SFAS No.
     107  defines a  financial  instrument  as cash,  evidence  of an  ownership
     interest  in an  entity  or  contractual  obligations,  which  require  the
     exchange  of  cash  or  other  financial  instruments.  Certain  items  are
     specifically  excluded  from the  disclosure  requirements,  including  the
     Company's common stock. In addition, other nonfinancial instruments such as
     property and equipment and other assets and  liabilities are not subject to
     the disclosure requirements.

   Risks and uncertainties
     In the normal course of its business the Company encounters two significant
     types of risks: economic and regulatory. There are three main components of
     economic risk: interest rate risk, credit risk and market risk. The Company
     is subject to interest  rate risk to the degree  that its  interest-bearing
     liabilities  mature or reprice at different  times, or on different  bases,
     than its interest-earning assets. Credit risk is the risk of default on the
     Company's loan and  investment  securities  portfolios  that results from a
     borrower's  inability  or  unwillingness  to  make  contractually  required
     payments.   Market  risk  reflects  changes  in  the  value  of  collateral
     underlying  loans  receivable  and the valuation of real estate held by the
     Company.


                                       30
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

     The Company is subject to the regulations of various governmental agencies.
     These  regulations can and do change  significantly  from period to period.
     The  Company  also  undergoes  periodic   examinations  by  the  regulatory
     agencies,  which may subject it to further  changes  with  respect to asset
     valuations,  amounts of required loss allowances and operating restrictions
     from the regulators'  judgments  based on information  available to them at
     the time of their examination.

Stock-based compensation
     The Company has a stock-based employee  compensation plan, which is further
     described in Note 16. Until January 1, 2006, the Company  accounted for the
     plan  under  the  recognition  and  measurement  principles  of  Accounting
     Principles  Board ("APB")  Opinion No. 25,  "Accounting for Stock Issued to
     Employees,"   and  related   Interpretations.   No   stock-based   employee
     compensation  cost was  reflected in net income prior to 2006, as all stock
     options  granted  under the plan had an exercise  price equal to the market
     value of the  underlying  common  stock on the date of grant.  The  Company
     adopted SFAS 123(R) on January 1, 2006. The following table illustrates the
     effect on net income and net income per common  share as if the Company had
     applied the fair value recognition  provisions of SFAS No. 123, "Accounting
     for Stock-Based Compensation," to stock-based employee compensation in 2005
     and 2004, and the actual expense  recognized in 2006 under SFAS 123(R). Per
     share and weighted average shares outstanding have been restated to reflect
     the ten percent stock dividend  declared on July 19, 2006. The February 28,
     2005 stock dividend was reflected in the 2004 financial statements.

<TABLE>
<CAPTION>
                                                                                                Years ended December 31,
                                                                                                ------------------------
                                                                                       2006               2005                2004
                                                                                       ----               ----                ----

<S>                                                                                  <C>                <C>                <C>
Net income, as reported ..................................................           $ 3,260            $ 2,361           $   1,319
Add:  Stock-based compensation expense included in net
       income, net of tax effects ........................................                71                  -                   -
Deduct:  Total stock-based employee compensation
     expense determined under fair value based
     method for all awards, net of related tax effects
                                                                                         (71)              (124)                (54)
                                                                                     -------            -------           ---------

Pro forma net income - basic .............................................             3,260              2,237               1,265

Add: Interest savings, net of tax/weighted average
     incremental shares assumed on conversion of
     subordinated debentures .............................................                 -                 73                  50
                                                                                     -------            -------           ---------

Net income (2006) and pro forma net income (2005
    and 2004) - diluted ..................................................           $ 3,260            $ 2,310           $   1,315
                                                                                     =======            =======           =========

Net income per common share:
     Basic - as reported .................................................           $  0.97            $  0.83           $    0.50
                                                                                     =======            =======           =========
     Basic - pro forma (2005 and 2004) ...................................           $  0.97            $  0.79           $    0.48
                                                                                     =======            =======           =========


     Diluted - as reported ...............................................           $  0.89            $  0.69           $    0.39
                                                                                     =======            =======           =========
     Diluted - pro forma (2005 and 2004) .................................           $  0.89            $  0.65           $    0.37
                                                                                     =======            =======           =========
</TABLE>


                                       31
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

         The  weighted  average  fair values of the options  granted  during the
years ended  December  31,  2006,  2005 and 2004 have been  estimated  using the
Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
                                                                                                  December 31
                                                                                                  -----------
                                                                                  2006              2005            2004
                                                                                  ----              ----            ----
Assumptions:
<S>                                                                                <C>              <C>              <C>
   Dividend yield ......................................................           0.64%            0.89%            1.32%
   Weighted average risk-free interest rate ............................           5.04%            4.24%            5.00%
   Weighted average expected volatility ................................          31.14%           20.09%           15.25%
   Weighted average expected life in years .............................           8.00             8.00             8.00

Weighted average fair values ...........................................         $ 5.42           $ 2.79           $ 1.67
</TABLE>

         As of December 31, 2006 the Company had 472,038  outstanding options to
employees  and  directors.  The table set forth below  summarizes  stock  option
activity for the Company's stock compensation plan for the period ended December
31, 2006. The number of shares outstanding, granted and exercised as well as the
corresponding  weighted average exercise prices have been retroactively restated
to reflect all stock dividends since the date the options were granted.

<TABLE>
<CAPTION>
                                                                   Stock Options
                                                                   -------------
                                                                            Weighted-Average
                                                                               Remaining
                                                         Weighted-Average      Contractual          Intrinsic
                                               Shares     Exercise Price      Life (Years)           Value*
                                               ------     --------------      ------------           ------
<S>                                            <C>            <C>                                   <C>
Outstanding at December 31, 2005 ..........    456,392        $ 5.24
Granted ...................................     19,800        $12.50                                $    248
Exercised .................................    (1,954)        $ 5.97                                $     33
Forfeited .................................    (2,200)        $ 8.41
                                               ------
Outstanding at December 31, 2006 ..........    472,038        $ 5.53             4.86               $  9,195
                                               =======

Exercisable at December 31, 2006 ..........    344,014        $ 4.15             3.48               $  7,173
                                               =======
</TABLE>

*Intrinsic value is calculated in the aggregate for shares granted,  outstanding
and exercisable by taking the closing price of the Company's  common stock as of
December  31,  2006,  as reported by the OTCBB  ($25.00 in this case),  less the
weighted-average exercise price of the respective category of stock option. That
result is then multiplied by the number of shares  outstanding.  Intrinsic value
for shares  exercised is the closing price of the stock as reported by the OTCBB
on the date of exercise less the actual exercise price of the particular  shares
exercised. This difference is then multiplied by the number of shares exercised.
This intrinsic value is calculated for each exercise during the year and totaled
here for all exercises during the year.

         The table set forth below  summarizes  non-vested  stock  options as of
December 31, 2006.  The number of  non-vested  shares  outstanding,  granted and
vested  during  the  year  and  the  weighted  average  fair  values  have  been
retroactively restated to reflect all stock dividends since the date the options
were granted.

<TABLE>
<CAPTION>
                                                                         Weighted- Average
                                                                             Grant Date           Total
                                                            Number           Fair Value         Fair Value
                                                            ------           ----------         ----------
<S>                                                        <C>                 <C>                <C>
Non-vested outstanding at December 31, 2005                161,733             $ 2.38
Granted                                                     19,800               5.42
Vested during the year                                     (51,309)              2.10             $  108
Forfeited during the year                                   (2,200)              2.56
                                                           -------
Non-vested outstanding at December 31, 2006                128,024               3.08
                                                           =======
</TABLE>



                                       32
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued


         The total fair value of options vested during 2005 and 2004 was $40 for
each  year.  As  of  December  31,  2006,  there  was  $405  total  unrecognized
compensation cost related to non-vested share-based  compensation  arrangements,
which is expected to be recognized over a weighted average period of 3.92 years.
The Company issues authorized but unissued shares to satisfy option exercises.

Recently issued accounting standards
   The following is a summary of recent  authoritative  pronouncements  that may
   affect accounting,  reporting, and disclosure of financial information by the
   Company:

           In February  2007,  the FASB  issued  SFAS No.  159,  "The Fair Value
    Option for  Financial  Assets  and  Financial  Liabilities  -  Including  an
    amendment of FASB Statement No. 115." This statement  permits,  but does not
    require,  entities to measure many financial  instruments at fair value. The
    objective is to provide entities with an opportunity to mitigate  volatility
    in reported  earnings  caused by measuring  related  assets and  liabilities
    differently  without  having to apply complex hedge  accounting  provisions.
    Entities electing this option will apply it when the entity first recognizes
    an eligible  instrument and will report  unrealized gains and losses on such
    instruments in current earnings.  This statement 1) applies to all entities,
    2)   specifies   certain   election   dates,   3)  can  be   applied  on  an
    instrument-by-instrument  basis with some exceptions,  4) is irrevocable and
    5) applies  only to entire  instruments.  One  exception  is demand  deposit
    liabilities which are explicitly excluded as qualifying for fair value. With
    respect to SFAS 115,  available-for-sale and held-to-maturity  securities at
    the  effective  date are eligible for the fair value option at that date. If
    the fair value option is elected for those securities at the effective date,
    cumulative unrealized gains and losses at that date shall be included in the
    cumulative-effect   adjustment  and  thereafter,  such  securities  will  be
    accounted for as trading  securities.  SFAS 159 is effective for the Company
    on January 1, 2008.  Earlier  adoption is  permitted  in 2007 if the Company
    also elects to apply the provisions of SFAS 157,  "Fair Value  Measurement."
    The Company is currently analyzing the fair value option provided under SFAS
    159.

           In September 2006, the SEC issued Staff Accounting  Bulleting No. 108
    ("SAB 108").  SAB 108 provides  interpretive  guidance on how the effects of
    the carryover or reversal of prior year  misstatements  should be considered
    in  quantifying  a potential  current year  misstatement.  Prior to SAB 108,
    Companies   might   evaluate  the   materiality   of   financial   statement
    misstatements  using either the income  statement or balance sheet approach,
    with the income statement  approach focusing on new  misstatements  added in
    the current year, and the balance sheet approach  focusing on the cumulative
    amount of misstatement  present in a company's balance sheet.  Misstatements
    that would be  material  under one  approach  could be viewed as  immaterial
    under  another  approach,  and not be  corrected.  SAB 108 now requires that
    companies view  financial  statement  misstatements  as material if they are
    material according to either the income statement or balance sheet approach.
    The Company has analyzed SAB 108 and  determined  that upon adoption it will
    have  no  impact  on  the  reported   results  of  operations  or  financial
    conditions.

           In September,  2006, The FASB ratified the consensuses reached by the
    FASB's Emerging Issues Task Force ("EITF") relating to EITF 06-4 "Accounting
    for  the  Deferred  Compensation  and  Postretirement   Benefit  Aspects  of
    Endorsement  Split-Dollar Life Insurance  Arrangements."  EITF 06-4 requires
    employers to recognize a liability for future  benefits in  accordance  with
    SFAS No. 106, "Employers' Accounting for Postretirement  Benefits Other Than
    Pensions"  (plan) or Accounting  Principles  Board Opinion No. 12,  "Omnibus
    Opinion - 1967" (individual contract) based on the substantive  agreement(s)
    with  the  employee(s).  If the  agreement  pays a death  benefit,  then the
    Company needs to accrue that death  benefit.  If the agreement  requires the
    Company to keep the split dollar  arrangement in force during the retirement
    period,  then the Company has to accrue the cost of  maintaining  the policy
    based on the employee(s) actuarial life expectancy. These expenses should be
    recognized over the employment  service period required to vest the benefit.
    EITF 06-4 is effective for fiscal years  beginning  after December 15, 2006,
    but earlier adoption is permitted.  Entities should recognize the effects of
    applying this EITF through either (a)


                                       33
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

    a change in accounting  principle through a cumulative-effect  adjustment to
    retained  earnings  or to other  components  of equity or net  assets in the
    statement of financial  position as of the beginning of the year of adoption
    or (b) a change in accounting principle through retrospective application to
    all prior periods. The Company is currently analyzing the effect of adoption
    of EITF 06-4 on its  financial  position,  results  of  operations  and cash
    flows.

           In  September  of  2006,  the  FASB  issued  SFAS  157,  "Fair  Value
    Measurements."  This statement  defines fair value,  establishes a framework
    for measuring fair value in conformity with accounting  principles generally
    accepted in the United States of America, and expands disclosures about fair
    value   measurements.   This  statement   applies  under  other   accounting
    pronouncements  that require or permit fair value  measurements and does not
    require   any  new  fair   value   measurements,   but   rather   eliminates
    inconsistencies  found  in  various  prior  pronouncements.  This  statement
    emphasizes   that  fair  value  is  a  market-based   measurement,   not  an
    entity-specific  measurement.  This statement expands  disclosures about the
    use of fair value to measure  assets and  liabilities  in interim and annual
    periods.  This  statement is effective for financial  statements  issued for
    fiscal years  beginning  after November 15, 2007, and interim periods within
    those fiscal years. Earlier application is encouraged.  The Company does not
    expect the  adoption  of this  statement  to have a  material  effect on its
    financial statements or on its results of operations.

           In June of 2006, the FASB issued  Interpretation  No. 48, "Accounting
    for  Uncertainty in Income  Taxes--an  interpretation  of FASB Statement No.
    109" ("FIN 48"). FIN 48 prescribes a recognition  threshold and  measurement
    attribute for the financial  statement  recognition and measurement of a tax
    position  taken or expected to be taken in a tax return.  When a position is
    taken in a tax return  that  reduces  the  amount of income  taxes paid to a
    taxing  authority,  the enterprise  realizes an immediate  economic benefit.
    However,  considerable  time can elapse before the acceptability of that tax
    position is determined.  FIN 48 requires the affirmative  evaluation that it
    is more likely than not,  based on the  technical  merits of a tax position,
    that an enterprise is entitled to economic benefits resulting from positions
    taken   in  tax   returns.   If  a  tax   position   does   not   meet   the
    more-likely-than-not  recognition threshold, the benefit of that position is
    not recognized in the financial  statements.  FIN 48 is effective for fiscal
    years  beginning  after  December  15,  2006,  but  earlier  application  is
    encouraged. The Company is currently analyzing the effect of adoption of FIN
    48 on its financial position, results of operations and cash flows.

           Other  accounting  standards that have been issued or proposed by the
     FASB or other standards-setting bodies that do not require adoption until a
     future date are not expected to have a material impact on the  consolidated
     financial statements upon adoption.


NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

           The Bank is required to maintain average reserve  balances,  computed
by applying prescribed  percentages to its various types of deposits,  either at
the Bank or on deposit with the Federal  Reserve  Bank. At December 31, 2006 and
2005 these required reserves were met by vault cash.



                                       34
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 3 - INVESTMENT SECURITIES

         The amortized  cost and fair value of investment  securities  available
for sale are as follows:

<TABLE>
<CAPTION>
                                                                                           December 31, 2006
                                                                                           -----------------
                                                                                            Gross unrealized
                                                                     Amortized              ----------------                 Fair
                                                                       Cost               Gains            Losses            Value
                                                                       ----               -----            ------            -----
<S>                                                                    <C>               <C>               <C>               <C>
Government-sponsored enterprises ...........................           $22,500           $    72           $   103           $22,469
State and municipals .......................................             3,332                23                16             3,339
Mortgage backed ............................................            16,023                79               264            15,838
                                                                       -------           -------           -------           -------

       Total investment securities .........................           $41,855           $   174           $   383           $41,646
                                                                       =======           =======           =======           =======
</TABLE>

<TABLE>
<CAPTION>
                                                                                           December 31, 2005
                                                                                           -----------------
                                                                                            Gross unrealized
                                                                     Amortized              ----------------                 Fair
                                                                       Cost               Gains            Losses            Value
                                                                       ----               -----            ------            -----

<S>                                                                   <C>                <C>               <C>               <C>
Government-sponsored enterprises ..........................           $14,498            $     -           $   209           $14,289
State and municipals ......................................               463                  -                 2               461
Mortgage backed ...........................................            13,772                  -               362            13,410
                                                                      -------           --------           -------           -------

       Total investment securities ........................           $28,733            $     -           $   573           $28,160
                                                                      =======           ========           =======           =======
</TABLE>

           Government-sponsored  enterprises  include  FHLB bonds,  FHLMC bonds,
FNMA bonds and an FHLB structured note.

           The amortized costs and fair values of securities  available for sale
at December 31, 2006, by contractual maturity, are shown in the following chart.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.

                                                       Amortized
                                                          Cost      Fair value
                                                          ----      ----------

Less than one year ...............................      $ 8,012        $ 7,967
One to five years ................................       15,511         15,463
Five to ten years ................................       10,022          9,847
After ten years ..................................        8,310          8,369
                                                        -------        -------

       Total investment securities ...............      $41,855        $41,646
                                                        =======        =======

         Investment  securities with an aggregate amortized cost of $2,229 (fair
value of $2,227) at  December  31,  2006 and  $1,499  (fair  value of $1,465) at
December 31, 2005 were pledged to collateralize public deposits and borrowings.



                                       35
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 3 - INVESTMENT SECURITIES, Continued

           The following table shows gross unrealized losses and fair value, and
length of time that individual  securities have been in a continuous  unrealized
loss position at December 31, 2006.

<TABLE>
<CAPTION>
                                                         Less than 12 Months          12 Months or More            Total
                                                         -------------------          -----------------            -----
                                                        Fair        Unrealized      Fair       Unrealized      Fair       Unrealized
                                                        Value         Losses        Value        Losses        Value        Losses
                                                        -----         ------        -----        ------        -----        ------
<S>                                                 <C>            <C>             <C>           <C>           <C>           <C>
Government-sponsored enterprises ...............    $        -     $       -       $11,404       $   103       $11,404       $   103

State and municipals ...........................         1,946            16             -             -         1,946            16

Mortgage backed ................................           823             4         9,891           260        10,714           264
                                                       -------       -------       -------       -------       -------       -------

Total ..........................................       $ 2,769       $    20       $21,295       $   363       $24,064       $   383
                                                       =======       =======       =======       =======       =======       =======
</TABLE>

           The following table shows gross unrealized losses and fair value, and
length of time that individual  securities have been in a continuous  unrealized
loss position at December 31, 2005.

<TABLE>
<CAPTION>
                                                         Less than 12 Months          12 Months or More            Total
                                                         -------------------          -----------------            -----
                                                        Fair        Unrealized     Fair        Unrealized       Fair      Unrealized
                                                        Value        Losses        Value         Losses         Value      Losses
                                                        -----        ------        -----         ------         -----      ------

<S>                                                    <C>           <C>           <C>           <C>           <C>             <C>
Government-sponsored enterprises ...............       $ 6,926       $    75       $ 7,363       $   134       $14,289         209

State and municipals ...........................           461             2             -             -           461           2

Mortgage backed ................................         8,808           143         4,602           219        13,410         362
                                                       -------       -------       -------       -------       -------     -------

Total ..........................................       $16,195       $   220       $11,965           353       $28,160         573
                                                       =======       =======       =======       =======       =======     =======
</TABLE>

         At December  31,  2006,  twenty-four  individual  securities  were in a
continuous  loss position for twelve months or more. The Company has the ability
and intent to hold these securities until such time as the value recovers or the
securities mature.  The Company believes,  based on industry analyst reports and
credit ratings,  that the  deterioration  in value is attributable to changes in
market interest rates and not in the credit quality of the issuer and therefore,
these losses are not  considered  other-than-temporary.  All of the  twenty-four
securities have either a Standard & Poor's AAA or a Moody's Aaa credit rating as
quoted by Bloomberg.

         The Bank,  as a member  institution  of the FHLB,  is  required  to own
capital  stock in the  FHLB  based  generally  upon the  balance  of  investment
securities pledged and FHLB borrowings.  FHLB capital stock, with a cost of $504
and $798 at  December  31,  2006 and 2005,  respectively,  is  included in other
investments  in the  consolidated  balance  sheets.  The  decrease in the Bank's
investment  in FHLB  stock  corresponds  to the  Bank's  repayment  of the  FHLB
advances  previously  outstanding.  No ready market exists for the stock, and it
has no quoted market value.  However,  redemption of the stock has  historically
been at par value.

                                       36
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 4 - LOANS

           The  composition  of net loans by major loan  category  is  presented
below:

                                                               December 31,
                                                               ------------
                                                           2006            2005
                                                           ----            ----

Commercial, financial and agricultural ...........       $ 35,783       $ 41,915
Real estate - construction .......................         65,096         39,895
Real estate - mortgage ...........................        120,673        110,694
Installment loans to individuals .................          5,209          7,858
                                                         --------       --------

Loans, gross .....................................        226,761        200,362
Less allowance for possible loan losses ..........          2,423          3,050
                                                         --------       --------

                                                         $224,338       $197,312
                                                         ========       ========

           At December  31, 2006 and 2005,  non-accrual  loans  totaled $834 and
$2,551,  respectively.  The gross interest  income that would have been recorded
under the original terms of the loans amounted to $318,  $96, and $168, in 2006,
2005 and 2004, respectively. The Bank had no loans with payments past due ninety
days or more and accruing interest at December 31, 2006 and 2005.  Variable rate
and fixed rate loans totaled $134,582 and $92,179, respectively, at December 31,
2006.

           The  following is a summary of the activity  within the allowance for
possible loan losses for the periods presented:

<TABLE>
<CAPTION>
                                                                                         For the years ended December 31,
                                                                                         --------------------------------
                                                                                   2006                2005                2004
                                                                                   ----                ----                ----

<S>                                                                           <C>                  <C>                  <C>
Balance, beginning of year ..........................................         $     3,050          $     2,293          $     2,345
Provision for possible loan losses ..................................               1,110                1,125                1,000
Loans charged against the allowance, net of recoveries ..............              (1,737)                (368)              (1,052)
                                                                              -----------          -----------          -----------

Balance, end of year ................................................         $     2,423          $     3,050          $     2,293
                                                                              ===========          ===========          ===========
</TABLE>

         The following is a summary of impaired loans for the periods reported:

                                                               At December 31,
                                                               ---------------
                                                            2006           2005
                                                            ----           ----
Impaired loans:
     No valuation allowance required ...............        $  790        $  280
     Valuation allowance required ..................           358         2,160
                                                            ------        ------
Total impaired loans ...............................        $1,148        $2,440
                                                            ======        ======

Valuation allowance ................................        $  199        $  630
                                                            ======        ======


                                                For the years ended December 31,
                                                --------------------------------
                                                     2006      2005       2004
                                                     ----      ----       ----

Average recorded investment in impaired loans ....  $2,171    $3,388    $3,406
Interest income recognized on impaired loans .....      68       172       102



                                       37
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 5 - PREMISES AND EQUIPMENT

         Components of premises and equipment  included in the balance sheet are
as follows:

                                                                December 31,
                                                                ------------
                                                           2006            2005
                                                           ----            ----

Land and land improvements .......................       $ 1,214        $ 1,104
Building and leasehold improvements ..............         3,728          2,752
Construction in process ..........................             -            335
Furniture and equipment ..........................         1,638          1,353
Vehicles .........................................           284            251
                                                         -------        -------

                                                           6,864          5,795
Accumulated depreciation .........................        (1,744)        (1,415)
                                                         -------        -------

        Total property and equipment .............       $ 5,120        $ 4,380
                                                         =======        =======

           Depreciation  expense for the years ended December 31, 2006, 2005 and
2004 amounted to $388, $329, and $385, respectively.  Depreciation is charged to
operations over the estimated  useful lives of the assets.  The estimated useful
lives and methods of depreciation for the principal items follow:

<TABLE>
<CAPTION>
                 Type of Asset                           Life in Years                   Depreciation Method
     ----------------------------------------       --------------------------      ---------------------------------

<S>                                                              <C>                         <C>
     Software                                                    3                           Straight-line
     Furniture and equipment                                     5 to 7                      Straight-line
     Buildings and improvements                                  5 to 40                     Straight-line
     Vehicles                                                    3                           Straight-line
</TABLE>


NOTE 6 - DEPOSITS

           The following is a detail of deposit accounts:
                                                                December 31,
                                                                ------------
                                                               2006       2005
                                                               ----       ----

Noninterest bearing demand .............................    $ 15,215    $ 12,321
Interest bearing:
   Demand accounts .....................................       3,224       2,941
   Money market accounts ...............................      82,538      50,905
   Savings .............................................         571         751
                                                            --------    --------

                                                             101,548      66,918
                                                            --------    --------

   Time certificates of deposit, less than $100,000 ....      91,165      80,064
   Time certificates of deposit, $100,000 and over .....      76,210      74,679
                                                            --------    --------

                                                             167,375     154,743
                                                            --------    --------

     Total deposits ....................................    $268,923    $221,661
                                                            ========    ========

         Interest  expense on time  deposits  greater than  $100,000 was $3,294,
$2,226, and $905, in 2006, 2005 and 2004, respectively.  Brokered deposits as of
December 31, 2006 amounted to $18,393.

                                       38
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 6 - DEPOSITS, Continued

         At December  31,  2006 the  scheduled  maturities  of  certificates  of
deposit are as follows:

               2007                                              $    125,239
               2008                                                    36,460
               2009                                                     2,176
               2010                                                     2,272
               2011 and thereafter                                      1,228

                                                                 -------------

                                                                 $    167,375
                                                                 =============


NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES

<TABLE>
<CAPTION>
                                                                                         For the Years Ended
                                                                                         -------------------
                                                                   December 31, 2006      December 31, 2005    December 31, 2004
                                                                   -----------------      -----------------    -----------------
<S>                                                                     <C>                   <C>                 <C>
Outstanding at end of period .................................          $      -              $ 8,500             $13,500
Weighted average rate, end of period .........................                 -%                4.34%               3.67%
Maximum amount outstanding at
     any month end ...........................................            $ 8,500             $16,500             $15,500
Average amount outstanding during the period .................            $ 6,905             $11,392             $11,498
Weighted average rate, during the period .....................               4.36%               4.03%               3.70%
</TABLE>

NOTE 8 - OTHER BORROWINGS

           At December  31, 2006 and 2005,  the Company had  outstanding  $0 and
$3,900,  respectively,  in other  borrowings from an unrelated bank. The Company
borrowed an  additional  $100 under a line of credit during the first quarter of
2006 to bring the line to $4,000  before  paying  it off on May 11,  2006,  with
proceeds from the Trust transaction described in note 9.

NOTE 9 - CAPITAL TRUST AND JUNIOR SUBORDINATED DEBENTURES

           On May 3, 2006,  the  Company  sponsored  the  creation of a Delaware
statutory trust, GrandSouth Capital Trust I (the "Trust"), and is the sole owner
of the $247 in common securities issued by the Trust. On May 10, 2006, the Trust
issued  $8,000  in  floating  rate  capital  securities.  The  proceeds  of this
issuance,  and the amount of the Company's  investment in the common securities,
were used to acquire  $8,247  principal  amount of the  Company's  floating rate
junior subordinated debt securities due 2036  ("Debentures").  These securities,
and the accrued interest  thereon,  now constitute the Trust's sole assets.  The
interest rate associated with the debt securities,  and the distribution rate on
the common  securities of the Trust,  is  adjustable  quarterly at 3 month LIBOR
plus 185 basis  points  (7.22% at  December  31,  2006).  The  Company may defer
interest payments on the Debentures for up to twenty consecutive  quarters,  but
not beyond the stated  maturity date of the  Debentures.  In the event that such
interest payments are deferred by the Company, the Trust may defer distributions
on the capital and common  securities.  In such an event,  the Company  would be
restricted in its ability to pay dividends on its common stock and perform under
other obligations that are not senior to the Debentures.

         The Debentures  are redeemable at par at the option of the Company,  in
whole or in part, on any interest  payment date on or after June 23, 2011. Prior
to that date, the Debentures are redeemable at par plus a premium of up to 4.40%
of par upon the  occurrence  of certain  events  that would have a negative  tax
effect on the Trust or that would cause it to be required to be registered as an
investment  company under the Investment Company Act of 1940 or that would cause
trust preferred securities not to be eligible to be treated as Tier 1 capital by
the Federal Reserve.  Upon repayment or redemption of the Debentures,  the Trust
will use the  proceeds  of the  transaction  to redeem an  equivalent  amount of
capital  securities and common  securities.  The Trust's  obligations  under the
capital securities are unconditionally  guaranteed by the Company. In accordance
with  FASB  Interpretation  No.  46(R),  the  Trust is not  consolidated  in the
Company's financial statements.


                                       39
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 10 - COMMITMENTS AND CONTINGENCIES

         The  Company is party to  litigation  and claims  arising in the normal
course of business.  Management, after consultation with legal counsel, believes
that the  liabilities,  if any, arising from such litigation and claims will not
be material to the Company's financial position or results of operations.

         The  Company  has a ground  lease on its main  office  location,  which
expires in 2021.  The monthly lease  payment is $1 for years one through  eleven
and increases to $2 per month in year sixteen. The Company also leases land upon
which it  constructed a branch office under a  non-cancelable  operating  lease,
which expires in March of 2018.  The lease  requires  monthly lease  payments of
$0.8. The lease contains four renewal options of five years each with provisions
for adjustments to the monthly lease payments.  The lease agreement requires the
Company to pay all property taxes.

         The  Company  leased an  office,  which it used as a branch  until July
2003, under a non-cancelable  operating lease, which terminated in October 2004.
Monthly  lease  payments  of $3 were due on the lease until  cancellation.  This
office was closed in July 2003, but the lease obligation continued until October
2004.

         Future  minimum  lease  payments  under  current  operating  leases are
summarized as follows:

    For the year ended
         December 31,
         ------------

            2007                                 $    23
            2008                                      23
            2009                                      23
            2010                                      23
            2011                                      23
         Thereafter                                  218
                                                 -------
                                                 $   333
                                                 =======


NOTE 11 - UNUSED LINES OF CREDIT

           At  December  31,  2006,  the Bank had two unused  lines of credit to
purchase  federal funds  totaling  $9,400 from unrelated  banks.  These lines of
credit  are  available  on a one to  fourteen  day basis for  general  corporate
purposes  of the Bank.  The lenders  reserve  the right to withdraw  the line at
their option.  The Bank had an additional line of credit with the FHLB to borrow
up to fifteen percent of the Bank's total assets. At December 31, 2006, the Bank
had  unused  available  credit  of  $45,047  from the  FHLB.  The line of credit
agreement requires the Bank to pledge investment  securities or qualifying loans
as collateral.

                                       40
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 12 - INCOME TAXES

           The following  summary of the provision for income taxes includes tax
deferrals,  which arise from temporary differences in the recognition of certain
items of revenue and expense for tax and  financial  reporting  purposes for the
years ended December 31:

                                               2006          2005           2004
                                               ----          ----           ----

Income taxes currently payable
   Federal .............................      $ 1,323      $ 1,400       $   649
   State ...............................          165          116            65
                                              -------      -------       -------

                                                1,488        1,516           714
Deferred tax provision (benefit) .......          273         (361)           55
                                              -------      -------       -------

       Income tax provision ............      $ 1,761      $ 1,155       $   769
                                              =======      =======       =======


The income tax effect of cumulative temporary differences at December 31, are as
follows:
                                                            Deferred tax asset
                                                            ------------------
                                                          2006             2005
                                                          ----             ----

Allowance for possible loan losses ...............       $   412        $   699
Nonaccrual loan interest .........................            57             40
Unrealized net losses on investment
 securities available for sale ...................            71            212
Write down of assets acquired
 in settlement of loans ..........................             -             86
Deferred compensation ............................           108             88
Other ............................................            50              -
                                                         -------        -------

       Deferred tax asset ........................           698          1,125
                                                         -------        -------

Less:  valuation allowance .......................           (80)           (50)
                                                         -------        -------
                                                             618          1,075
                                                         =======        =======

Depreciation .....................................           191            234
                                                         -------        -------
                                                             191            234
                                                         -------        -------
       Net deferred tax asset ....................       $   427        $   841
                                                         =======        =======

         The  net  deferred  tax  asset  is  included  in  other  assets  in the
consolidated balance sheets. The valuation allowance is related to the Company's
stand-alone state net operating loss carryforwards.

         The  provision  for income taxes is  reconciled to the amount of income
tax computed at the federal statutory rate on income before income taxes for the
years ended December 31, as follows:

<TABLE>
<CAPTION>
                                                                        2006                      2005                    2004
                                                                        ----                      ----                    ----
                                                              Amount           %        Amount          %         Amount         %
                                                              ------           -        ------          -         ------         -

<S>                                                          <C>              <C>     <C>              <C>     <C>               <C>
Tax expense at statutory rate ..........................     $ 1,707          34      $ 1,196          34      $   710           34
Increase in taxes resulting from:
   State bank tax (net of federal benefit) .............         107           2           77           2           43            2
   Officers life insurance .............................         (57)         (1)         (55)         (1)           -            -
   Other ...............................................           4           -          (63)         (2)          16            1
                                                             -------          --      -------          --      -------           --

       Income tax provision ............................     $ 1,761          35      $ 1,155          33      $   769           37
                                                             =======          ==      =======          ==      =======           ==
</TABLE>

                                       41
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 13 - RELATED PARTY TRANSACTIONS

           Certain  directors,  executive officers and companies with which they
are affiliated,  are customers of and have banking transactions with the Bank in
the  ordinary  course of  business.  These  loans and  commitments  were made on
substantially the same terms, including interest rates and collateral,  as those
prevailing at the time for  comparable  arms-length  transactions.  A summary of
loan and commitment transactions with directors,  including their affiliates and
executive officers are as follows:

                                                          For the years ended
                                                          -------------------
                                                              December 31,
                                                              ------------
                                                         2006             2005
                                                         ----             ----
Balance, beginning of year ...................         $ 1,646          $ 2,071
New loans ....................................           1,924              202
Less loan payments ...........................            (624)            (627)
                                                       -------          -------

Balance, end of year .........................         $ 2,946          $ 1,646
                                                       =======          =======

         Deposits by directors and their related  interests at December 31, 2006
and 2005 approximated $1,425 and $1,216, respectively.

         The Company leases land from a relative of a director,  shareholder and
executive  officer  of the  Company  (see Note 10).  Lease  expenses  charged to
operations under these agreements  approximated $9 in 2006, $10 in 2005, and $40
in 2004.

         Of the $3,500 of debentures  that were  converted  into common stock in
2005,  $1,810 were converted into 353,511 shares of common stock held by related
parties.


NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

         In the ordinary course of business,  and to meet the financing needs of
its  customers,  the  Bank is a party  to  various  financial  instruments  with
off-balance sheet risk. These financial  instruments,  which include commitments
to extend credit and standby  letters of credit,  involve,  to varying  degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheet. The contract amount of those instruments  reflects the extent
of involvement the Bank has in particular classes of financial instruments.

         The Bank's  exposure to credit loss in the event of  nonperformance  by
the other party to the financial instrument for commitments to extend credit and
standby  letters of credit is  represented by the  contractual  amounts of those
instruments.  The Bank uses the same credit  policies in making  commitments and
conditional obligations as it does for on-balance sheet instruments. Commitments
to extend  credit are  agreements  to lend to a customer  as long as there is no
violation of any material  condition  established  in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  the  payment  of a  fee.  At  December  31,  2006  and  2005,  unfunded
commitments  to extend credit were $71,053 and $45,968,  respectively.  Variable
rate and fixed rate  unfunded  commitments  to extend  credit  were  $42,875 and
$28,178,  respectively, at December 31, 2006. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit,  is based on management's
credit  evaluation of the borrower.  Collateral  varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate.  At December 31, 2006 and 2005, there were  outstanding  letters of
credit totaling $1,318 and $332, respectively.


                                       42
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 15 - EMPLOYEE BENEFIT PLAN

         The Bank sponsors the  GrandSouth  Bank Profit  Sharing  Section 401(k)
Plan  (the  "Plan")  for  the  benefit  of  all  eligible  employees.  The  Bank
contributes  seventy-five  percent of the first four  percent of the  employee's
compensation  contributed to the Plan.  Contributions  made to the Plan in 2006,
2005, and 2004 amounted to $67, $56, and $40, respectively.

         In 2001,  supplemental benefits were approved by the Board of Directors
for certain  executive  officers of the Bank.  These  benefits are not qualified
under  the  Internal  Revenue  Code and they are not  funded.  However,  certain
funding is provided  informally and indirectly by life insurance  policies owned
by the Bank. The Company  recorded net expense related to these benefits of $61,
$61, and $56 in 2006, 2005 and 2004, respectively.


                                       43
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 16 - STOCK OPTION PLAN

         During 1998,  the Board of  Directors  approved a stock option plan for
the benefit of the directors,  officers and employees. The Board may grant up to
856,028  options (after the  shareholders  approved an amendment to increase the
number of shares in the plan at the 2005 Annual  meeting) at an option price per
share not less than the fair  market  value on the date of  grant.  All  options
granted to officers and  employees  vest 20 percent each year for five years and
expire 10 years from the grant date. The related  compensation expense (see Note
1) is recognized over the vesting period. Information on options outstanding and
exercisable at December 31, 2006 is disclosed in the table below.

<TABLE>
<CAPTION>
                                               Options outstanding                           Options exercisable
                                               -------------------                           -------------------
                                                     Weighted
                                                      Average           Weighted                            Weighted
      Range of                                       Remaining          Average                             Average
      Exercise                     Number           Contractual         Exercise           Number           Exercise
       Prices                    Outstanding            Life             Price           Exercisable         Price
       ------                    -----------            ----             -----           -----------         -----

<S>                               <C>                   <C>            <C>                <C>               <C>
  $    3.25                       199,850               1.88           $   3.25           199,850           $   3.25
       3.58                        52,626               4.12               3.58            52,626               3.58
       5.01 - 5.18                 44,268               5.18               5.16            44,268               5.16
       6.08                        36,300               7.14               6.08            21,780               6.08
       7.73 - 8.64                 16,500               8.44               8.18             4,950               8.03
       9.14                       102,694               8.64               9.14            20,540               9.14
      12.27 - 13.62                19,800               9.35              12.50                 -                  -
                                  -------                                                 -------

                                  472,038               4.86               5.53           344,014               4.15
                                  =======                                                 =======
</TABLE>
         A summary  of the  status of the plan and  changes  during  the year is
presented below:

<TABLE>
<CAPTION>
                                                                        For the years ended December 31,
                                                                        --------------------------------
                                                           2006                        2005                   2004
                                                           ----                        ----                   ----
                                                                   Weighted                  Weighted              Weighted
                                                                   Average                    Average               Average
                                                                   Exercise                  Exercise              Exercise
                                                     Shares         Price       Shares        Price     Shares      Price
                                                     ------         -----       ------        -----     ------      -----

<S>                                                <C>          <C>            <C>         <C>          <C>         <C>
Outstanding at beginning of year ............      456,392      $    5.24      334,414     $  3.87      298,114     $ 3.50
Granted .....................................       19,800          12.50      121,978        8.99       36,300       6.08
Exercised ...................................       (1,954)          5.97            -           -            -          -
Forfeited or expired ........................       (2,200)          8.41            -           -            -          -
                                                   -------                     -------                  -------
Outstanding at end of year ..................      472,038           5.53      456,392        5.24      334,414       3.87
                                                   =======                     =======                  =======
Options exercisable at December 31, .........      344,014           4.15      275,197        3.56      248,283       3.43
Shares available for grant ..................      383,990                     399,771                  28,949

</TABLE>

         All share and per share values have been retroactively restated for all
stock  dividends  since the date the options were  granted.  The Company  issues
authorized but unissued shares to satisfy option exercises.


                                       44
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)


NOTE 17 - COMMON STOCK AND NET INCOME PER COMMON SHARE

Following  is a  reconciliation  of basic net income  per share to  diluted  net
income per share for the years ended December 31, 2006, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                                     Income              Shares           Per-share
                                                                                  (numerator)        (denominator)          amount
                                                                                  -----------        -------------          ------
For the year ended December 31, 2006
<S>                                                                                <C>                 <C>                 <C>
      Basic net income per common share
         Income available to common shareholders ...........................       $   3,260           3,372,065           $   0.97
         Effect of dilutive instruments:
            Stock options ..................................................               -             281,784                  -
                                                                                   ---------           ---------
      Diluted net income per common share
         Income available to common shareholders
            plus assumed exercises of stock options ........................       $   3,260           3,653,849           $   0.89
                                                                                   =========           =========

For the year ended December 31, 2005
      Basic net income per common share
         Income available to common shareholders ...........................       $   2,361           2,840,528           $   0.83
         Effect of dilutive instruments:
            Stock options ..................................................               -             168,001                  -
         Effect of convertible instruments:
            Interest savings/weighted average
                incremental shares assumed on
                conversion of subordinated debentures ......................              73             532,356                  -
                                                                                   ---------           ---------
      Diluted net income per common share
         Income available to common shareholders
            plus assumed exercises of stock options ........................       $   2,434           3,540,885           $   0.69
                                                                                   =========           =========

For the year ended December 31, 2004
      Basic net income per common share
         Income available to common shareholders ...........................       $   1,319           2,620,593           $   0.50
         Effect of dilutive instruments:
            Stock options ..................................................               -             147,495                  -
         Effect of convertible instruments:
            Interest savings/weighted average
                incremental shares assumed on
                conversion of subordinated debentures ......................              50             752,526                  -
                                                                                   ---------           ---------
      Diluted net income per common share
         Income available to common shareholders
            plus assumed exercises of stock options ........................       $   1,369           3,520,614           $   0.39
                                                                                   =========           =========
</TABLE>


                                       45
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 18 - RESTRICTIONS ON DIVIDENDS

         The ability of the Company to pay cash  dividends is dependent upon its
receiving  cash in the form of dividends from the Bank.  South Carolina  banking
regulations  restrict  the  amount  of cash  dividends  the  Bank can pay to the
Company.  In the event that the  interest  payments  on the junior  subordinated
debentures  (see note 9) are  deferred  by the  Company,  the  Company  would be
restricted in its ability to pay dividends on its common stock.


NOTE 19 - REGULATORY MATTERS

         The  Company  and the Bank are  subject to various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum  capital  requirements  can  initiate  certain  mandatory,  and possible
additional discretionary actions by regulators that, if undertaken, could have a
direct  material  effect on the Company's  financial  statements.  Under capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
specific capital  guidelines must be met that involve  quantitative  measures of
the Company's and Bank's  assets,  liabilities,  and certain  off-balance  sheet
items as calculated under regulatory accounting practices. The Company's capital
amounts and  classification  are also  subject to  qualitative  judgments by the
regulators about components, risk weightings, and other factors.

         Quantitative  measures  established  by  regulation  to ensure  capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
(set  forth in the table  below) of total  and Tier 1 capital  to  risk-weighted
assets,  and of Tier 1 capital to average  assets.  The  Company and Bank actual
capital  amounts  and  ratios  and  minimum  regulatory  amounts  and ratios are
presented as follows:

<TABLE>
<CAPTION>
                                                                                                             To be well capitalized
                                                                                        For capital          under prompt corrective
                                                                                     adequacy purposes           action provisions
                                                                    Actual                  Minimum                   Minimum
                                                                    ------                  -------                   -------
                                                             Amount        Ratio    Amount           Ratio     Amount         Ratio
                                                             ------        -----    ------           -----     ------         -----

Company (consolidated):
<S>                                                         <C>            <C>     <C>                 <C>   <C>              <C>
As of December 31, 2006
Total capital (to risk weighted assets) ...............     $30,031        12.3%   $19,576             8.0%       N/A           N/A
Tier 1 capital (to risk weighted assets) ..............      26,079        10.7      9,788             4.0        N/A           N/A
Tier 1 capital (to average assets) ....................      26,079         9.3     11,199             4.0        N/A           N/A

Bank:
As of December 31, 2006
Total capital (to risk weighted assets) ...............     $27,623        11.3%   $19,555             8.0%   $24,443          10.0%
Tier 1 capital (to risk weighted assets) ..............      25,200        10.3      9,777             4.0     14,666           6.0
Tier 1 capital (to average assets) ....................      25,200         8.5     11,812             4.0     14,765           5.0

Company (consolidated):
As of December 31, 2005
Total capital (to risk weighted assets) ...............     $18,374         8.8%   $16,787             8.0%        N/A          N/A
Tier 1 capital (to risk weighted assets) ..............      15,747         7.5      8,393             4.0         N/A          N/A
Tier 1 capital (to average assets) ....................      15,747         6.7      9,416             4.0         N/A          N/A

Bank:
As of December 31, 2005
Total capital (to risk weighted assets) ...............     $21,145        10.1%   $16,778             8.0%   $  20,972        10.0%
Tier 1 capital (to risk weighted assets) ..............      18,518         8.8      8,389             4.0       12,583         6.0
Tier 1 capital (to average assets) ....................      18,518         8.0      9,230             4.0       11,538         5.0
</TABLE>


                                       46
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS

         SFAS No. 107,  "Disclosures about Fair Value of Financial  Instruments"
requires disclosure of fair value information,  whether or not recognized in the
balance  sheets,  when it is practical to estimate the fair value.  SFAS No. 107
defines a financial  instrument as cash, evidence of an ownership interest in an
entity or  contractual  obligations  that  require the exchange of cash or other
instruments.  Certain  items  are  specifically  excluded  from  the  disclosure
requirements,  including  the Bank's  common  stock,  property and equipment and
other assets and liabilities.

         Fair value approximates  carrying value for cash and due from banks and
federal funds sold due to the short-term nature of the instrument.

         Investment  securities  available for sale are valued using quoted fair
market  prices.  Other  investments  at cost are considered to be an appropriate
estimate of fair value due to historical redemption of the stock at cost.

         Fair value for loans maturing after one year is based on the discounted
present value of the estimated  future cash flows.  Discount rates used in these
computations  approximate  the rates  currently  offered  for  similar  loans of
comparable terms and credit quality.

         Fair value for demand deposit  accounts is equal to the carrying value.
Interest-bearing  accounts with no fixed maturity date are valued based on rates
offered  within  the  Bank's  market  using  current  interest  rates on similar
instruments. Certificate of deposit accounts maturing within one year are valued
at their  carrying  value.  The fair value of  certificate  of deposit  accounts
maturing  after one year are estimated by  discounting  cash flows from expected
maturities using current interest rates on similar instruments.

         The  carrying   amounts  of  the  variable  rate  junior   subordinated
debentures  are  reasonable   estimates  of  fair  value  because  they  reprice
quarterly.  The fair values of fixed rate  advances  from the FHLB are estimated
using the discounted cash flow calculation that applies to the Company's current
borrowing rate available from the FHLB. The fair values of other  borrowings are
estimated using currently offered market rates.

         The Company has used  management's best estimate of fair value based on
the above  assumptions.  Thus, the fair values  presented may not be the amounts
that could be realized in an immediate sale or settlement of the instrument.  In
addition, any income taxes or other expenses that would be incurred in an actual
sale or settlement are not taken into consideration in the fair value presented.

         The estimated  fair values of the Company's  financial  instruments  at
December 31, are as follows:

<TABLE>
<CAPTION>
                                                                                2006                                  2005
                                                                                ----                                  ----
                                                                      Carrying           Fair             Carrying            Fair
                                                                        Amount           value             Amount             value
                                                                        ------           -----             ------             -----
Financial Assets:
<S>                                                                   <C>               <C>               <C>               <C>
   Cash and due from banks .................................          $  6,145          $  6,628          $  6,628          $  6,628
   Federal funds sold ......................................            13,659            13,659             6,312             6,312
   Investment securities available for sale ................            41,646            41,646            28,160            28,160
   Other investments, at cost ..............................               504               504               798               798
   Loans, gross ............................................           226,761           226,629           200,362           199,796

Financial Liabilities:
   Deposits ................................................           268,923           268,737           221,661           221,528
   Federal Home Loan Bank advances .........................                 -                 -             8,500             8,462
   Other borrowings ........................................                 -                 -             3,900             3,900
   Junior subordinated debentures ..........................             8,247             8,247                 -                 -
</TABLE>


                                       47
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION

      Following is condensed financial information of GrandSouth  Bancorporation
(parent company only):

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                             ------------
                                                                                                   2006                        2005
                                                                                                   ----                        ----
ASSETS
<S>                                                                                                <C>                       <C>
     Cash ......................................................................                   $   350                   $    64
     Investment in bank subsidiary .............................................                    25,799                    18,914
     Due from subsidiary .......................................................                       848                       737
     Investment in capital trust ...............................................                       247                         -
     Deferred tax asset ........................................................                       549                       374
                                                                                                   -------                   -------

                                                                                                   $27,793                   $20,089
                                                                                                   =======                   =======

LIABILITIES AND SHAREHOLDERS' EQUITY
     Accrued expenses ..........................................................                   $    76                   $    61
     Note payable ..............................................................                         -                     3,900
     Junior subordinated debentures ............................................                     8,247                         -
     Shareholders' equity ......................................................                    19,470                    16,128
                                                                                                   -------                   -------
                                                                                                   $27,793                   $20,089
                                                                                                   =======                   =======
</TABLE>

                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                                  For the years ended
                                                                                                  -------------------
                                                                                                      December 31,
                                                                                      2006                2005              2004
                                                                                      ----                ----              ----
<S>                                                                                 <C>                 <C>                 <C>
REVENUES ...............................................................            $    12             $     -             $     -

EXPENSES
      Interest .........................................................                495                 320                 160
      Sundry ...........................................................                 76                  67                  40
                                                                                    -------             -------             -------

            Loss before equity in undistributed net
                income of bank subsidiary ..............................               (559)               (387)               (200)

EQUITY IN UNDISTRIBUTED NET INCOME
      OF BANK SUBSIDIARY ...............................................              3,631               2,606               1,445
                                                                                    -------             -------             -------

            Income before income taxes .................................              3,072               2,219               1,245

      Income tax benefit ...............................................                188                 142                  74
                                                                                    -------             -------             -------

            Net income .................................................            $ 3,260             $ 2,361             $ 1,319
                                                                                    =======             =======             =======
</TABLE>


                                       48
<PAGE>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (Dollars in thousands except per share data)

NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION, Continued

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                    For the years ended
                                                                                                        December 31,
                                                                                                        ------------
                                                                                            2006            2005              2004
                                                                                            ----            ----              ----

OPERATING ACTIVITIES
<S>                                                                                       <C>              <C>              <C>
      Net income ................................................................         $ 3,260          $ 2,361          $ 1,319
      Adjustments to reconcile net income to net cash
         used for operating activities
         Deferred income taxes ..................................................            (175)            (132)             (75)
         Accrued expenses .......................................................              28               50               (7)
         Stock based compensation ...............................................             110                -                -
         Increase in due to (from) subsidiary ...................................            (111)            (841)              43
         Equity in undistributed net income of bank subsidiary ..................          (3,631)          (2,606)          (1,445)
                                                                                          -------          -------          -------

                Net cash used for operating activities ..........................            (519)          (1,168)            (165)
                                                                                          -------          -------          -------

INVESTING ACTIVITY
      Additional investment in bank subsidiary ..................................          (3,050)            (200)          (2,039)
      Investment in capital trust ...............................................            (247)               -                -
                                                                                          -------          -------          -------

      Net cash used in investing activities .....................................          (3,297)            (200)          (2,039)
                                                                                          -------          -------          -------

FINANCING ACTIVITIES
      Proceeds from issuance of junior subordinated debentures ..................           8,247                -                -
      Proceeds from note payable ................................................             100            1,400            2,500
      Repayment of note payable .................................................          (4,000)               -                -
      Payment of cash dividends .................................................            (252)            (192)            (130)
      Proceeds from exercise of stock options ...................................              12                -                -
      Cash paid in lieu of fractional shares ....................................              (5)              (2)              (1)
                                                                                          -------          -------          -------


                Net cash provided by financing activities .......................           4,102            1,206            2,369
                                                                                          -------          -------          -------

                Net increase (decrease) in cash .................................             286             (162)             165

CASH, BEGINNING OF YEAR .........................................................              64              226               61
                                                                                          -------          -------          -------

CASH, END OF YEAR ...............................................................         $   350          $    64          $   226
                                                                                          =======          =======          =======


SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES

Dividends declared, but unpaid ..................................................         $    67          $    61          $    43
                                                                                          =======          =======          =======
Subordinated debentures converted into common stock .............................         $     -          $ 3,500          $     -
                                                                                          =======          =======          =======

Stock dividend ..................................................................         $ 4,592                -          $ 1,146
                                                                                          =======          =======          =======
</TABLE>


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