SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2001                File Number 000-31937

                            GRANDSOUTH BANCORPORATION
                 (Name of Small Business Issuer in its Charter)

             South Carolina                              57-1104394
    (State or Other Jurisdiction            (IRS Employer Identification Number)
      of Incorporation or Organization)

              327 Fairview Road, Simpsonville, South Carolina 29681
                (Address of Principal Executive Office, Zip Code)

         Issuer's Telephone Number, Including Area Code: (864) 962-8833

    Securities Registered Pursuant to Section 12(b) of the Exchange Act: None

      Securities Registered Pursuant to Section 12(g) of the Exchange Act:
                           Common Stock, No Par Value
                                (Title of Class)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  Registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days.

          Yes [X] No [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

         The issuer's revenues for its most recent fiscal year were $8,632,332.

         The aggregate  market value of the Common Stock held by  non-affiliates
on February 28, 2002, was  approximately  $11,050,621.  As of February 28, 2002,
there were  1,875,329  shares of the  Registrant's  Common Stock,  no par value,
outstanding.  For purposes of the foregoing  calculation only, all directors and
executive officers of the Registrant have been deemed affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)  Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of
     Shareholders - Part III


    Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]

<Page>


                                     PART I

Forward-Looking Statements

         This  Report on Form  10-KSB  may  contain  forward-looking  statements
relating  to  such  matters  as  anticipated  financial  performance,   business
prospects,   technological  developments,  new  products  and  similar  matters.
Statements included in this report that are not historical facts are intended to
be  and  are  hereby  identified  as  "forward-looking"  statements.  The  words
"estimate", "project", "intend", "expect", "believe",  "anticipate", "plan", and
similar expressions identify forward-looking  statements. The Private Securities
Litigation  Reform  Act of  1995  provides  a safe  harbor  for  forward-looking
statements.  In order to  comply  with  terms  of the  safe  harbor,  GrandSouth
Bancorporation  (the "Company")  notes that a variety of factors could cause the
Company's   actual  results  and  experience  to  differ   materially  from  the
anticipated   results  or  other   expectations   expressed  in  the   Company's
forward-looking  statements.  The risks and  uncertainties  that may  affect the
operations,  performances,  development  and results of the  Company's  business
include,  but are not limited to, the following:  risks from changes in economic
and industry  conditions;  changes in interest  rates;  risks inherent in making
loans including  repayment  risks and value of collateral;  dependence on senior
management ; and recently-enacted or proposed legislation.  Statements contained
in this filing regarding the demand for GrandSouth Bank's products and services,
changing  economic  conditions,  interest rates,  consumer spending and numerous
other factors may be forward-looking statements and are subject to uncertainties
and risks.

Item 1.  Description of Business.

General

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

         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 Fountain Inn and  Simpsonville,  South  Carolina.  The main office is
located at 325 South Main Street, in Fountain Inn, South Carolina,  and a branch
office is located at 327 Fairview Road,  Simpsonville,  South Carolina. The Bank
opened a new branch in a temporary  facility  during 2001 and is  constructing a
new main office at this location.  The new main office is located in Greenville,
South Carolina and is expected to open in the second quarter of 2002.

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

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

         Management of the Bank  believes that the loan  portfolio is adequately
diversified.  There are no significant concentrations of loans in any particular
individuals,  industries or groups of related  individuals or industries and the
Bank has no foreign  loans.  The loan portfolio  consists  primarily of mortgage
loans and extensions of credit to businesses and individuals in its service area
within  Greenville  County,  South  Carolina.   The  economy  of  this  area  is


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diversified  and does  not  depend  on any one  industry  or  group  of  related
industries.  Management has established loan policies and practices that include
set limitations on  loan-to-collateral  value for different types of collateral,
requirements  for  appraisals,  obtaining  and  maintaining  current  credit and
financial information on borrowers, and credit approvals.

         Other services  offered by the Bank include  residential  mortgage loan
origination services, safe deposit boxes, night depository service,  VISA(R) and
MasterCard(R) charge cards, tax deposits, and traveler's checks.

         At  February  28,  2002,  the  Bank  employed  30  persons   full-time.
Management of the Bank believes that its employee relations are excellent.

Competition

         Competition between commercial banks and thrift  institutions  (savings
and loan  associations)  and credit unions has  intensified  significantly  as a
result of the  elimination  of many  previous  distinctions  between the various
types of financial institutions,  and the expanded powers and increased activity
of thrift  institutions  in areas of banking that  previously  had been the sole
domain of commercial banks. Recent  legislation,  together with other regulatory
changes by the primary  regulators of the various  financial  institutions,  has
resulted in the elimination of many  distinctions  between a commercial bank and
thrift institution.  Consequently,  competition among financial  institutions of
all types is virtually unlimited with respect to legal authority to provide most
financial services.

         The Bank competes in the South Carolina county of Greenville, for which
the most recent  market share data  available  is as of June 30,  2001.  At that
time, 22 banks,  savings and loans,  and savings banks with 142 branch locations
competed in  Greenville  County for  aggregate  deposits of  approximately  $5.4
billion.

         Banks generally compete with other financial  institutions  through the
savings  products and services  offered,  the pricing of services,  the level of
service provided,  the convenience and availability of services,  and the degree
of expertise  and  personal  concern  with which  services  are offered.  In the
conduct of certain  areas of its business,  the Bank  competes  with  commercial
banks, credit unions,  consumer finance companies,  insurance  companies,  money
market  mutual  funds and other  financial  institutions,  some of which are not
subject to the same degree of regulation and restriction  imposed upon the Bank.
Many of these  competitors  have  substantially  greater  resources  and lending
limits than the Bank and offer certain services,  such as international  banking
services and trust services,  that the Bank does not provide.  Moreover, most of
these  competitors  have more numerous branch offices located  throughout  their
market areas,  a competitive  advantage  that the Bank does not have to the same
degree.

         The banking industry is significantly  affected by prevailing  economic
conditions as well as by government policies and regulations  concerning,  among
other things,  monetary and fiscal affairs,  the housing  industry and financial
institutions.  Deposits at banks are influenced by a number of economic factors,
including interest rates, competing  instruments,  levels of personal income and
savings,  and the extent to which interest on retirement savings accounts is tax
deferred.  Lending  activities  are  also  influenced  by a number  of  economic
factors,  including  demand  for  and  supply  of  housing,  conditions  in  the
construction  industry,  and availability of funds. Primary sources of funds for
lending  activities  include savings  deposits,  income from  investments,  loan
principal  repayments,   and  proceeds  from  sales  of  loans  to  conventional
participating lenders.

Effect of Government Regulation

         Bank  holding  companies  and banks  are  extensively  regulated  under
federal and state law. To the extent that the  following  information  describes
statutory  and  regulatory  provisions,  it is  qualified  in  its  entirety  by
reference to such  statutes and  regulations.  Any change in  applicable  law or
regulation  may have a material  effect on the  business  of the Company and the
Bank.


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General

         As a bank holding  company under the Bank Holding Company Act ("BHCA"),
the  Company  obtained  the  approval of the Board of  Governors  of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the
regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing  services to or performing  services for its subsidiaries or engaging
in any other  activity  which the Federal  Reserve  determines  to be so closely
related to banking or managing or controlling  banks as to be a proper  incident
thereto. The Company may engage in a broader range of activities if it becomes a
"financial  holding company"  pursuant to the  Gramm-Leach-Bliley  Act, which is
described below under the caption "Recent  Legislation."  The BHCA prohibits the
Company  from  acquiring  direct  or  indirect  control  of more  than 5% of the
outstanding  voting stock or substantially all of the assets of any bank or from
merging or  consolidating  with  another  bank  holding  company  without  prior
approval of the Federal  Reserve.  Additionally,  the BHCA prohibits the Company
from engaging in or from  acquiring  ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal  Reserve to be so closely  related to
banking as to be properly  incident  thereto.  The BHCA generally does not place
territorial   restrictions  on  the  activities  of  such  non-banking   related
activities.

         The  Company is  subject to  regulation  and  supervision  by the South
Carolina  State Board of Financial  Institutions  (the "State  Board").  A South
Carolina bank holding company must provide the State Board with information with
respect to the financial  condition,  operations,  management and  inter-company
relationships of the holding company and its subsidiaries.  The State Board also
may require such other information as is necessary to keep itself informed about
whether the  provisions  of South  Carolina law and the  regulations  and orders
issued  thereunder  by the State Board have been  complied  with,  and the State
Board may examine any bank holding company and its subsidiaries.

Obligations of the Company to its Subsidiary Bank

         A number of obligations  and  restrictions  are imposed on bank holding
companies  and their  depository  institution  subsidiaries  by Federal  law and
regulatory  policy that are designed to reduce  potential  loss  exposure to the
depositors of such  depository  institutions  and to the FDIC insurance funds in
the event the depository  institution  is in danger of becoming  insolvent or is
insolvent.  For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository  institutions and to commit resources to support such institutions in
circumstances  where it might not do so absent such  policy.  In  addition,  the
"cross-guarantee"  provisions of the Federal  Deposit  Insurance Act, as amended
("FDIA"),  require  insured  depository  institutions  under  common  control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings  Association  Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the  FDIC  as a  result  of the  default  of a  commonly  controlled  insured
depository  institution or for any assistance provided by the FDIC to a commonly
controlled  insured  depository  institution in danger of default.  The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best  interest  of the SAIF or the BIF or both.  The FDIC's  claim for
damages  is  superior  to  claims  of  shareholders  of the  insured  depository
institution  or its holding  company but is subordinate to claims of depositors,
secured  creditors and holders of subordinated  debt (other than  affiliates) of
the commonly controlled insured depository institutions.

         The FDIA also provides that amounts  received from the  liquidation  or
other resolution of any insured  depository  institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit  liabilities of
the  institution  prior to payment  of any other  general  or  unsecured  senior
liability,   subordinated  liability,  general  creditor  or  shareholder.  This
provision  would give  depositors  a preference  over  general and  subordinated
creditors  and  shareholders  in the event a receiver is appointed to distribute
the assets of the Bank.

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank


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regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

Capital Adequacy Guidelines for Bank Holding Companies and State Banks

         The various federal bank regulators,  including the Federal Reserve and
the FDIC have adopted  risk-based and leverage capital  adequacy  guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks.

         Failure to meet capital  guidelines could subject the Bank to a variety
of enforcement  remedies,  including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.

         The risk-based  capital standards of both the Federal Reserve Board and
the FDIC explicitly identify  concentrations of credit risk and the risk arising
from non-traditional  activities,  as well as an institution's ability to manage
these risks,  as  important  factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital  due to changes in interest  rates be  considered  by the  agencies as a
factor in evaluating a bank's capital  adequacy.  The Federal Reserve Board also
has issued additional  capital guidelines for bank holding companies that engage
in certain trading activities.

         The Company and the Bank exceeded all applicable  capital  requirements
at December 31, 2001.

Payment of Dividends

         The  Company is a legal  entity  separate  and  distinct  from its bank
subsidiary.  Most of the  revenues of the  Company  are  expected to result from
dividends  paid to the Company by the Bank.  There are statutory and  regulatory
requirements  applicable to the payment of dividends by subsidiary banks as well
as by the Company to its  shareholders.  It is not anticipated  that the Company
will pay cash dividends in the near future.

Certain Transactions by the Company with its Affiliates

         Federal  law   regulates   transactions   among  the  Company  and  its
affiliates,  including  the  amount of the  Bank's  loans to or  investments  in
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate.  Further,  a bank holding company and its affiliates
are prohibited  from engaging in certain tie-in  arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.

FDIC Insurance Assessments

         Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits,  depending on the institution's
capital position and other supervisory  factors.  However,  because  legislation
enacted in 1996 requires that both  SAIF-insured and BIF-insured  deposits pay a
pro rata portion of the interest due on the obligations  issued by the Financing
Corporation   ("FICO"),   the  FDIC  is  currently  assessing   BIF-insured  and
SAIF-insured  deposits an  additional  1.82 basis points per $100 of deposits to
cover  those  obligations.  The FICO  assessment  will  continue  to be adjusted
quarterly to reflect  changes in the assessment  bases of the  respective  funds
based on quarterly Call Report and Thrift Financial Report submissions.

Regulation of the Bank

         The Bank is subject to examination by the State Board. In addition, the
Bank is  subject  to  various  other  state and  federal  laws and  regulations,
including state usury laws,  laws relating to  fiduciaries,  consumer credit and
laws relating to branch banking.  The Bank's loan operations are also subject to


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certain federal  consumer credit laws and  regulations  promulgated  thereunder,
including,  but not  limited  to: the federal  Truth-In-Lending  Act,  governing
disclosures of credit terms to consumer borrowers;  the Home Mortgage Disclosure
Act, requiring financial  institutions to provide certain information concerning
their mortgage  lending;  the Equal Credit  Opportunity Act and the Fair Housing
Act,  prohibiting  discrimination on the basis of certain  prohibited factors in
extending credit; the Fair Credit Reporting Act, governing the use and provision
of information to credit reporting agencies; the Bank Secrecy Act, dealing with,
among other things, the reporting of certain currency transactions; and the Fair
Debt  Collection  Act,  governing  the  manner  in which  consumer  debts may be
collected by collection  agencies.  The deposit  operations of the Bank are also
subject to the Truth in Savings Act,  requiring certain  disclosures about rates
paid on savings accounts; the Expedited Funds Availability Act, which deals with
disclosure of the availability of funds deposited in accounts and the collection
and return of checks by banks; the Right to Financial Privacy Act, which imposes
a duty to maintain certain confidentiality of consumer financial records and the
Electronic  Funds Transfer Act and  regulations  promulgated  thereunder,  which
govern  automatic   deposits  to  and  withdrawals  from  deposit  accounts  and
customers'  rights and  liabilities  arising  from the use of  automated  teller
machines and other electronic banking services.

         The  Bank  is  also  subject  to  the  requirements  of  the  Community
Reinvestment  Act (the  "CRA").  The CRA imposes on  financial  institutions  an
affirmative  and  ongoing  obligation  to meet the credit  needs of their  local
communities,  including low- and moderate-income neighborhoods,  consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers,  acquisitions
and applications to open a branch or facility.

Other Safety and Soundness Regulations

         Prompt  Corrective  Action.  The federal  banking  agencies  have broad
powers under  current  federal law to take prompt  corrective  action to resolve
problems of insured depository institutions.  The extent of these powers depends
upon whether the  institutions in question are "well  capitalized,"  "adequately
capitalized,"    "undercapitalized,"    "significantly    undercapitalized"   or
"critically undercapitalized."

         A bank that is "undercapitalized"  becomes subject to provisions of the
FDIA:   restricting  payment  of  capital  distributions  and  management  fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital  restoration  plan;  restricting  the growth of the bank's
assets and requiring prior approval of certain expansion proposals.  A bank that
is  "significantly   undercapitalized"   is  also  subject  to  restrictions  on
compensation  paid  to  senior  management  of  the  bank,  and a bank  that  is
"critically   undercapitalized"  is  further  subject  to  restrictions  on  the
activities of the bank and restrictions on payments of subordinated  debt of the
bank.  The  purpose  of these  provisions  is to  require  banks  with less than
adequate  capital to act quickly to restore  their  capital and to have the FDIC
move  promptly  to take over  banks  that are  unwilling  or unable to take such
steps.

         Brokered Deposits.  Under current FDIC regulations,  "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept  brokered  deposits  with a waiver  from the FDIC  (subject  to
certain  restrictions on payment of rates), while  "undercapitalized"  banks may
not accept brokered  deposits.  The regulations  provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the  definitions  adopted by the agencies to implement the prompt  corrective
action  provisions  described in the  previous  paragraph.  Management  does not
believe  that  these  regulations  will have a  material  adverse  effect on the
operations of the Bank.

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 the Company and any other  adequately  capitalized  bank holding company
located in South  Carolina can acquire a bank located in any other state,  and a
bank  holding  company  located  outside  South  Carolina  can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and
other restrictions.  Unless prohibited by state law, adequately  capitalized and
managed bank holding  companies are permitted to  consolidate  their  multistate


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bank operations into a single bank subsidiary and to branch  interstate  through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate  branches within a state continue to be subject to applicable  state
branching  laws.  South  Carolina law was amended,  effective  July 1, 1996,  to
permit such  interstate  branching but not de novo branching by an  out-of-state
bank.

Graham-Leach-Bliley Act

         On November 12, 1999, the President signed the Gramm-Leach-Bliley  Act,
which  makes it easier for  affiliations  between  banks,  securities  firms and
insurance companies to take place. The Act removes Depression-era  barriers that
had separated  banks and securities  firms,  and seeks to protect the privacy of
consumers' financial information.  Most of the provisions of the Act require the
applicable   regulators  to  adopt  regulations  in  order  to  implement  these
provisions and a significant number of regulations have already been adopted.

         Under provisions of the new legislation, which were effective March 11,
2000, banks,  securities firms and insurance companies are able to structure new
affiliations  through  a  holding  company  structure  or  through  a  financial
subsidiary.  The legislation creates a new type of bank holding company called a
"financial  holding  company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial  activities,"  which are activities that are (1) financial in nature;
(2) incidental to activities that are financial in nature;  or (3) complementary
to a  financial  activity  and that do not impose a safety and  soundness  risk.
Significantly,   the  permitted  financial   activities  for  financial  holding
companies  include  authority  to  engage  in  merchant  banking  and  insurance
activities,  including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and  have  received  a  rating  of   "satisfactory"   on  their  last  Community
Reinvestment Act examination.

         The  legislation  also  creates  another  new type of  entity  called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities,  including real
estate development or investment,  insurance or annuity underwriting,  insurance
portfolio  investing and merchant  banking,  are reserved for financial  holding
companies.  A bank's  investment  in a financial  subsidiary  affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial  subsidiaries  may not be consolidated  with those of the bank. The
bank must also be certain that its risk  management  procedures  are adequate to
protect it from  financial and  operational  risks created both by itself and by
any financial subsidiary.  Further, the bank must establish policies to maintain
the separate corporate  identities of the bank and its financial  subsidiary and
to prevent each from becoming liable for the obligations of the other.

         The Act also  establishes  the  concept  of  "functional  supervision,"
meaning that  similar  activities  should be  regulated  by the same  regulator.
Accordingly,  the Act spells out the regulatory authority of the bank regulatory
agencies,  the Securities and Exchange Commission and state insurance regulators
so that each type of activity is  supervised by a regulator  with  corresponding
expertise.  The Federal  Reserve Board is intended to be an umbrella  supervisor
with the  authority  to  require a bank  holding  company or  financial  holding
company  or any  subsidiary  of  either  to  file  reports  as to its  financial
condition,  risk management  systems,  transactions with depository  institution
subsidiaries  and  affiliates,  and compliance  with any federal law that it has
authority to enforce.

         Although the Act reaffirms that states are the regulators for insurance
activities  of  all  persons,  including   federally-chartered  banks,  the  Act
prohibits  states from preventing  depository  institutions and their affiliates
from conducting insurance activities.

         The Act also  establishes  a minimum  federal  standard  of  privacy to
protect the confidentiality of a consumer's  personal financial  information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions.

         The  Company  anticipates  that  the Act and  the  regulations  adopted
pursuant to the Act will be likely to create new  opportunities  for it to offer
expanded  services to  customers  in the future,  though the Company has not yet


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determined what the nature of the expanded services might be or when the Company
might find it feasible to offer them. The Company  further  expects that the Act
will increase competition from larger financial  institutions that are currently
more capable than the Company of taking  advantage of the opportunity to provide
a broader range of services.  However, the Company continues to believe that its
commitment to providing  high quality,  personalized  service to customers  will
permit it to remain competitive in its market area.

Legislative Proposals

           New  proposed   legislation  which  could  significantly  affect  the
business of banking has been  introduced  or may be  introduced in Congress from
time to time.  Management  of the Bank cannot  predict the future course of such
legislative proposals or their impact on the Company and the Bank should they be
adopted.

Fiscal and Monetary Policy

           Banking is a business  which  depends to a large  extent on  interest
rate  differentials.  In general,  the difference between the interest paid by a
bank on its deposits and its other  borrowings,  and the interest  received by a
bank on its loans and securities  holdings,  constitutes  the major portion of a
bank's  earnings.  Thus, the earnings and growth of the Company and the Bank are
subject to the  influence of economic  conditions  generally,  both domestic and
foreign,  and also to the monetary and fiscal  policies of the United States and
its agencies,  particularly the Federal Reserve.  The Federal Reserve  regulates
the supply of money through  various means,  including  open market  dealings in
United States government securities, the discount rate at which banks may borrow
from the Federal Reserve, and the reserve  requirements on deposits.  The nature
and timing of any changes in such  policies  and their impact on the Company and
the Bank cannot be predicted.

Item 2.    Description of Property.

           The Bank  leases a lot at the  corner of South  Main  Street and East
Knight  Street in Fountain Inn. The lot is leased for 20 years for $9,000 a year
from Blake P. Garrett, Jr., Trustee, with four five year renewal options.  Lease
payments  are subject to increase to reflect  increases  in the  Consumer  Price
Index.  Blake P. Garrett,  Jr., is the brother of Mason Y. Garrett,  Chairman of
the Board of  Directors  of the Bank.  Blake P.  Garrett,  Jr., is trustee for a
partnership  which  owns  the  property.  The  Bank  completed  construction  in
December,  1998 of a 3,000 square foot one story  office  building on the lot at
the cost of approximately $500,000.

           Since its  opening,  the Bank has  operated  in a  building  formerly
operated as a branch office by NationsBank in Simpsonville, South Carolina. That
office is leased from Blake P.  Garrett,  Jr., as Trustee,  for $3,000 per month
for 3 years with three five year  renewal  options.  Mason Y. Garrett is a 10.3%
partner in the  partnership. The Bank also  leases a store  front  office in the
adjoining shopping center.

           The  Bank  also  owns  a lot in  Greenville,  South  Carolina  and is
constructing its main office on the site. Total construction costs are estimated
to be $2.1 million and the new office is scheduled to be completed in June 2002.
A temporary facility is used as a branch at that site during construction.

Item 3.    Legal Proceedings.

           The Bank is from time to time a party to  various  legal  proceedings
arising in the ordinary  course of business,  but  management of the Bank is not
aware  of  any  pending  or  threatened   litigation  or  unasserted  claims  or
assessments  that are  expected  to  result in  losses,  if any,  that  would be
material to the Bank's business and operations.

Item 4.    Submission of Matters to Vote of Security Holders.

           No matters were submitted to a vote of security holders in the fourth
quarter of 2001.


                                       8
<Page>

                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

         Although the common stock of the Company is traded from time to time on
an individual  basis,  no  established  trading market has developed and none is
expected to develop in the foreseeable future. The common stock is not traded on
the NASDAQ  National  Market  System,  nor are there any market  makers known to
management.  During 2001, management is aware of a few transactions in which the
Company's  common stock has been  transferred  for prices ranging from $ 6.50 to
$7.00 per share. However, management has not ascertained that these transactions
are the result of arm's length negotiations  between the parties, and because of
the limited number of shares involved,  such prices may not be indicative of the
market value of the common stock.

         As of February 28, 2002, there were approximately 634 holders of record
of the Company's  common stock,  excluding  individual  participants in security
position listings.

         The  Company  has never paid any cash  dividends,  and to  support  its
continued  capital  growth,  does not expect to pay cash  dividends  in the near
future.  The  Company's  principal  source  of funds  with  which  it could  pay
dividends is the Bank. 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.

Item 6.  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.

Critical Accounting Policies

 The  Company  has  adopted  various   accounting   policies  which  govern  the
application of accounting  principles generally accepted in the United States 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 such 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,  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
policy that  requires  the most  significant  judgments  and  estimates  used in
preparation of its consolidated  financial  statements.  Refer to the "Provision
for Loan Losses" and "Allowance  for Loan Losses"  sections below for a detailed
description of the Company's  estimation process and methodology  related to the
allowance for loan losses.


                                       9
<Page>

Financial Condition

         At December  31, 2001 the  Company had total  assets of $117.6  million
composed  primarily  of loans  of $91.5  million,  securities,  investments  and
Federal Funds sold of $19.5 million and cash and due from banks of $2.2 million.
Liabilities  were $109.1  million at December  31, 2001,  composed  primarily of
deposits of $95.0  million and Federal Home Loan Bank  advances of $8.5 million.
Shareholders' equity was $8.6 million at December 31, 2001.

         The Company's loan  portfolio at December 31, 2001 consisted  primarily
of $36.8 million of commercial  loans,  $41.9 million of real estate  mortgages,
$6.8  million of real  estate  construction  loans and $7.1  million of consumer
loans.  The allowance for loan losses totaled $1.2 million at December 31, 2001.
Management  believes  that the  allowance  for loan losses is adequate to absorb
losses inherent in the loan portfolio as of December 31, 2001.

Earnings Performance

         The Bank had net income from operations for the year ended December 31,
2001 of $295,814,  or $0.16 basic and $0.15 diluted earnings per share, compared
to $297,270 or $0.16 basic  earnings  per share and $0.15  diluted  earnings per
share for the year ended  December  31, 2000.  The Bank had net interest  income
(the difference  between interest earned on interest earning assets and interest
paid on interest bearing  liabilities,  excluding the provision for loan losses)
of  $3,590,637  for 2001 as compared to $3,378,388  for 2000.  The Bank also had
other operating income  (principally  service charges,  fees and commissions) of
$277,061 in 2001 and $115,287 in 2000.  The Bank provided  $722,500 and $865,000
to its  reserve  for loan  losses in 2001 and 2000  respectively,  and had other
operating expenses (principally  salaries and benefits,  occupancy and equipment
expenses and data  processing  expenses) of $2,978,440 in 2001 and $2,155,152 in
2000.

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, 2001,  net interest  income was $3.6
million.  For the year ended  December  31, 2000,  net interest  income was $3.4
million.  This increase was primarily  attributable  to an increase in volume as
average  interest  earning assets  increased to $97.2 million in 2001 from $82.4
million in 2000. The average yield on interest earning assets decreased to 8.65%
from 9.33% in 2001 compared to 2000,  while the average cost of interest bearing
liabilities  decreased  to 5.47% from 5.90%.  The net yield on average  interest
earning assets decreased to 3.70% in 2001 from 4.10% in 2000.


                                       10
<Page>


The table "Average Balances,  Yields and Rates," provides a detailed analysis of
the effective  yields and rates on the categories of interest earning assets and
interest bearing liabilities for the years ended December 31, 2001 and 2000.

<Table>
<Caption>
                                                                             Average Balances, Yields and Rates
                                                                                   (Dollars in Thousands)
                                                              Year Ended December 31, 2001        Year Ended December 31, 2000
                                                              ----------------------------        ----------------------------
                                                                         Interest                             Interest
                                                             Average      Income/    Yields/     Average       Income/     Yields/
                                                           Balances(1)    Expense     Rates    Balances(1)     Expense      Rates
                                                           -----------    -------     -----    -----------     -------      -----
Assets
<S>                                                         <C>           <C>        <C>         <C>            <C>         <C>
Federal funds sold and interest bearing deposits ......     $  7,420      $  331      4.47%      $ 6,421        $  396       6.17%
Investment securities .................................       10,263         682      6.64         9,322           595       6.38
Loans (2) .............................................       79,475       7,392      9.30        66,623         6,691      10.04
                                                            --------      ------                 -------        ------
  Total interest earning assets .......................       97,158       8,405      8.65        82,366         7,682       9.33
Cash and due from banks ...............................        3,121                               1,974
Allowance for loan losses .............................       (1,073)                             (1,264)
Premises and equipment ................................        1,561                                 959
Other assets ..........................................        1,649                               1,313
                                                            --------                             -------
  Total assets ........................................      102,416                              85,348
                                                            ========                             =======
Liabilities and shareholders' equity
  Interest bearing deposits ...........................       82,996       4,552      5.48        72,956         4,304       5.90
  FHLB advances .......................................        1,593          68      4.29             -             -          -
  Subordinated debentures .............................        3,500         194      5.53             -             -          -
                                                            --------      ------                 -------        ------
    Total interest bearing liabilities ................       88,089       4,814      5.47        72,956         4,304       5.90
Noninterest bearing demand deposits ...................        5,212                               3,732
Other liabilities .....................................        2,036                                 928
                                                            --------                             -------
    Total liabilities .................................       95,337                              77,616
Shareholders' equity ..................................        7,079                               7,731
                                                            --------                             -------
  Total liabilities and  shareholders' equity .........     $102,416                             $85,348
                                                            ========                             =======
Interest rate spread (3) ..............................                               3.19                                   3.43
Net interest income and net yield .....................                    3,591      3.70                       3,378       4.10
  on earning assets  (4)
Interest free funds supporting earning assets (5)......        9,069                               9,410
</Table>
(1)  Average balances are computed on a daily basis.
(2)  Nonaccruing  loans are included in the average loan  balances and income on
     such loans is recognized on a cash basis.
(3)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(4)  Net interest income divided by total interest earning assets.
(5)  Total interest earning assets less total interest bearing liabilities.


                                       11
<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.

<Table>
<Caption>
                                                          Year Ended December 31, 2001 compared to 2000
                                                                   Increase (Decrease) Due to
                                                                   --------------------------
                                                       Volume          Rate       Volume/ Rate      Change
                                                       ------          ----       ------------      ------
Interest earned on:                                                  (Dollars in Thousands)
<S>                                                    <C>           <C>              <C>            <C>
       Federal Funds Sold ..........................       62         (110)            (17)           (65)
       Investments .................................       61           23               3             87
       Net Loans ...................................    1,291         (495)            (95)           701
                                                       ------        ------            ----          ----

Total Interest Income ..............................    1,414         (582)           (109)           723
Interest paid on:
       Deposits ....................................      592         (302)            (42)           248
       FHLB advances ...............................       68             -              -             68
       Subordinated debentures .....................      194             -              -            194
                                                       ------        ------           ----           ----
Total Interest Expense .............................      854         (302)            (42)           510

Change in Net Interest Income ......................   $  560        $(280)           $(67)          $213
                                                       ======        ======           =====          ====
</Table>


         During 2002,  management  expects  that  interest  rates will  increase
during the last half of the year, but will not radically change.  Therefore, any
improvements  in net  interest  income for 2002 are  expected  to be largely the
result of  increases  in the volume and changes in the mix of  interest  earning
assets  and  liabilities.  Management  expects  to  continue  to use  aggressive
marketing  strategies  to increase the Bank's market share for both deposits and
quality  loans  within its service area in  Greenville,  South  Carolina.  These
strategies involve offering  attractive interest rates and continuing the Bank's
commitment to providing outstanding customer service.

Interest Rate Sensitivity

         Interest rate  sensitivity  management is concerned with 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 and the expected  interest rate  environment so that
adjustments in interest rate sensitivity can be timely made.

         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,
2001 of $12.9  million  for a  cumulative  gap ratio of  82.49%.  When  interest
sensitive  liabilities exceed interest sensitive assets for a specific repricing
"horizon", a negative interest sensitivity gap results. The gap is positive when
interest sensitive assets exceed interest sensitive liabilities. 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.

                                       12
<Page>

         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.  Time  deposits in other  banks are  reflected  in the  deposits'
maturity dates.  Repurchase agreements and other borrowed funds are reflected in
the earliest  contractual  repricing  interval due to the immediately  available
nature  of  these  funds.  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.  Fixed rate
advances are reflected at their  contractual  maturity dates,  and variable rate
advances  are  reflected  in the  earliest  repricing  interval  since they were
borrowed under the daily rate credit option, and reprice daily.

                          Interest Sensitivity Analysis

<Table>
<Caption>
                                                                              December 31, 2000
                                                                              -----------------
                                                       Within         4-12      Over 1-5       Over 5
                                                      3 Months       Months      Years         Years          Total
                                                      --------       ------     --------       ------         -----
                                                                       (Dollars in thousands)
Interest earning assets
<S>                                                   <C>          <C>          <C>          <C>          <C>
   Federal funds sold ...........................     $  8,138            -     $      -     $      -     $   8,138
   Investments and FHLB stock ...................            -            -        2,552        8,794        11,346
   Loans ........................................       40,027       12,714       39,056          893        92,690
                                                        ------     --------     --------     --------     ---------

        Total interest earning assets ...........       48,165       12,714       41,608        9,687       112,174
                                                        ======     ========     ========     ========     =========
Interest bearing liabilities
   Interest bearing deposits
      Interest bearing transaction accounts .....        2,198            -            -            -         2,198
      Savings and money market accounts .........       22,264            -            -            -        22,264
      Time deposits $100M and over ..............        9,478        8,354        3,209            -        21,041
      Other time deposits .......................       12,691       18,818       13,263            -        44,772
                                                     ---------     --------     --------     --------     ---------
        Total interest bearing deposits .........       46,631       27,172       16,472            -        90,275
                                                     ---------     --------     --------     --------     ---------

   Other borrowings .............................            -            -        6,500        5,500        12,000
                                                      --------     --------     --------     --------     ---------
        Total interest bearing liabilities ......     $ 46,631     $ 27,172     $ 22,972     $  5,500     $ 102,275
                                                      ========     ========     ========     ========     =========

Interest sensitivity gap ........................   $    1,534      (14,458)      18,639        4,187
Cumulative interest sensitivity gap .............        1,534      (12,924)       5,712        9,899

Gap ratio .......................................      103.29%        46.79%      181.12%      100.00%
Cumulative gap ratio ............................      103.29%        82.49%      105.90%      109.68%
</Table>

Provision for Loan Losses

         The allowance for loan losses,  established  through charges to expense
in the form of a provision for loan losses,  allows 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 enough to provide for inherent losses. The Bank provided $722,500 and $
865,000 to the  allowance  during the years  ended  December  31, 2001 and 2000,
respectively.


                                       13
<Page>

Other Income

         In 2001, the Bank had other income of $277,061 principally from service
charges,  fees and  commissions  as compared to $115,287 of such income in 2000.
The increase was the result of a higher amount of service and overdraft  fees on
deposits in 2001.

Other Expenses

         Other expenses consist of salaries and employee  benefits of $1,676,062
and $1,218,919 for 2001 and 2000, respectively. The increase is primarily due to
the addition of staff in 2001,  three of whom  service the new branch  location,
which opened in May, 2001. Net occupancy, and data processing expenses,  totaled
$542,315  for the year ended  December  31, 2001 as compared to $392,591 for the
year ended  December 31, 2000.  The increase in expenses was due to increases in
facilities  needed to support  the Bank's  growth.  In 2001,  the Bank  recorded
write-downs of assets acquired in settlement of loans of $151,495. There were no
such write downs included in other expenses in 2000.

Income Taxes

         During  the year  ended  December  31,  2001,  the Bank  recorded a tax
benefit of $129,056  compared to expense of $176,253 for the year ended December
31, 2000. 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, 2001,  the Bank's  investment  portfolio,  excluding
investments  required for  membership  in the Federal  Home Loan Bank  ("FHLB"),
comprised  approximately  9.3  %  of  its  total  assets.  The  following  table
summarizes the carrying value amounts of securities held by the Bank at December
31, 2001 and at December 31, 2000.  Available-for-sale  securities are stated at
estimated fair value. The Bank had no held for investment securities at December
31, 2001 or 2000.

                        Securities Portfolio Composition

<Table>
<Caption>
                                                    December 31, 2001                   December 31, 2000
                                            ----------------------------------   ---------------------------------
                                                           Net                                 Net
                                                        Unrealized                          Unrealized
                                               Book      Holding      Fair         Book      Holding      Fair
                                              Value    Gain/(Loss)    Value        Value   Gain/(Loss)    Value
                                              -----    -----------    -----        -----   -----------    -----
                                                                   (Dollars in thousands)
Available for sale:
<S>                                            <C>            <C>     <C>          <C>            <C>     <C>
         U. S. Agency obligations .........    $ 3,483        $  80   $ 3,563      $ 9,991        $(45)   $ 9,946
              Mortgage-backed securities ..      7,391          (33)    7,358          827          (9)       818
                                               -------        -----   -------      -------        -----   -------
                                               $10,874        $  47   $10,921      $10,818        $(54)   $10,765
                                               =======        =====   =======      =======        =====   =======
</Table>


         The Bank also holds stock of the FHLB. This stock is recorded at a cost
of $425,000 and $118,600 at December 31, 2001 and 2000, respectively, and has no
quoted market value. However,  redemption of this stock has historically been at
par value.


                                       14
<Page>

The following  table  presents  maturities  and weighted  average yields of debt
securities  available for sale at December 31, 2001.  All of the  securities are
categorized  as  available-for-sale  securities and are stated at estimated fair
value.

                   Securities Portfolio Maturities and Yields

                                                      December 31, 2001
                                                      -----------------
                                                 Fair
                                                 Value               Yield
                                                 -----               -----
                                                 (Dollars in thousands)
U. S. Government Agency obligations
         Due from one to five years .........  $ 2,552               5.29%
         Due from five to ten years .........    1,012               6.48
                                               -------
                                                 3,564
                                               -------
Mortgage-backed securities
         Due from five to ten years .........    1,091               5.39
         Due after ten years ................    6,266               5.57
                                               -------
                                                 7,357
                                               -------
                                               $10,921               5.57%
                                               =======

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no  significant  concentrations  of loans in any  particular  individuals or
industry or group of related individuals or industries, and there are no foreign
loans.

         The amount of loans  outstanding  at December  31,  2001 and 2000,  are
shown in the following table according to type of loan:

                           Loan Portfolio Composition

                                                              December 31,
                                                              ------------
                                                       2001               2000
                                                       ----               ----
                                                         (Dollars in thousands)
Commercial ...................................        $ 36,800         $ 27,781
Real estate - Construction ...................           6,846            5,853
Real estate - Mortgage .......................          41,924           31,130
Consumer .....................................           7,120            5,911
                                                      --------         --------
    Total loans ..............................          92,690           70,675
Less allowance for loan losses ...............          (1,176)            (958)
                                                      --------         --------
                                                      $ 91,514         $ 69,717
                                                      ========         ========


         A certain degree of risk taking 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 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


                                       15
<Page>

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  generally  consist of  financing  the
construction  of 1-4 family  dwellings  and some  nonfarm,  nonresidential  real
estate.  Usually, loan to cost ratios are limited to 80% and permanent financing
commitments are required prior to the advancement of loan proceeds.

         Loans secured by real estate  mortgages  comprised  45.2% of the Bank's
loan  portfolio  at December  31, 2001.  Residential  real estate loans  consist
mainly  of first  and  second  mortgages  on  single  family  homes,  with  some
multifamily  loans.  Loan-to-value  ratios for these  instruments  are generally
limited  to 80%.  Nonfarm,  nonresidential  loans are  secured by  business  and
commercial  properties with  loan-to-value  ratios generally limited to 80%. The
repayment  of both  residential  and  business  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.

Maturity and Interest Sensitivity Distribution of Loans

         The  following  table  sets  forth  the  maturity  distribution  of the
Company's  loans, by type, at December 31, 2001, as well as the type of interest
requirement on such loans.

<Table>
<Caption>
                                                                             December 31, 2001
                                                         One Year          One to        Five Years
                                                          Or Less        Five Years       Or More          Total
                                                          -------        ----------       -------          -----
                                                                          (Dollars in thousands)

<S>                                                        <C>             <C>               <C>          <C>
Commercial, financial and industrial .................     $23,001         $13,799           $  -         $36,800
Real estate - construction ...........................       4,720           1,689            437           6,846
Real estate - mortgage ...............................      22,973          18,558            393          41,924
Consumer installment .................................       2,047           5,010             63           7,120
                                                           -------         -------           ----         -------
         Total loans .................................     $52,741         $39,056           $893         $92,690
                                                           =======         =======           ====         =======

                                                   Predetermined rate                                     $57,944

                                                        Variable rate                                     $34,746
</Table>

Nonperforming Loans; Other Problem Assets

         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 generally
discontinued  unless  the  estimated  net  realizable  value  of  collateral  is
sufficient to assure  collection of the principal  balance and accrued interest.
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 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, 2001 and 2000,  the Bank had $1,362,265 and
$2,281,570,  respectively, of nonaccrual loans. Gross interest income that would
have been recorded  with respect to nonaccrual  loans in 2001 and 2000 under the
original terms of the loans was $195,396 and $158,028, respectively. At December
31, 2001 and 2000 there were $626,000 and $0, respectively,  of loans 90 days or
more past due and still accruing interest.


                                       16
<Page>

Potential Problem Loans

         Management  has  identified  and maintains a list of potential  problem
loans. These are loans that are not included in nonaccrual status, or loans 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, 2001, $626,000 of loans were past due ninety days or more and still
accruing interest.  There were no loans determined by management to be potential
problem loans at December 31, 2000.

Assets Acquired in Foreclosure

         At  December  31,  2001  and  2000,  the Bank had  assets  acquired  in
settlements of loans of  approximately  $574,00 and $888,000,  respectively.  Of
those  amounts,  100% and 90.7%,  respectively,  consisted of real estate owned.
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.

Allowance for Loan Losses

         The  allowance  for loan  losses  is  increased  by direct  charges  to
operating  expense.  Losses on loans are charged  against the  allowance  in the
period in which  management has determined  that it is more likely than not such
loans have become uncollectible.  Recoveries of previously charged off loans are
credited  to the  allowance.  The  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.

         In reviewing the adequacy of the allowance for loan losses at each year
end,  management took into  consideration the historical loan losses experienced
by the Bank,  current economic  conditions  affecting the borrowers'  ability to
repay,  the volume of loans,  and the  trends in  delinquent,  nonaccruing,  and
potential  problem loans, and the quality of collateral  securing  nonperforming
and problem loans. After charging off all known losses, management considers the
allowance for loan losses adequate to cover its estimate of loan losses inherent
in the loan portfolio as of December 31, 2001.

         In  calculating  the amount  required in the allowance for loan losses,
management  applies a  consistent  methodology  that is updated  quarterly.  The
methodology  utilizes a loan risk grading  system and  detailed  loan reviews to
assess credit risks and the overall  quality of the loan  portfolio,  as well as
other  off-balance-sheet  credit  risks  such as loan  commitments  and  standby
letters of credit. Also, the calculation provides for management's assessment of
trends in national and local economic  conditions  that might affect the general
quality of the loan portfolio.  Regulators  review the adequacy of the allowance
for loan  losses  as part of  their  examination  of the  Bank  and may  require
adjustments  to the allowance  based upon  information  available to them at the
time of the examination.

         During 2001,  the Bank  experienced  net  charge-offs  in the amount of
approximately $505,000.  Management believes that it has adequately provided for
losses  considering  its  assessment  of  collateral  values  and other  factors
affecting  collectibility.  In addition,  Management  feels that  procedures  to
monitor  extensions  of  credit,   construction  draws,  and  current  financial
condition of borrowers  have  improved  during the last two years as compared to
previous periods.

         The allowance is not allocated to different  segments of the portfolio.
The Bank  charges  losses from any  segment of the  portfolio  to the  allowance
without any allocation.


                                       17
<Page>

                         Summary of Loan Loss Experience

<Table>
<Caption>
                                                                                                          Year Ended
                                                                                                          ----------
                                                                                           December 31, 2001       December 31, 2000
                                                                                           -----------------       -----------------
                                                                                                    (Dollars in thousands)

<S>                                                                                          <C>                      <C>
Total gross loans outstanding at end of period ....................................          $ 92,690                 $ 70,675
Average amount of loans outstanding, gross ........................................            78,318                   66,623
                                                                                             --------                 --------

Balance of allowance for loan losses - beginning ..................................               958                    1,173
                                                                                             --------                 --------
Loans charged off:
     Real estate loans ............................................................              (247)                    (770)
     Consumer loans ...............................................................               (94)                    (119)
     Commercial and other loans ...................................................              (164)                    (191)
                                                                                             --------                 --------
        Total charge-offs .........................................................              (505)                  (1,080)

Recoveries of loans previously charged-off ........................................                 -                        -
                                                                                             --------                 --------
Net charge-offs ...................................................................              (505)                  (1,080)

Additions to allowance charged to expense .........................................               723                      865
                                                                                             --------                 --------

Balance of allowance for loan losses - ending .....................................          $  1,176                 $    958
                                                                                             ========                 ========

Ratios
     Net charge-offs during period to average
        loans outstanding during period ...........................................              0.64%                    1.62%
     Net charge-offs to loans at end of period ....................................              0.54                     1.53
     Allowance for loan losses to average loans ...................................              1.50                     1.44
     Allowance for loan losses
         to loans at end of period ................................................              1.27                     1.36
     Allowance for loan losses to nonperforming loans
        at end of period ..........................................................              86.3                     42.0
     Net charge-offs to allowance for loan losses .................................              42.9                      113
     Net charge-offs to provision for loan losses .................................              69.9                      125
</Table>

Deposits

The amounts and  composition  of total deposits as of December 31, 2001 and 2000
were as follows:

<Table>
<Caption>
                                                                                       December 31,
                                                                                       ------------
                                                                          2001                                 2000
                                                                          ----                                 ----
                                                               Amount             Percent           Amount               Percent
                                                               ------             -------           ------               -------
<S>                                                         <C>                    <C>             <C>                    <C>
Noninterest bearing ............................            $ 4,762,844              5.0%          $ 3,789,108              4.8%
NOW accounts ...................................              2,197,697              2.3             1,840,918              2.4
Money market accounts ..........................             21,770,636             22.9            14,701,710             18.8
Savings ........................................                494,466              0.5               220,696              0.3
Time, less than $100,000 .......................             44,772,190             47.1            39,158,883             50.1
Time, $100,000 and over ........................             21,040,227             22.2            18,497,774             23.6
                                                            -----------            -----           -----------            -----
                                                            $95,038,060            100.0%          $78,209,089            100.0%
                                                            ===========            =====           ===========            =====
</Table>


                                       18
<Page>

The average  amounts and average rate paid on deposits  held by the Bank for the
years ended December 31, 2001 and 2000 are summarized below:

<Table>
<Caption>
                                                                                                   Deposits
                                                                                             (Dollars in Thousands)
                                                                             December 31, 2001                  December 31, 2000
                                                                             -----------------                  -----------------
                                                                              Amount             %          Amount             %
                                                                              ------            ----        ------             ----

<S>                                                                           <C>                           <C>
Noninterest bearing demand .........................................          $ 5,212           -           $ 3,732            -
Interest bearing transaction accounts ..............................            1,911           1.54          1,637            3.28
Savings ............................................................              303           1.18            224            1.69
Money market accounts ..............................................           17,312           3.70         13,133            5.53
Certificates of deposit and individual  retirement
accounts ...........................................................           63,470           6.11         57,962            6.07
                                                                              -------           ----        -------            ----
         Total average deposits ....................................          $88,208           5.16%       $76,688            5.07%
                                                                              =======           ====        =======            ====
</Table>

         As of December 31, 2001,  the Bank held $21.0  million in time deposits
of $100,000 or more,  with  approximately  $9.5 million with  maturities  within
three months, $8.4 million with maturities over three through twelve months, and
$2.7  million with  maturities  over twelve  months  through  three  years,  and
$476,000  with  maturities  over three  years.  The Bank had no  wholesale  time
deposits  (certificates  generated through  corporations,  banks, credit unions,
etc., on a national level) as of December 31, 2001.

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, 2001 and 2000.

                                                        Years Ended December 31,
                                                          2001            2000
                                                          ----            ----

          Return on average assets ..............          0.29%           0.35%
          Return on average equity ..............          4.18            3.85
          Dividend payout ratio .................             -               -
          Average equity to average
            asset ratio .........................          6.91            9.06

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 loans 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).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less wholesale time deposits) provide a relatively stable funding base, and were
equal to 62.9% of total assets at December 31, 2001. Asset liquidity is provided
from several sources,  including  amounts due from banks and federal funds sold,
and funds from maturing loans.  The Bank is a member of the FHLB of Atlanta and,


                                       19
<Page>

as such,  has the  ability  to borrow  against  the  security  of its 1-4 family
residential  mortgage  loans.  At December 31, 2001, the Bank had the ability to
borrow up to 10% of assets  from the  FHLB.  $8.5  million  of  borrowings  were
outstanding  from the FHLB at December 31, 2001. The borrowings bear interest at
rates  ranging  from 4.33% to 4.38%.  $6.5  million  matures  in 2006,  and $2.0
million  matures in 2001.  The $6.5 million  advance is a fixed rate  borrowing,
while  the $2.0  million  advance  is  callable,  and may  reprice  prior to its
maturity  date.  The FHLB requires  that  securities,  qualifying  single family
mortgage  loans and stock of the FHLB owned by the Bank be pledged to secure any
advances from the FHLB. The unused borrowing capacity  currently  available from
the FHLB assumes that the Bank's  $425,000  investment  in FHLB stock as well as
certain  securities  and  qualifying  mortgages  would be  pledged to secure any
future borrowings.  The maximum amount of FHLB borrowings outstanding at the end
of any month in 2001 was $8.5  million.  The Bank  believes that it could obtain
additional borrowing capacity from the FHLB by identifying additional qualifying
collateral that could be pledged.

The Bank also has $875,000 available through lines of credit with other banks as
an additional source of liquidity funding.  Management  believes that the Bank's
overall  liquidity  sources  are  adequate  to meet its  operating  needs in the
ordinary course of business.

Off-Balance Sheet Risk


The Company,  through the operations of the Bank, makes contractual  commitments
to  extend  credit in the  ordinary  course of its  business  activities.  These
commitments  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, 2001,  the Bank had issued  commitments  to extend  credit of $ 14.6 million
through  various  types of lending.  Commitments  at variable  rates of interest
totaled $5.3 million and commitments at fixed rates totaled $9.3 million.


The commitments  generally  expire over on year. Past experience  indicates that
many of these  commitments  to extend  credit will expire  unused.  However,  as
described in "Liquidity",  the Company  believes that is 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.  Standby  letters of credit  totaled  $417,700 at December 31,
2001.  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 $ 595,000 at December 31, 2001.
These  obligations  are payable  over  several  years as shown in Note 10 to the
Company's consolidated financial statements.


Capital Resources

         The equity capital of the Company  increased by $373,513 during 2001 as
the result of net operating income of $295,814, unrealized gains, net of tax, in
the  investment  portfolio of $67,689,  and exercises of stock options  totaling
$10,010.

         The Bank is subject to regulatory  capital  adequacy  standards.  Under
these standards, financial institutions 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 affected  institution
were to fall below certain levels,  increasingly stringent regulatory corrective
actions are mandated.


                                       20
<Page>

The Bank's  December 31, 2001  capital  ratios are  presented  in the  following
table,  compared with the "well  capitalized"  and minimum ratios under the FDIC
regulatory definitions and guidelines:

<Table>
<Caption>
                                                                                                                  To be well
                                                                                                                 capitalized
                                                                                                                 under prompt
                                                                                     For capital                  corrective
                                                                                   adequacy purposes          action provisions
                                                                                   -----------------          -----------------
                                                            Actual                      Minimum                     Minimum
                                                            ------                      -------                     -------
                                                     Amount          Ratio       Amount         Ratio         Amount         Ratio
                                                     ------          -----       ------         -----         ------         -----
                                                                                (Dollars in thousands)
As of December 31, 2001
<S>                                                 <C>              <C>         <C>              <C>        <C>              <C>
   Total Capital (to risk
      weighted assets) ....................         $11,687          12.2%       $ 7,751          8.0%       $ 9,688          10.0%
   Tier 1 Capital (to risk
      weighted assets) ....................          10,691          11.0          3,875          4.0%         5,813           6.0
   Tier 1 Capital (to average
      assets)(leverage) ...................          10,691           9.7          4,418          4.0%         5,523           5.0
</Table>

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.


Item 7.  Financial Statements.

         The following  financial  statements of GrandSouth  Bancorporation  are
included herewith:

         Report of Independent Certified Public Accountants
         Balance Sheets at December 31, 2001 and 2000
         Consolidated  Statements of Operations for the years ended December 31,
         2001, 2000 and 1999 Consolidated Statements of Shareholders' Equity for
         the  years  ended  December  31,  1999,  2000  and  2001   Consolidated
         Statements  of Cash Flows for the years ended  December 31, 2001,  2000
         and 1999 Notes to Consolidated Financial Statements



                                       21
<Page>













                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY

                   REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999




                                       22
<Page>












               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
GrandSouth Bancorporation and Subsidiary
Fountain Inn, South Carolina


         We  have  audited  the  accompanying  consolidated  balance  sheets  of
GrandSouth Bancorporation and Subsidiary (the "Company") as of December 31, 2001
and 2000 and the related  consolidated  statements of operations,  shareholders'
equity,  and cash  flows for each of the years in the three  year  period  ended
December  31,   2001.   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 auditing standards generally
accepted in the United States of America.  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 consolidated financial position of
the GrandSouth  Bancorporation  and Subsidiary at December 31, 2001 and 2000 and
the  results  of their  operations  and cash  flows for each of the years in the
three year period  ended  December  31,  2001,  in  conformity  with  accounting
principles generally accepted in the United States of America.



                                   s/Elliott Davis, LLP




February 15, 2002
Greenville, South Carolina



                                       23
<Page>



                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS


<Table>
<Caption>
                                                                                                              DECEMBER 31,
                                                                                                              ------------
                                                                                                        2001                 2000
                                                                                                        ----                 ----
                                                            ASSETS
<S>                                                                                                 <C>                <C>
Cash and due from banks .....................................................................       $  2,207,293       $  2,256,288
Federal funds sold ..........................................................................          8,138,000          2,520,000
Investment securities available for sale ....................................................         10,921,166         10,764,692
Other investments, at cost ..................................................................            425,000            118,600
Loans, net ..................................................................................         91,514,192         69,717,470
Property and equipment, net .................................................................          2,117,214          1,221,585
Bank owned life insurance ...................................................................            749,968                  -
Assets acquired in settlement of loans ......................................................            573,526            887,667
Other assets ................................................................................            993,966            905,085
                                                                                                    ------------       ------------

           Total assets .....................................................................       $117,640,325       $ 88,391,387
                                                                                                    ============       ============

                                             LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits
     Noninterest bearing ....................................................................       $  4,762,844       $  3,789,108
     Interest bearing .......................................................................         90,275,216         74,419,981
                                                                                                    ------------       ------------

           Total deposits ...................................................................         95,038,060         78,209,089
                                                                                                    ------------       ------------

Federal Home Loan Bank advances .............................................................          8,500,000                  -
Subordinated debentures .....................................................................          3,500,000                  -
Other liabilities ...........................................................................          2,047,169          2,000,715
                                                                                                    ------------       ------------

           Total liabilities ................................................................        109,085,229         80,209,804
                                                                                                    ------------       ------------

COMMITMENTS AND CONTINGENCIES - Notes 10 and 14

SHAREHOLDERS' EQUITY
     Common stock, no par value, 20,000,000 shares authorized,
        1,875,329 and 1,873,129 shares issued at December 31, 2001 and 2000 .................          8,464,227          8,454,217
     Retained earnings (deficit) ............................................................             59,119           (236,695)
     Accumulated other comprehensive income (loss) ..........................................             31,750            (35,939)
                                                                                                    ------------       ------------

           Total shareholders' equity .......................................................          8,555,096          8,181,583
                                                                                                    ------------       ------------

           Total liabilities and shareholders' equity .......................................       $117,640,325       $ 88,391,387
                                                                                                    ============       ============
</Table>










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


                                       24
<Page>



                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<Table>
<Caption>
                                                                                                For the years ended
                                                                                                    December 31,
                                                                                                    ------------
                                                                                     2001               2000                 1999
                                                                                     ----               ----                 ----
INTEREST INCOME
<S>                                                                             <C>                  <C>                 <C>
    Loans and fees on loans ...........................................         $ 7,391,647          $ 6,691,021         $ 4,567,676
    Investment securities .............................................           1,013,624              991,607             932,225
                                                                                -----------          -----------         -----------

          Total interest income .......................................           8,405,271            7,682,628           5,499,901

INTEREST EXPENSE
    Deposits and borrowings ...........................................           4,814,634            4,304,240           2,945,441
                                                                                -----------          -----------         -----------

          Net interest income .........................................           3,590,637            3,378,388           2,554,460

PROVISION FOR POSSIBLE LOAN LOSSES ....................................             722,500              865,000             740,000
                                                                                -----------          -----------         -----------

          Net interest income after provision for
            possible loan losses ......................................           2,868,137            2,513,388           1,814,460
                                                                                -----------          -----------         -----------

NONINTEREST INCOME
    Service fees on deposit accounts ..................................             209,453               90,100              72,438
    Other .............................................................              67,608               25,187              87,067
                                                                                -----------          -----------         -----------

          Total noninterest income ....................................             277,061              115,287             159,505
                                                                                -----------          -----------         -----------

NONINTEREST EXPENSES
    Salaries and benefits .............................................           1,676,062            1,218,919           1,054,740
    Printing and supplies .............................................              86,665               63,584              88,787
    Data processing ...................................................             242,656              181,513             158,648
    Occupancy and equipment ...........................................             299,659              211,078             217,589
    Writedowns of assets acquired in settlement of loans ..............             151,495                    -                   -
    Other operating ...................................................             521,903              480,058             322,121
                                                                                -----------          -----------         -----------

          Total noninterest expenses ..................................           2,978,440            2,155,152           1,841,885
                                                                                -----------          -----------         -----------

          Income before income taxes ..................................             166,758              473,523             132,080

INCOME TAX PROVISION (BENEFIT) ........................................            (129,056)             176,253              45,000
                                                                                -----------          -----------         -----------

          Net income ..................................................         $   295,814          $   297,270         $    87,080
                                                                                ===========          ===========         ===========

BASIC NET INCOME PER COMMON SHARE .....................................         $      0.16          $      0.16         $      0.05
                                                                                ===========          ===========         ===========

DILUTED NET INCOME PER COMMON
    SHARE .............................................................         $      0.15          $      0.15         $      0.05
                                                                                ===========          ===========         ===========

WEIGHTED AVERAGE NUMBER OF COMMON
    SHARES OUTSTANDING
       Basic ..........................................................           1,875,329            1,873,129           1,873,129
                                                                                ===========          ===========         ===========

       Diluted ........................................................           1,916,186            1,926,003           1,924,387
                                                                                ===========          ===========         ===========
</Table>


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


                                       25
<Page>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              For the years ended December 31, 2001, 2000 and 1999

<Table>
<Caption>
                                                     Common stock                                      Accumulated
                                                 ---------------------     Additional       Retained        other          Total
                                                                             paid-in        Earnings    comprehensive  shareholders'
                                                 Shares         Amount       capital        (deficit)   income (loss)      equity
                                                 ------         ------       -------        ---------   -------------      ------

<S>                                              <C>         <C>           <C>            <C>            <C>            <C>
Balance, December 31, 1998 .................     1,702,847   $ 4,257,118   $ 4,197,118    $  (621,045)   $    (7,971)   $ 7,825,220
                                                                                                                        -----------

    Net income .............................             -             -             -         87,080              -         87,080
    Other comprehensive loss -
       Unrealized loss on
       investment securities (net of
       tax benefit of $78,769) .............             -             -             -              -       (160,188)      (160,188)
                                                                                                                        -----------

    Comprehensive loss .....................             -             -             -              -              -        (73,108)
    Stock split effected in the
       form of stock dividend (10%) ........       170,282       425,705      (425,705)             -              -              -
    Cash in lieu of fractional
       shares on stock split effected in
       the form of a stock dividend ........             -             -           (19)             -              -            (19)
                                                ----------   -----------   -----------    -----------    -----------    -----------

Balance, December 31, 1999 .................     1,873,129     4,682,823     3,771,394       (533,965)      (168,159)     7,752,093
                                                                                                                        -----------

    Net income .............................             -             -             -        297,270              -        297,270
    Other comprehensive income -
       Unrealized gain on investment
       securities (net of income tax
       expense of $64,692) .................             -             -             -              -        132,220        132,220
                                                                                                                        -----------

    Comprehensive income ...................             -             -             -              -              -        429,490
    Par value conversion upon
       exchange of stock ...................             -     3,771,394    (3,771,394)             -              -              -
                                                ----------   -----------   -----------    -----------    -----------    -----------

Balance, December 31, 2000 .................     1,873,129     8,454,217             -       (236,695)       (35,939)     8,181,583
                                                                                                                        -----------

    Net income .............................             -             -             -        295,814              -        295,814
    Other comprehensive income -
       Unrealized gain on investment
       securities (net of income tax
       expense of $33,339) .................             -             -             -              -         67,689         67,689
                                                                                                                        -----------

    Comprehensive income ...................             -             -             -              -              -        363,503
    Exercise of stock options ..............         2,200        10,010             -              -              -         10,010
                                                ----------   -----------   -----------    -----------    -----------    -----------

Balance, December 31, 2001 .................     1,875,329   $ 8,464,227   $         -    $    59,119    $    31,750    $ 8,555,096
                                                ==========   ===========   ===========    ===========    ===========    ===========
</Table>







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


                                       26
<Page>

                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                                                For the years ended
                                                                                                     December 31,
                                                                                                     ------------
                                                                                      2001                2000              1999
                                                                                      ----                ----              ----
OPERATING ACTIVITIES
<S>                                                                              <C>                <C>                <C>
      Net income ..........................................................      $    295,814       $    297,270       $     87,080
      Adjustments to reconcile net income to net cash
         provided by operating activities
         Deferred income tax expense (benefit) ............................          (271,143)            (1,033)            34,324
         Provision for possible loan losses ...............................           722,500            865,000            740,000
         Depreciation and amortization ....................................           144,159            123,481            124,326
         Gain on sale of property and equipment ...........................                 -             (7,264)                 -
         Loss on sale of investment securities ............................                 -                  -              3,051
         Write-down of assets acquired in settlement of loans .............           151,495             80,000                  -
         Decrease (increase) in other assets ..............................           128,966             95,226           (788,501)
         Increase in other liabilities ....................................            46,454          1,568,877            519,237
                                                                                 ------------       ------------       ------------

              Net cash provided by operating activities ...................         1,218,245          3,021,557            719,517
                                                                                 ------------       ------------       ------------

INVESTING ACTIVITIES
      Decrease (increase) in federal funds sold ...........................        (5,618,000)         5,900,000          2,550,000
      Purchase of investment securities ...................................       (11,816,674)        (3,725,941)        (8,614,480)
      Purchase of Federal Home Loan Bank stock ............................          (306,400)                 -                  -
      Proceeds from sale of investment securities .........................                 -                  -            731,460
      Proceeds from maturity of investment securities .....................        11,761,226            758,180            987,902
      Increase in loans, net ..............................................       (22,628,222)        (9,685,110)       (39,686,968)
      Purchase of Bank owned life insurance ...............................          (749,968)                 -                  -
      Increase in assets acquired in settlement of loans ..................                 -           (147,941)                 -
      Proceeds from sale of assets acquired in settlement of loans ........           291,605                  -                  -
      Proceeds from sale of property and equipment ........................                 -            523,094                  -
      Purchase of property and equipment ..................................        (1,039,788)          (913,108)          (189,941)
                                                                                 ------------       ------------       ------------

              Net cash used in investing activities .......................       (30,106,221)        (7,290,826)       (44,222,027)
                                                                                 ------------       ------------       ------------

FINANCING ACTIVITIES
      Proceeds from Federal Home Loan Bank advances .......................         8,500,000                  -                  -
      Proceeds from issuance of subordinated debentures ...................         3,500,000                  -                  -
      Exercise of stock options ...........................................            10,010                  -                  -
      Net increase in deposits ............................................        16,828,971          5,414,562         40,889,962
      Cash in lieu of fractional shares on stock split effected
         in the form of a stock dividend ..................................                 -                  -                (19)
                                                                                 ------------       ------------       ------------

              Net cash provided by financing activities ...................        28,838,981          5,414,562         40,889,943
                                                                                 ------------       ------------       ------------

              Net (decrease) increase in cash and cash
              equivalents .................................................           (48,995)         1,145,293         (2,612,567)

CASH AND CASH EQUIVALENTS, BEGINNING
      OF YEAR .............................................................         2,256,288          1,110,995          3,723,562
                                                                                 ------------       ------------       ------------

CASH AND CASH EQUIVALENTS, END OF YEAR ....................................      $  2,207,293       $  2,256,288       $  1,110,995
                                                                                 ============       ============       ============

SUPPLEMENTAL INFORMATION
     Cash paid for:
         Income taxes .....................................................      $    174,370       $          -       $    222,500
                                                                                 ============       ============       ============

         Interest .........................................................      $  4,257,929       $  2,440,385       $  2,789,864
                                                                                 ============       ============       ============

         Loans transferred to assets acquired
           in settlement  of loans ........................................      $    109,000       $    819,726       $          -
                                                                                 ============       ============       ============
</Table>

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


                                       27
<Page>


                    GRANDSOUTH BANCORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.  Common stock and additional  paid-in  capital amounts have been
adjusted  as of  December  31,  2000 to reflect  the par value  conversion.  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.  For ease of presentation,
the  formation of the holding  company has been treated as if it occurred at the
earliest  date  presented  in  these  consolidated  financial  statements.  This
presentation has no effect on net income or shareholders' equity.

           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 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.
     All  transactions  of the  organizing  association  are  included  in these
     consolidated financial statements.

   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 businesses in and around Upstate
     South Carolina for various  personal and commercial  purposes.  The Company
     has a diversified loan portfolio and the borrowers'  ability to repay their
     loans is not dependent upon any specific economic sector.

   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 three
     categories:

     1.   Available for sale:  These are securities  which 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.

                                                                     (Continued)


                                       28
<Page>

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

     2.   Held to maturity:  These are investment  securities  which 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  which 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, interest and fee income on loans
     Loans are stated at the principal balance  outstanding.  Unearned discount,
     unamortized  loan fees,  and the  allowance  for  possible  loan losses are
     deducted  from total  loans in the  consolidated  balance  sheet.  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.

   Allowance for possible loan losses
     The  provision  for  possible  loan losses  charged to  operating  expenses
     reflect  the amount  deemed  appropriate  by  management  to  establish  an
     adequate reserve to meet the present and foreseeable  risk  characteristics
     of the current loan portfolio.  Management's judgement 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 which are
     determined to be uncollectible are charged against the allowance. Provision
     for possible 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.

                                                                     (Continued)


                                       29
<Page>

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

   Property and equipment
     Property 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 property 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 transfers.  If further reduction in value occurs,
     charges are included in income from operations.

   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 on the weighted  average  number of common  shares
     outstanding for diluted  earnings per share. In 1999, the Company issued an
     eleven for ten stock  split  effected  in the form of a ten  percent  stock
     dividend. Per share amounts have been retroactively restated to reflect the
     stock split.

   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 Due From
     Banks". 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.

                                                                     (Continued)



                                       30
<Page>

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

   Recently issued accounting standards
     In September 2000, the Financial Accounting Standards Board ("FASB") issued
     SFAS No. 140,  "Accounting for Transfers and Servicing of Financial  Assets
     and  Extinguishments  of  Liabilities -- a replacement of SFAS No. 125." It
     revises  the  standards  for  accounting  for   securitizations  and  other
     transfers  of  financial   assets  and  collateral  and  requires   certain
     disclosures but will carry over most of SFAS No. 125's  provisions  without
     reconsideration.  SFAS No. 140 is effective  for transfers and servicing of
     financial assets and  extinguishment  of liabilities  occurring after March
     31, 2001. This statement is effective for recognition and  reclassification
     of collateral and for disclosures  related to  securitization  transactions
     and  collateral  for fiscal  years ending  after  December  15,  2000.  The
     adoption of the  provisions of SFAS No. 140 in 2001 did not have any effect
     on the Company.

     In June 2001, the FASB issued SFAS No. 141, "Business  Combinations."  SFAS
     No. 141 addresses  accounting  and reporting for all business  combinations
     and  defines  the  purchase  method  as the only  acceptable  method.  This
     statement is effective for all business  combinations  initiated after June
     30, 2001.  The Company had no  transactions  affected by this  statement in
     2001.

     In June 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets."  This SFAS  addresses  how  goodwill and other  intangible  assets
     should be accounted for at their acquisition  (except for those acquired in
     a business  combination)  and after they have been initially  recognized in
     the financial  statements.  The statement is effective for all fiscal years
     beginning after December 15, 2001. This SFAS has no effect on the Company's
     financial statements.

     In July 2001,  the SEC issued  Staff  Accounting  Bulletin  ("SAB") No. 102
     "Selected Loan Loss Allowance  Methodology and Documentation  Issues." This
     staff  accounting  bulletin  clearly  defines  the  required   development,
     documentation,  and application of a systematic methodology for determining
     allowances  for  loan  and  lease  losses  in  accordance  with  accounting
     principles  generally  accepted  in  the  United  States  of  America.  The
     Company's  management  believes it is in compliance  with the provisions of
     SAB No. 102.

     Other  accounting  standards  that have been issued or proposed by the 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.

   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  speeds, or on different bases,
     than its interest-earning assets. Credit risk is the risk of default on the
     Company's  loan  portfolio  that  results  from  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.

     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.

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


                                       31
<Page>

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, 2001 and
2000 these required reserves were met by vault cash.


NOTE 3 - FEDERAL FUNDS SOLD

           When the Bank's cash reserves  (Note 2) are in excess of the required
amount,  it may lend the excess to other banks on a daily basis.  As of December
31, 2001 and 2000,  federal funds sold amounted to  $8,138,000  and  $2,520,000,
respectively.


NOTE 4 - INVESTMENT SECURITIES

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

<Table>
<Caption>
                                                                                       December 31, 2001
                                                                                       -----------------
                                                                                        Gross unrealized
                                                              Amortized                 ----------------                   Fair
                                                                cost                Gains               Losses             value
                                                                ----                -----               ------             -----

<S>                                                          <C>                 <C>                 <C>                 <C>
Federal Agencies ...................................         $ 3,483,068         $    80,526         $         -         $ 3,563,594
Mortgage backed ....................................           7,390,711              20,957              54,096           7,357,572
                                                             -----------         -----------         -----------         -----------

       Total investment securities .................         $10,873,779         $   101,483         $    54,096         $10,921,166
                                                             ===========         ===========         ===========         ===========

<Caption>
                                                                                          December 31, 2000
                                                                                          -----------------

<S>                                                          <C>                 <C>                 <C>                 <C>
Federal Agencies ...................................         $ 9,991,148         $    46,122         $    90,867         $ 9,946,403
Mortgage backed ....................................             827,183               1,239              10,133             818,289
                                                             -----------         -----------         -----------         -----------

       Total investment securities .................         $10,818,331         $    47,361         $   101,000         $10,764,692
                                                             ===========         ===========         ===========         ===========
</Table>

           The amortized costs and fair values of securities  available for sale
at December 31, 2001, 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
                                                       ----           ----------

One to five years ..........................       $ 2,484,775       $ 2,552,031
Five to ten years ..........................         2,102,046         2,102,915
After ten years ............................         6,286,958         6,266,220
                                                   -----------       -----------

       Total investment securities .........       $10,873,779       $10,921,166
                                                   ===========       ===========



           Investment  securities with an aggregate amortized cost of $9,987,868
(fair value of  $10,028,425)  at December 31, 2001 and  $553,351  (fair value of
$553,164) at December 31, 2000 were pledged to collateralize public deposits and
borrowings.

           The  Bank,  as a member  institution  of the  Federal  Home Loan Bank
(FHLB) of Atlanta,  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 $425,000  and  $118,600  at December  31, 2001 and
2000, is included in other  investments in the consolidated  balance sheets.  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.



                                       32
<Page>

NOTE 5 - LOANS

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

                                                             December 31,
                                                             ------------
                                                       2001                2000
                                                       ----                ----

Commercial .....................................     $36,799,837     $27,781,092
Real estate - construction .....................       6,846,288       5,853,417
Real estate - mortgage .........................      41,924,033      31,129,745
Consumer .......................................       7,119,604       5,911,115
                                                     -----------     -----------

Loans, gross ...................................      92,689,762      70,675,369
Less allowance for possible loan losses ........       1,175,570         957,899
                                                     -----------     -----------

                                                     $91,514,192     $69,717,470
                                                     ===========     ===========

           At December 31, 2001 and 2000,  non-accrual loans totaled  $1,362,265
and  $2,281,570,  respectively.  The gross interest income which would have been
recorded under the original  terms of the loans  amounted to $195,396,  $158,028
and $19,402 in 2001, 2000 and 1999,  respectively.  At December 31, 2001,  loans
with payments past due ninety days or more and accruing  interest were $626,000.
There we no loans past due more than ninety days and still accruing  interest at
December 31, 2000.  Variable rate and fixed rate loans totaled  $34,745,828  and
$57,943,934, respectively, at December 31, 2001.

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

                                                   For the years ended
                                                      December 31,
                                                      ------------
                                            2001          2000             1999
                                            ----          ----             ----

Balance, beginning of year .........   $   957,899    $ 1,173,000    $   433,000
Provision for loan losses ..........       722,500        865,000        740,000
Loans charged against the allowance       (504,829)    (1,080,101)             -
                                       -----------    -----------    -----------

Balance, end of year ...............   $ 1,175,570    $   957,899    $ 1,173,000
                                       ===========    ===========    ===========

NOTE 6 - PROPERTY AND EQUIPMENT

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

                                                             December 31,
                                                             ------------
                                                       2001                2000
                                                       ----                ----

Land .......................................      $   331,322       $   331,322
Building and leasehold improvements ........          655,505           655,505
Furniture and equipment ....................          543,530           434,932
Vehicles ...................................           69,432            58,895
Construction in progress ...................          925,222             5,687
                                                  -----------       -----------

                                                    2,525,011         1,486,341
Accumulated depreciation ...................         (407,797)         (264,756)
                                                  -----------       -----------

        Totalpropertyandequipment ..........      $ 2,117,214       $ 1,221,585
                                                  ===========       ===========

                                                                     (Continued)


                                       33
<Page>

NOTE 6 - PROPERTY AND EQUIPMENT, Continued

           The Bank purchased land in 2000 to construct its main office.  During
2001,  the Company  began  construction  on its main office which is included in
construction  in progress at December 31,  2001.  Total  estimated  costs of the
building are $2.1 million, and anticipated completion date is June 2002.

           Depreciation  expense for the years ended December 31, 2001, 2000 and
1999 amounted to $144,159, $136,753, and $124,326, 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 of 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 7 - DEPOSITS

         The following is a detail of deposit accounts:

                                                            December 31,
                                                            ------------
                                                       2001              2000
                                                       ----              ----

Noninterest bearing ........................       $ 4,762,844       $ 3,789,108
Interest bearing:
   NOW accounts ............................         2,197,697         1,840,918
   Money market accounts ...................        21,770,636        14,701,710
   Savings .................................           494,466           220,696
                                                   -----------       -----------

                                                    29,225,643        20,552,432
                                                   -----------       -----------

     Time, less than $100,000 ..............        44,772,190        39,158,883
     Time, $100,000 and over ...............        21,040,227        18,497,774
                                                   -----------       -----------

                                                    65,812,417        57,656,657
                                                   -----------       -----------

       Total deposits ......................       $95,038,060       $78,209,089
                                                   ===========       ===========

         Interest expense on time deposits greater than $100,000 was $1,239,313,
$1,077,154, and $658,465, in 2001, 2000 and 1999, respectively.

         At December  31,  2001 the  scheduled  maturities  of  certificates  of
deposit are as follows:

      2002                                                           $49,706,727
      2003                                                            13,954,255
      2004                                                               982,178
      2005                                                               824,725
      2006                                                               344,532
                                                                     -----------

                                                                     $65,812,417
                                                                     ===========

NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES

         The Bank had advances  outstanding from the FHLB totaling $8,500,000 at
December 31, 2001.  The advances  bear interest at fixed rates ranging from 4.33
percent  to 4.38  percent.  An  advance of  $6,500,000  matures in 2006,  and an
advance of $2,000,000  matures in 2011. The advance maturing in 2011 is callable
and may reprice  prior to its  maturity  date.  Advances are  collateralized  by
investment  securities  with a book  value  of  $9,669,076  and  fair  value  of
$9,707,722.

         During 2001, the maximum amount of advances outstanding were $8,500,000
and the average amount  outstanding  during 2001 was  $1,594,000.  There were no
amounts outstanding at December 31, 2000.


                                       34
<Page>

NOTE 9 - SUBORDINATED DEBENTURES

         In  2001,  the  Company  issued  ten-year   variable  rate  convertible
subordinated debentures.  The debentures pay interest quarterly at prime minus 2
percent  (2.75  percent at December 31,  2001).  The holders of  debentures  may
convert the principal  amount of the debenture  into common stock of the Company
at the  conversion  ratio of $6.50  (approximate  fair  value  at  issuance)  of
debenture  principal for one share of the Company's  stock.  The Company has the
option of  redeeming  the  debentures  at any time after  December 31, 2005 as a
whole or in part and from  time to time at  predetermined  prices.  The  Company
incurred $193,255 in interest expense on the debentures in 2001.


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 Bank's financial position.

         The Company has entered  into a  construction  contract to build a main
office and estimates total costs will be approximately $2.1 million.  The office
will be  completed  in June 2002.  The Company  has a ground  lease on the site,
which expires in 2021. The monthly lease payment is $1,000 for years one through
five,  and  increases to $1,322 per month in year eleven and to $1,521 per month
in year sixteen.

         The Company  leases a branch  office under a  non-cancelable  operating
lease which expires in February 2006 with monthly lease payments of $3,000.  The
lease  contains two additional  five-year  renewal  options with  provisions for
adjustments  to the monthly lease  payments.  The lease  agreement  requires the
Company to pay all taxes, insurance and maintenance costs.

         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 $800. 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.

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

     For the years ended
         December 31,
   -------------------------

       2002                                                             $ 57,600
       2003                                                               57,600
       2004                                                               57,600
       2005                                                               57,600
       2006                                                               29,250
     Thereafter                                                          334,953
                                                                        --------

                                                                        $594,603
                                                                        ========

         Refer to Note 14  concerning  financial  instruments  with off  balance
sheet risk.


NOTE 11 - UNUSED LINES OF CREDIT

         At December 31, 2001, the Bank had an unused line of credit to purchase
federal funds totaling  $875,000 from an unrelated  bank. This line of credit is
available  on a one to seven day basis for  general  corporate  purposes  of the
Bank. The lender has reserved the right to withdraw the line at its option.  The
Bank had a second  unused  line of  credit  with  the FHLB to  borrow  up to ten
percent of the Bank's total assets.  The line of credit  agreement  requires the
Bank to pledge investment securities as collateral.



                                       35
<Page>
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:

<Table>
<Caption>
                                                                                  2001                  2000                 1999
                                                                                  ----                  ----                 ----
Income taxes currently payable
<S>                                                                            <C>                   <C>                   <C>
   Federal ........................................................            $ 153,300             $ 164,286             $   6,776
   State ..........................................................               21,300                13,000                 3,900
                                                                               ---------             ---------             ---------
                                                                                 174,600               177,286                10,676
Deferred tax provision (benefit) ..................................              (66,520)               (1,033)               34,324
                                                                               ---------             ---------             ---------
Adjustment to valuation allowance .................................             (204,881)                    -                     -
Adjustment of effective income tax rates
     in computing deferred taxes ..................................              (32,255)                    -                     -
                                                                               ---------             ---------             ---------
       Provision (benefit) ........................................            $(129,056)            $ 176,253             $  45,000
                                                                               =========             =========             =========
</Table>

         The income tax effect of cumulative  temporary  differences at December
31, are as follows:

<Table>
<Caption>
                                                                                                    Deferred tax asset (liability)
                                                                                                    ------------------------------
                                                                                                       2001                 2000
                                                                                                       ----                 ----
<S>                                                                                                   <C>                 <C>
Allowance for possible loan losses .........................................................          $ 272,379           $ 338,531
Nonaccrual loan interest ...................................................................             66,435                   -
Unrealized net (gains) losses on investment securities available for sale ..................            (16,112)             18,237
Depreciation ...............................................................................            (15,978)            (16,200)
Amortization ...............................................................................             (8,064)             (5,650)
Cash basis versus accural basis of accounting ..............................................            (21,889)            (29,200)
Other ......................................................................................             61,118                   -
                                                                                                      ---------           ---------
                                                                                                        337,889             305,718

Valuation allowance ........................................................................                  -            (204,881)
                                                                                                      ---------           ---------
       Net deferred tax asset ..............................................................          $ 337,889           $ 100,837
                                                                                                      =========           =========
</Table>

           The net  deferred  tax  asset  is  included  in other  assets  in the
consolidated balance sheets.

           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>
                                                      2001                          2000                          1999
                                                ----------------------        ---------------------         -----------------------
                                                Amount          %             Amount         %              Amount          %
                                                ------          ------        ------         ------         ------          -------
<S>                                           <C>               <C>          <C>               <C>          <C>              <C>
Tax expense  (benefit) at statutory rate ...  $  56,700            34%       $160,998           34%         $44,907           34%
Increase (decrease) in taxes resulting
from:
   State bank tax (net of federal benefit) .     14,100             8           8,829            2            2,574             -
   Adjustment to valuation allowance .......   (204,881)         (122)              -            -                -             -
                                              ---------         -----        --------          ---           ------           ---
Other ......................................      5,025             3           6,426            1           (2,481)            -
                                              ---------         -----        --------          ---           ------           ---
       Income tax provision (benefit) ......   (129,056)         (77%)       $176,253           37%         $45,000            34%
                                              =========         =====        ========          ===          =======           ===
</Table>

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 were made on substantially the same
terms, including interest rates and collateral,  as those prevailing at the time
for comparable arms-length transactions.
                                                                     (Continued)
                                       36
<Page>

NOTE 13 - RELATED PARTY TRANSACTIONS, Continued

           A  summary  of loan  transactions  with  directors,  including  their
affiliates and executive officers are as follows:

                                                       For the years ended
                                                          December 31,
                                                          ------------
                                                    2001                2000
                                                    ----                ----

Balance, beginning of year .............        $ 1,076,071         $ 1,108,611
New loans ..............................          1,599,516             135,940
Less loan payments .....................           (692,864)           (168,480)
                                                -----------         -----------

Balance, end of year ...................        $ 1,982,723         $ 1,076,071
                                                ===========         ===========


           Deposits by  directors  and their  related  interests at December 31,
2001 and 2000 approximated $2,385,000 and $2,193,000, respectively.

           A director,  shareholder  and  executive  officer of the Company is a
partner in a partnership from which the Company leases operating  facilities and
land (see Note 10). Lease expenses  charged to operations under these agreements
approximated $34,000 in 2001 and $33,600 in 2000 and 1999.

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, 2001 and 2000,  unfunded  commitments to extend credit
were approximately $14,578,121 and $10,634,000,  respectively. Variable rate and
fixed rate unfunded  commitments to extend credit were approximately  $5,257,818
and $9,320,303,  respectively, at December 31, 2001 and 2000. 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,  2001 and 2000,  there were  outstanding  letters of
credit totaling $417,700 and $335,400, respectively.


NOTE 15 - EMPLOYEE BENEFIT PLAN

         On  September  1, 1998,  the Bank  adopted the  GrandSouth  Bank Profit
Sharing Section 401(k) 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 2001,
2000, and 1999 amounted to $28,995, $20,107, and $9,745, 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.  The
Company recorded  expense related to these benefits of  approximately  $8,000 in
2001.

                                       37
<Page>

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
260,000 options 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
Bank has  adopted the  disclosure-only  provisions  of  Statement  of  Financial
Accounting  Standards  No.  123,  "Accounting  for  Stock-Based   Compensation".
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation  cost been determined based on the fair value at the grant date
for the above stock option awards  consistent  with the  provisions of SFAS 123,
the Bank's net income and net income per common share would have been  decreased
to the pro forma amounts indicated below:

<Table>
<Caption>
                                                                                                For the years ended
                                                                                                    December 31,
                                                                                                    ------------
                                                                                     2001                2000                 1999
                                                                                     ----                ----                 ----

<S>                                                                             <C>                  <C>                  <C>
Net income - as reported .............................................          $   295,814          $   297,270          $   87,080
Net income - pro forma ...............................................              266,383              261,839              49,559
Basic net income per common share - as reported ......................                  .16                  .16                 .05
Basic net income per common share - pro forma ........................                  .14                  .14                 .03
Diluted net income per common share - as reported ....................                  .15                  .15                 .05
Diluted net income per common share - pro forma ......................                  .14                  .13                 .02
</Table>


           The fair value of the option  grant is estimated on the date of grant
using the  Black-Scholes  option pricing model. The risk free interest rate used
was 5.89 percent,  the expected option life was 5 years and the assumed dividend
rate was zero.

           A summary  of the status of the plan and  changes  during the year is
presented below:

<Table>
<Caption>
                                                                      For the years ended December 31,
                                           ----------------------------------------------------------------------------------------
                                                      2001                          2000                          1999
                                           ----------------------------  ---------------------------  -----------------------------
                                                             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 period ......     145,200         $4.55         154,000        $4.55          154,000         $4.55
Granted .................................      37,658          5.00               -            -                -             -
Exercised ...............................      (2,200)         4.55               -            -                -             -
Forfeited or expired ....................           -                         8,800         4.55                -             -
                                              -------                       -------                       -------

Outstanding at end of period ............     180,658          4.60         145,200         4.55          154,000          4.55
                                              =======                       =======                       =======

Options exercisable at December 31, .....      85,800          4.55          59,400         4.55           30,800          4.55
Shares available for grant ..............      77,142                       114,800                        33,000
</Table>


         Granted  shares and per share  exercise  prices  have been  restated to
reflect the 1999 stock split effected in the form of a stock dividend (10%).


                                       38
<Page>

NOTE 17 - COMMON STOCK AND EARNINGS PER SHARE

         SFAS No. 128,  "Earnings  per Share",  requires  that the Bank  present
basic and diluted net income per common share.  The assumed  conversion of stock
options  creates the difference  between basic and diluted net income per common
share.  Net income per share is  calculated by dividing net income (loss) by the
weighted average number of common shares  outstanding for each period presented.
The weighted  average number of common shares  outstanding  for basic net income
per  common  share was  1,875,329  in 2001,  1,873,129  in 2000,  and 1999.  The
weighted average number of common shares  outstanding for diluted net income per
common share was 1,916,186 in 2001, 1,926,003 in 2000 and 1,924,387 in 1999. The
difference in the weighted  average number of shares  outstanding  for basic net
income per common share and the weighted  average  number of shares  outstanding
for diluted net income per common  share was the effect of the assumed  exercise
of the stock options  outstanding.  The treasury stock method is used to compute
the effect of stock  options on the  weighted  average  number of common  shares
outstanding for the diluted method.

           The Bank issued a ten percent common stock split effected in the form
of a stock dividend in 1999.


NOTE 18 - DIVIDENDS

           There are no current plans to initiate  payment of cash dividends and
future dividend policy will depend on the Bank's earnings, capital requirements,
financial condition and other factors considered relevant by the Bank's Board of
Directors.  The Bank is restricted by banking  regulations in its ability to pay
dividends  and  must  obtain  the  approval  of the  State  Board  of  Financial
Institutions prior to payment.


NOTE 19 - REGULATORY MATTERS

           The  Bank is  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 Bank's  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve quantitative  measures of the
Bank's assets,  liabilities,  and certain  off-balance-sheet items as calculated
under  regulatory   accounting   practices.   The  Bank'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 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.  Management believes, as of December 31, 2001,
that the Bank meets all capital adequacy requirements to which it is subject.


                                       39
<Page>

NOTE 19 - REGULATORY MATTERS, Continued

           As of December 31, 2001, the most recent  notification of the banking
regulators  categorized  the  Bank  as well  capitalized  under  the  regulatory
framework for prompt corrective action.  There are no conditions or events since
that  notification  that  management  believes  have  changed the  institution's
category.  The Bank's 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
                                                              ------         -----      ------       -----      ------        -----
                                                                                        (amounts in $000)

As of December 31, 2001
<S>                                                           <C>            <C>       <C>            <C>      <C>            <C>
Total capital (to risk weighted assets) ...............       $11,867        12.2%     $ 7,751        8.0%     $ 9,688        10.0%

Tier 1 capital (to risk weighted assets) ..............        10,691        11.0%       3,875        4.0%       5,813         6.0%

Tier 1 capital (to average assets) ....................        10,691         9.7%       4,418        4.0%       5,523         5.0%

As of December 31, 2000
Total capital (to risk weighted assets) ...............       $ 9,139        12.4%     $ 5,898        8.0%     $ 7,373        10.0%

Tier 1 capital (to risk weighted assets) ..............         8,217        11.1%       2,949        4.0%       4,424         6.0%

Tier 1 capital (to average assets) ....................         8,217         9.5%       3,466        4.0%       4,332         5.0%
</Table>


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  which require the exchange of cash or other
instruments.  Certain  items  are  specifically  excluded  form  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 the Bank's  off-balance  sheet  financial  instruments is based on the
discounted present value of the estimated future cash flows.

            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 and 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.


                                       40
<Page>

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued

           Due to the short term  nature of the FHLB  advances,  carrying  value
approximates.  The subordinated debentures were issued in 2001 and are deemed to
be an accurate  estimate the fair value of instruments  with similar  maturities
and risk.

           The Bank has used  management's  best estimate of fair value based on
the above  assumptions.  Thus, the fair values  presented may not be the amounts
which could be realized in an immediate sale or settlement of the instrument. In
addition,  any income  taxes or other  expenses  which  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 Bank's financial instruments are as
follows:

<Table>
<Caption>
                                                                                               December 31,
                                                                                               ------------
                                                                                  2001                              2000
                                                                                  ----                              ----
                                                                     Carrying            Fair           Carrying             Fair
                                                                      Amount             value           Amount              value
                                                                      ------             -----           ------              -----
Financial Assets:
<S>                                                                <C>               <C>               <C>               <C>
   Cash and due from banks .................................       $ 2,207,293       $ 2,207,293       $ 2,256,288       $ 2,256,288
   Federal funds sold ......................................         8,138,000         8,138,000         2,520,000         2,520,000
   Investment securities available for sale ................        10,921,166        10,921,166        10,764,692        10,764,692
   Other investments, at cost ..............................           425,000           425,000           118,600           118,600
   Loans ...................................................        92,689,762        92,807,806        70,675,369        76,291,827

Financial Liabilities:
   Deposits ................................................        95,038,060        95,520,501        78,209,089        83,762,436
   Federal Home Loan Bank advances .........................         8,500,000         8,500,000                 -                 -
   Subordinated debentures .................................         3,500,000         3,500,000                 -                 -

Financial Instruments with Off-Balance
    Sheet Risk:
   Standby letters of credit ...............................           417,700           417,700           335,400           335,400
   Commitments to extend credit ............................        14,578,121        14,578,121        10,634,000        10,634,000
</Table>


NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION

            Following  is  condensed   financial   information   of   GrandSouth
Bancorporation (parent company only, since inception on October 20, 2000):

                            CONDENSED BALANCE SHEETS

                                                            December 31,
                                                            ------------
                                                        2001              2000
                                                        ----              ----
ASSETS
     Cash ....................................      $ 1,322,369      $         -
     Investment in bank subsidiary ...........       10,697,082        8,181,583
     Deferred tax asset ......................           70,932                -
                                                    -----------      -----------

                                                    $12,090,383      $ 8,181,583
                                                    ===========      ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
     Accrued expenses ........................      $    35,287      $         -
     Subordinated debentures .................        3,500,000                -
     Shareholders' equity ....................        8,555,096        8,181,583
                                                    -----------      -----------

                                                    $12,090,383      $ 8,181,583
                                                    ===========      ===========


                                       41
<Page>

NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION, Continued

                         CONDENSED STATEMENTS OF INCOME

                                                             For the years ended
                                                                 December 31,
                                                                 ------------
                                                             2001           2000
                                                             ----           ----

REVENUES ..............................................   $       -    $       -

EXPENSES
     Interest .........................................     193,555            -
     Sundry ...........................................      30,039            -
                                                          ---------    ---------

        Loss before equity in undistributed net income
           of bank subsidiary .........................    (223,594)           -

EQUITY IN UNDISTRIBUTED NET INCOME
     OF BANK SUBSIDIARY ...............................     448,476      297,270
                                                          ---------    ---------
     Income before income taxes .......................     224,882      297,270
     Income tax benefit ...............................     (70,932)           -
                                                          ---------    ---------


        Net income ....................................   $ 295,814    $ 297,270
                                                          =========    =========



                       CONDENSED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                                                         For the years ended
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                     2001                  2000
                                                                                                     ----                  ----

OPERATING ACTIVITIES
<S>                                                                                              <C>                    <C>
     Net income ......................................................................           $   295,814            $   297,270
     Adjustments to reconcile net income to net cash
        used in operating activities
        Deferred income taxes ........................................................               (70,932)                     -
        Accrued expenses and other ...................................................                35,953                      -
        Equity in undistributed net income of Bank subsidiary ........................              (448,476)              (297,270)
                                                                                                 -----------            -----------

           Net cash used in operating activities .....................................              (187,641)                     -
                                                                                                 -----------            -----------

INVESTING ACTIVITIES
               Additional investment in bank subsidiary ..............................            (2,000,000)                     -
                                                                                                 -----------            -----------

FINANCING ACTIVITIES
     Proceeds from  issuance of subordinated debentures ..............................             3,500,000                      -
     Exercise of stock options .......................................................                10,010                      -
                                                                                                 -----------            -----------

           Net cash provided by financing activities .................................             3,510,010                      -
                                                                                                 -----------            -----------

           Net increase in cash and cash equivalents .................................             1,322,369                      -

CASH, BEGINNING OF YEAR ..............................................................                     -                      -
                                                                                                 -----------            -----------

CASH, END OF YEAR ....................................................................           $ 1,322,369             $        -
                                                                                                 ===========            ===========
</Table>

                                       42
<Page>

Item 8.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure.

         Not Applicable.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act.

         The  information  set  forth  under  the  captions  "Management  of the
Company"  and "Section  16(a)  Beneficial  Ownership  Reporting  Compliance"  in
registrant's  definitive  proxy statement filed with the Commission for the 2002
Annual Meeting of Shareholders is incorporated herein by reference.

Item 10. Executive Compensation.

         The information set forth under the captions "Management  Compensation"
and "Stock Option Plan" in  registrant's  definitive  proxy statement filed with
the  Commission  for the 2002 Annual  Meeting of  Shareholders  is  incorporated
herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

         The  information  set forth under the caption  "Security  Ownership  of
Certain  Beneficial  Owners and  Management" in  registrant's  definitive  proxy
statement  filed with the Commission for the 2002 Annual Meeting of Shareholders
is incorporated herein by reference.

Item 12. Certain Relationships and Related Transactions.

         The information set forth under the caption "Certain  Relationships and
Related Transactions" in registrant's  definitive proxy statement filed with the
Commission for the 2002 Annual Meeting of Shareholders is incorporated herein by
reference.

Item 13. Exhibits and Reports on Form 8-K.

(a)      Description of Exhibits.

Exhibit No.                Description
-----------                -----------

3.1                       Articles of Incorporation of Registrant (1)
3.2                       Bylaws of Registrant (1)
4.1                       Form of Common Stock Certificate (2)
10.1                      Stock Option Plan (2)
10.2                      Form of Stock Option Agreement (2)
10.3                      Form of 10-Year Variable Rate Convertible Subordinated
                          Debenture (3)
10.4                      Executive Supplemental Retirement Plan Executive
                           Agreement with Ronald K. Earnest
21                        Subsidiaries of Registrant (2)
-------------
(1)  Incorporated by reference to exhibits to Form 8-A filed November 13, 2000
(2)  Incorporated  by  reference  to  exhibits to Form 10-KSB for the year ended
     December 31, 2000
(3)  Incorporated  by reference to exhibits to Form 10-QSB for the quarter ended
     March 31, 2001.

3.   Reports on Form 8-K.

     No reports on Form 8-K were filed during the fourth quarter of 2001.


                                       43
<Page>

                                   SIGNATURES

      In accordance  with Section 13 or 15(d) of the Securities  Exchange Act of
1934,  the  registrant  caused  this  report to be  signed on its  behalf by the
undersigned, thereunto duly authorized.

                           GrandSouth Bancorporation


March 29, 2002             By: s/Ronald K. Earnest
                              --------------------------------------------------
                                 Ronald K. Earnest
                                 President and Chief Operating Officer


                           By: s/J. B. Garrett
                              --------------------------------------------------
                                 J. B. Garrett
                                 Vice President
                                 (Principal Financial and Principal Accounting
                                    Officer)


         In accordance  with the Exchange Act, this Report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated:
<Table>
<Caption>

Signature                                Title                                              Date
---------                                -----                                              ----
<S>                                      <C>                                                          <C>

---------------------------------------  Director                                           March 29, 2002
Blanton S. Phillips

s/Ronald K. Earnest                      President, Chief Operating Officer, Director       March 29, 2002
--------------------------------
Ronald K. Earnest

s/Harold E. Garrett                      Director                                           March 29, 2002
--------------------------------
Harold E. Garrett

s/Mason Y. Garrett                       Chairman, Director                                 March 29, 2002
--------------------------------
Mason Y. Garrett

                                         Director                                           March 29, 2002
--------------------------------
Michael L. Gault

s/Baety O. Gross                         Director                                           March 29, 2002
--------------------------------
Baety O. Gross

--------------------------------         Director                                           March 29, 2002
S. Hunter Howard, Jr.
</Table>



                                       44
<Page>

                                                    EXHIBIT INDEX


Exhibit No.               Description

3.1                       Articles of Incorporation of Registrant (1)
3.2                       Bylaws of Registrant (1)
4.1                       Form of Common Stock Certificate (2)
10.1                      Stock Option Plan (2)
10.2                      Form of Stock Option Agreement (2)
10.3                      Form of 10-Year Variable Rate Convertible Subordinated
                          Debenture (3)
10.4                      Executive Supplemental Retirement Plan Executive
                           Agreement with Ronald K. Earnest
21                        Subsidiaries of Registrant (2)
-------------
(1)  Incorporated by reference to exhibits to Form 8-A filed November 13, 2000
(2)  Incorporated  by  reference  to  exhibits to Form 10-KSB for the year ended
     December 31, 2000
(3)  Incorporated  by reference to exhibits to Form 10-QSB for the quarter ended
     March 31, 2001.



                                       45