EXHIBIT 13

                            GRANDSOUTH BANCORPORATON

                   Portions of Annual Report to Shareholders
                           Incorporated by Reference
                             into December 31, 2007
                                  Form 10-KSB


























<PAGE>

                             BUSINESS OF THE COMPANY

         GrandSouth   Bancorporation   (the   "Company")  is  a  South  Carolina
corporation  organized in 2000 under the laws of South  Carolina for the purpose
of being a bank 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 the
Company and the Company became the owner of all of the outstanding capital stock
of the Bank.  The Company  presently  engages in no business  other than that of
owning the Bank and has no employees.

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

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

         The Bank  offers  secured  and  unsecured,  short-to-intermediate  term
loans,  with floating and fixed 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.


                        CAUTIONARY NOTICE WITH RESPECT TO
                           FORWARD LOOKING STATEMENTS

         This report contains "forward-looking statements" within the meaning of
the  securities  laws.  The  Private  Securities  Litigation  Reform Act of 1995
provides a safe harbor for forward-looking  statements.  In order to comply with
the terms of the safe harbor,  the 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.

         All statements that are not historical  facts are statements that could
be  "forward-looking   statements."  You  can  identify  these   forward-looking
statements  through the use of words such as "may," "will,"  "should,"  "could,"
"would," "expect,"  "anticipate,"  "assume," indicate,"  "contemplate,"  "seek,"
"plan,"  "predict,"  "target,"  "potential,"  "believe,"  "intend,"  "estimate,"
"project,"  "continue,"  or  other  similar  words.  Forward-looking  statements
include,  but are not limited to,  statements  regarding  the  Company's  future
business  prospects,   revenues,  working  capital,  liquidity,  capital  needs,
interest costs, income, business operations and proposed services.

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

          o    future economic and business conditions;
          o    lack of sustained growth in the economies of the Company's market
               areas;
          o    government monetary and fiscal policies;
          o    the  effects  of  changes  in  interest   rates  on  the  levels,
               composition and costs of deposits, loan demand, and the values of
               loan collateral,  securities,  and interest  sensitive assets and
               liabilities;
          o    the  effects  of  competition  from  a  wide  variety  of  local,
               regional, national and other providers of financial,  investment,
               and insurance services, as well as competitors that offer banking
               products and  services by mail,  telephone,  computer  and/or the
               Internet;
          o    credit risks;
          o    the failure of assumptions  underlying the  establishment  of the
               allowance  for loan  losses and other  estimates,  including  the
               value of collateral securing loans;


                                       1
<PAGE>

          o    the risks of opening new offices, including,  without limitation,
               the related costs and time of building customer relationships and
               integrating operations as part of these endeavors and the failure
               to achieve expected gains,  revenue growth and/or expense savings
               from such endeavors;
          o    changes  in laws and  regulations,  including  tax,  banking  and
               securities laws and regulations;
          o    changes in accounting policies, rules and practices;
          o    changes  in  technology  or  products  may be more  difficult  or
               costly, or less effective, than anticipated;
          o    the effects of war or other conflicts, acts of terrorism or other
               catastrophic  events that may affect general economic  conditions
               and economic confidence; and
          o    other factors and information described in this report and in any
               of the  other  reports  that  we file  with  the  Securities  and
               Exchange Commission under the Securities Exchange Act of 1934.

         All  forward-looking   statements  are  expressly  qualified  in  their
entirety by this cautionary notice. The Company has no obligation,  and does not
undertake,  to update,  revise or correct any of the forward-looking  statements
after the date of this  report.  The Company  has  expressed  its  expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However,  there is no assurance that these expectations,  beliefs or projections
will result or be achieved or accomplished.


            MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         The  Company's  common  stock  trades  over the  counter and trades are
reported  on the OTC  Bulletin  Board (the  "OTCBB")  under the  symbol  "GRRB."
Although trading in the Company's stock is limited (only 46,657 shares traded in
2007),  the  following  table shows the reported  high and low bid prices of the
Company's  common stock reported by the OTCBB for the periods shown.  The prices
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.  The prices have been adjusted to reflect
a 10% stock dividend declared in July 2006.

                                          Years ended December 31,
                                          ------------------------
                                       2007                        2006
                                      ----                         ----
                                  Low          High        Low            High
                                  ---          ----        ---            ----
First Quarter ..............  $   16.75    $   19.05    $   10.91    $   14.09
Second Quarter .............  $   12.00    $   17.00    $   11.36    $   13.86
Third Quarter ..............  $   11.02    $   12.20    $   13.75    $   17.00
Fourth Quarter .............  $    9.50    $   12.00    $   16.00    $   19.75

         As of March 27, 2008, there were  approximately 565 shareholders of the
Company's common stock,  excluding individual  participants in security position
listings.

         In each of 2007 and 2006,  the Company paid cash  dividends of $.08 per
share.  The dividend policy of the Company as well as the Bank is subject to the
discretion of their respective  Boards of Directors and depends upon a number of
factors,  including  earnings,  financial  condition,  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.

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


                                       2
<PAGE>

Management's Discussion and Analysis of Financial Condition
         and Results of Operations

         This discussion is intended to assist in understanding the consolidated
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. All dollar amounts are in thousands except for
per share amounts,  unless otherwise noted. Per share net income and net income,
assuming dilution, have been adjusted to reflect stock dividends.

Critical Accounting Policies

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

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

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


Financial Condition

The major components of the Company's balance sheets are:

                                                        Years ended December 31,
                                                        ------------------------
                                                         2007             2006
                                                         ----             ----
                                                        (Dollars in thousands)
Total assets ...................................        $345,124        $300,310
Loans, net .....................................         259,786         224,338
Investments and federal funds sold .............          64,752          55,809
Cash and due from banks ........................           4,585           6,145
Total liabilities ..............................         322,657         280,840
Deposits .......................................         305,639         268,923
Short-term borrowings ..........................           5,000               -
Junior subordinated debt .......................           8,247           8,247
Shareholders' equity ...........................          22,467          19,470


        The increase in net loans during 2007  resulted  from strong loan demand
in the  Company's  market  areas,  especially  with  respect to  commercial  and
residential  real  estate  development  and due to the  opening  of a new branch
office in Anderson,  SC. Real estate construction loans increased by $19,362, or
29.7%,  over the 2006  amount and loans  secured  by  mortgages  of real  estate
increased  by  $7,960,  or 6.6%.  Commercial,  financial  and  industrial  loans
increased by $8,857, or 24.8%.

         The Bank  experienced  significant  growth  in  deposits  during  2007,
primarily due to the ongoing effects of the new office in Anderson  County,  new
money  market  accounts,  increasing  usage of the Bank's bill  paying  services
available  through  its  internet  banking  site at  www.GrandSouth.com  and the
success of the Bank's remote  deposit  capture  service.  Money market  accounts
increased by $16,958,  or 20.5%, and time deposits increased $17,812,  or 10.6%.
Time deposits in amounts of less than $100 increased by $10,506,  or 11.5%,  and
time  deposits  of $100 and  over  increased  by  $7,306,  or  9.6%.  Short-term
borrowings of $5,000 were obtained from the Federal Home Loan Bank of Atlanta in
the fourth quarter of 2007.

                                       3
<PAGE>


Issuance of Junior Subordinated Debentures

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

Earnings Performance

         Net income for 2007 was $2,799, a decrease of $461, or 14.1%,  from net
income of $3,260 for 2006.  While net interest  income for 2007  increased  only
slightly over the 2006 amount,  noninterest  expenses  increased  significantly.
Salaries and benefits,  premises and  equipment,  data  processing and printing,
postage and supplies expenses were higher,  primarily because 2007 was the first
full-year  of  operation  of  the  new  Anderson  branch  office.  In  addition,
significantly  higher professional fees were incurred to ensure that the Company
continues to comply with increasingly stringent regulatory requirements.

         Net income for 2006 increased by $899, or 38.1%,  over the 2005 amount.
Net  interest  income  increased by $3,147,  or 32.7%,  and  noninterest  income
increased by $179, or 30.9%.  Significant increases were noted in the amounts of
loans and investment  securities held. The primary funding source for growth was
deposits. Noninterest expenses increased by $1,836. Personnel expenses increased
significantly  in 2006 because the Bank added lenders in its commercial  lending
department  and provided  staffing for the new branch office opened in Anderson,
SC.

Net Interest Income

         Net   interest   income   is  the   amount   of   interest   earned  on
interest-earning assets (loans, investment securities, interest-earning deposits
in other banks,  and federal funds sold) less the interest  expense  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,  the volume and mix of interest  earning-assets
and  interest-bearing  liabilities and the relative funding of  interest-earning
assets.

2007 Compared with 2006

         Net  interest  income  for 2007  increased  by only  $154 over the 2006
amount.  Interest  income for 2007  increased  by $3,233  over the 2006  amount,
primarily as a result of higher  average  volumes of investment  securities  and
loans.  Yield on loans  decreased  slightly  during 2007 because of decreases in
interest rates that occurred late in the year.

         Higher  volumes of  interest-bearing  liabilities  combined with higher
rates paid for such funds to increase  interest  expense for 2007 by $3,079 over
the 2006  amount.  In  particular,  expenses  related to money  market  accounts
increased significantly.  The increased expense is almost entirely due to higher
average amounts of such deposits,  which were a result of the highly competitive
rates  paid  by the  Company.  The  success  realized  in the  deposit-gathering
function allowed the Company to reduce,  on average,  its reliance on short-term
borrowed funds and Federal Home Loan Bank advances during the year.

2006 Compared with 2005

         Net  interest  income for 2006 was  $12,770,  compared  with $9,623 for
2005. The average volume of  interest-earning  assets  increased by $48,254,  or
22.2%,  over the 2005 average and the average yield on  interest-earning  assets
increased  to  8.90%  in 2006  from  7.43%  in  2005.  The  average  amounts  of
interest-bearing  liabilities for 2006 increased by $39,404,  or 19.2%, over the
2005 amounts and the average rate paid  increased to 4.43% in 2006 from 3.17% in
2005.

         The table,  "Average Balances,  Income and Expense,  Yields and Rates",
provides  an  analysis  of the  average  amounts  of the  Company's  assets  and
liabilities  and the  effective  yields and rates on the  categories  of average
interest  earning assets and interest  bearing  liabilities  for the years ended
December 31, 2007, 2006 and 2005.

                                       4
<PAGE>

                 Average Balances, Income and Expense, Yields and Rates

<TABLE>
<CAPTION>
                                                                            Years ended December 31,
                                                                            ------------------------
                                                       2007                            2006                          2005
                                                       ----                            ----                          ----
                                          Average     Income/    Yields/   Average    Income/   Yields/  Average    Income/  Yields/
                                         Balances(1)  Expense    Rates   Balances(1)  Expense   Rates   Balances(1) Expense   Rates
                                         -----------  -------    -----   -----------  -------   -----   -------------------   -----
                                             (Dollars in thousands)
Assets
<S>                                         <C>       <C>        <C>      <C>       <C>         <C>      <C>        <C>        <C>
Federal funds sold and interest
    bearing deposits ....................   $ 10,672  $    583   5.46%    $ 13,144  $    651    4.95%    $  9,253   $   311    3.36%
Investments and other securities (2) ....     50,347     2,435   4.84%      36,451     1,622    4.45%      24,185       895    3.70%
Loans (2) (3) (4) .......................    250,024    23,826   9.53%     215,673    21,338    9.89%     183,576    14,917    8.13%
                                            --------  --------            --------  --------             --------   -------
       Total interest earning assets ....    311,043    26,844   8.63%     265,268    23,611    8.90%     217,014    16,123    7.43%
Cash and due from banks .................      4,422                         4,087                          3,737
Allowance for loan losses ...............     (2,765)                       (2,831)                        (2,503)
Premises and equipment ..................      5,038                         4,938                          3,979
Other assets ............................      8,629                         8,508                          9,848
                                            --------                      --------                       --------
       Total assets .....................   $326,367                      $279,970                       $232,075
                                            ========                      ========                       ========

Liabilities and shareholders' equity
Interest bearing deposits
    NOW accounts ........................   $  3,924  $     62   1.58%    $  2,934  $      8    0.27%     $  3,022  $     7    0.23%
    Savings .............................        616         3   0.49%         656         3    0.46%          765        4    0.52%
    Money market accounts ...............     92,373     3,940   4.27%      66,774     2,805    4.20%       53,837    1,419    2.64%
    Time deposits .......................    180,340     9,306   5.16%     160,594     7,229    4.50%      130,419    4,290    3.29%
                                            --------  --------            --------  --------              --------  -------
       Total interest bearing deposits ..    277,253    13,311   4.80%     230,958    10,045    4.35%      188,043    5,720    3.04%
FHLB advances ...........................        169        10   5.92%       6,905       301    4.36%       11,392      459    4.03%
Other borrowings ........................          -         -   0.00%       1,401       106    7.57%        3,232      205    6.34%
Long-term debt ..........................      8,247       599   7.26%       5,267       389    7.39%        2,460      116    4.72%
                                            --------  --------            --------  --------              --------  -------
       Total interest bearing liabilities    285,669    13,920   4.87%     244,531    10,841    4.43%      205,127    6,500    3.17%
Noninterest bearing demand deposits .....     15,970                        14,296                          12,107
Other liabilities .......................      3,746                         3,188                           1,965
Shareholders' equity ....................     20,982                        17,955                          12,876
                                            --------                      --------                        --------
       Total liabilities and
         shareholders' equity ...........   $326,367                      $279,970                        $232,075
                                            ========                      ========                        ========
Interest rate spread (5) ................                        3.76%                          4.47%                          4.26%
Net interest income and net yield
    on earning assets (6) ...............             $ 12,924   4.16%              $ 12,770    4.81%               $ 9,623    4.43%
Interest free funds supporting
    earning assets (7) ..................   $ 25,374                      $ 20,737                        $ 11,887
</TABLE>

--------------------------
(1)  Average balances are computed on a daily basis.
(2)  Income and yields on tax-exempt securities and loans have not been adjusted
     on a tax equivalent basis.
(3)  Nonaccrual  loans are included in the average  loan  balances and income on
     such loans generally is recognized on a cash basis.
(4)  Includes immaterial amounts of loan fees.
(5)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(6)  Net interest income divided by total interest earning assets.
(7)  Total interest earning assets less total interest bearing liabilities.


                                       5
<PAGE>

The table, "Volume and Rate Variance Analysis", provides a summary of changes in
net interest income resulting from changes in volumes of interest earning assets
and interest  bearing  liabilities  (change in volume  times old rate),  and the
rates earned and paid on such assets and  liabilities  (change in rate times old
volume).

                        Volume and Rate Variance Analysis

<TABLE>
<CAPTION>
                                                                2007 Compared with 2006               2006 Compared with 2005
                                                                -----------------------               -----------------------
                                                         Volume (1)      Rate (1)       Total     Volume (1)    Rate (1)     Total
                                                         ----------      --------       -----     ----------    --------     -----
                                                                                 (Dollars in thousands)
<S>                                                         <C>          <C>          <C>          <C>          <C>         <C>
Federal funds sold and interest
      bearing deposits ................................     $  (130)     $    62      $   (68)     $   131      $   209     $   340
Investment securities .................................         662          151          813          454          273         727
Loans .................................................       3,296         (808)       2,488        2,406        4,015       6,421
                                                            -------      -------      -------      -------      -------     -------
                 Total interest income ................       3,828         (595)       3,233        2,991        4,497       7,488
                                                            -------      -------      -------      -------      -------     -------
Interest bearing deposits
      NOW accounts ....................................           4           50           54            -            1           1
      Savings accounts ................................           -            -            -           (1)           -          (1)
      Money market accounts ...........................       1,091           44        1,135          343        1,043       1,386
      Time deposits ...................................         948        1,129        2,077          994        1,945       2,939
Federal Home Loan Bank advances .......................        (389)          98         (291)        (181)          23        (158)
Other borrowings ......................................        (106)           -         (106)        (117)          18         (99)
Long-term debt ........................................         216           (6)         210          132          141         273
                                                            -------      -------      -------      -------      -------     -------
                 Total interest expense ...............       1,764        1,315        3,079        1,170        3,171       4,341
                                                            -------      -------      -------      -------      -------     -------
                 Change in net interest income ........     $ 2,064      $(1,910)     $   154      $ 1,821      $ 1,326     $ 3,147
                                                            =======      =======      =======      =======      =======     =======
</TABLE>

--------------------
(1)  The  rate/volume  variance  for  each  category  has  been  allocated  on a
     consistent  basis between rate and volume variances based on the percentage
     of rate or volume variance to the sum of the two absolute  variances except
     in categories having balances in only one period. In such cases, the entire
     variance is attributed to volume variances.

         Management currently expects that interest rates will be more likely to
continue to decrease during the first half of 2008 due to well-known problems in
the  housing and credit  markets  and  actions  that may be taken by the Federal
Reserve.  During the second half of the year,  the trend in interest rates could
take widely  divergent paths  depending on developments in unemployment  levels,
concerns about inflation or recession, oil prices, etc. While management has not
presently  identified any specific factors that it believes might cause interest
rates to  increase  or decrease  rapidly in a short  period of time,  changes in
interest rates that could significantly affect the Company, either positively or
negatively,  are  possible.  In the  absence  of  significant  changes in market
interest rate levels, changes in net interest income during 2008 are expected to
result  primarily  from  changes in the volumes of interest  earning  assets and
liabilities.


Interest Rate Sensitivity

         Interest  rate  sensitivity  measures  the timing and  magnitude of the
repricing  of  assets  compared  with the  repricing  of  liabilities  and is an
important  part of  asset/liability  management.  The objective of interest rate
sensitivity  management is to generate stable growth in net interest income, and
to  control  the risks  associated  with  interest  rate  movements.  Management
constantly  monitors interest rate risk exposures 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 at the end of 2007 by $106,684,  resulting in a cumulative gap
ratio  of  .60.  When  interest   sensitive  assets  exceed  interest  sensitive


                                       6
<PAGE>

liabilities for a specific repricing  "horizon," a positive interest sensitivity
gap results.  The gap is negative when  interest  sensitive  liabilities  exceed
interest  sensitive  assets,  as was the case at the end of 2007 with respect to
the one-year time  horizon.  For a bank with a negative  gap,  falling  interest
rates would  ordinarily  be expected to have a positive  effect on net  interest
income and rising rates would ordinarily be expected to have a negative effect.

         The table,  "Interest Sensitivity  Analysis",  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
loans' final maturity dates. Variable rate loans are reflected at the earlier of
their  contractual  maturity date or the date at which the loans may be repriced
contractually.  Securities  are  reflected  at the earlier of each  instrument's
ultimate  maturity or contractual  repricing date.  Overnight federal funds sold
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.  These
liabilities  are subject to contractual  arrangements  that allow  management to
vary the rates paid on these  deposits  within a thirty-day  or shorter  period.
However,  the Company is not obligated to vary the rates paid on those  deposits
within any given period. Fixed rate time deposits,  principally  certificates of
deposit, are reflected at their contractual  maturity dates.  Variable rate time
deposits,  principally  individual  retirement  accounts,  are  reflected at the
earlier of their next repricing or maturity dates.

<TABLE>
<CAPTION>
                                                                                          December 31, 2007
                                                                                          -----------------
                                                                 Within        Over 3 to 12     Over 12      Nonaccrual
                                                                3 Months          Months         Months        Loans         Total
                                                                --------          ------         ------        -----         -----
                                                                                       (Dollars in thousands)
Interest earning assets
<S>                                                              <C>            <C>            <C>           <C>           <C>
     Interest bearing deposits due from banks ..............     $     298      $       -      $       -     $       -     $     298
     Federal funds sold ....................................         4,420              -              -             -         4,420
     Securities ............................................           998          4,142         54,427             -        59,567
     Federal Home Loan Bank stock ..........................           765              -              -             -           765
     Loans .................................................       124,907         26,266        110,429         1,127       262,729
                                                                 ---------      ---------      ---------     ---------     ---------
             Total interest earning assets .................       131,388         30,408        164,856         1,127     $ 327,779
                                                                 ---------      ---------      ---------     ---------     =========

Interest bearing liabilities
     Interest bearing deposits
         NOW accounts ......................................     $   5,312      $       -      $       -     $       -     $   5,312
         Savings and money market accounts .................       100,103              -              -             -       100,103
         Time deposits $100M and over ......................        17,176         44,628         21,712             -        83,516
         Other time deposits ...............................        23,044         64,970         13,657             -       101,671
                                                                 ---------      ---------      ---------     ---------     ---------
             Total interest bearing deposits ...............       145,635        109,598         35,369             -       290,602
     Short-term borrowings .................................         5,000              -              -             -         5,000
     Long-term debt ........................................         8,247              -              -             -         8,247
                                                                 ---------      ---------      ---------     ---------     ---------
             Total interest bearing liabilities ............       158,882        109,598         35,369             -     $ 303,849
                                                                 ---------      ---------      ---------     ---------     =========

Interest sensitivity gap ...................................     $ (27,494)     $ (79,190)
Cumulative interest sensitivity gap ........................     $ (27,494)     $(106,684)
Gap ratio ..................................................          0.83          0.28
Cumulative gap ratio .......................................          0.83          0.60
</TABLE>

Provision for Loan Losses

         The allowance for loan losses is established through charges to expense
in the form of a provision for loan losses.  The level of the allowance for loan
losses is based on  management's  judgment  of the amount  sufficient  to absorb
losses inherent in the loan portfolio.  Loan losses or recoveries are charged or
credited  directly  to the  allowance.  The  provision  for  losses for 2007 was
$1,045,  a  decrease  of $65 from the amount  provided  in 2006.  This  decrease
resulted primarily from a reduction in the amount of net charge-offs from $1,737
in 2006 to $525 in 2007.

         The provision for loan losses for 2006 decreased from its level of 2005
due to the charge-off during 2006 of a significant  amount of the loans reported
as nonperforming at the end of 2005. Those losses were provided for in 2005. See
"Allowance  for  Loan  Losses"  and  "The  Application  of  Critical  Accounting
Policies"  for  further  information  about  the  methodology  used and  factors
considered  by management  in  determining  the amount of the allowance for loan
losses.


                                       7
<PAGE>

Noninterest  Income

         Noninterest  income  for 2007  decreased  by $97  from the 2006  amount
because of  non-recurring  gains of $119 realized on sales of assets acquired in
settlement  of loans in 2006 and  losses  of $24  realized  on  dispositions  of
investment  securities in 2007. Service charges on deposit accounts increased by
$31 over the 2006  amount  due to  larger  account  volumes  resulting  from the
opening of the Anderson, SC branch office.

         In 2006, the Bank had noninterest  income of $759 compared with $580 in
2005.  The $179  increase was caused  primarily by a gain of $119 on the sale of
assets previously acquired in settlement of a loan and a $77 increase in service
charges on deposit accounts.


Noninterest Expenses

         Noninterest  expenses for 2007  increased by $764,  or 10.3%,  over the
2006 amount. Salaries and employee benefits increased by $328 due to an increase
of $107 in the amounts of incentive compensation and automobile  allowances,  an
increase of $51 in matching  contributions to the Company's 401(k) plan due to a
change  in the  Company's  matching  contribution  formula,  and  $142  from the
deferral of costs associated with loan  originations in accordance with SFAS 91.
Also, 2007 was the first full year of operation of the Bank's  Anderson  office.
Professional  fees increased by $226 due to the Company's  efforts to assess its
system of internal control over financial reporting pursuant to the requirements
of the Sarbanes-Oxley Act of 2002, and services in connection with assessment of
the impact of Internal Revenue Code Section 409A on various  executive  deferred
compensation   arrangements  and  amendments  to  the   arrangements   resulting
therefrom.  Insurance  expenses  increased by $81  primarily  due to higher FDIC
assessments for federal deposit  insurance  coverage.  Data processing  expenses
increased by $86 due to higher numbers of deposit accounts.

         In 2006,  salaries and employee  benefits  increased  due to the Bank's
adding  personnel in the  commercial  loan  department and opening of the branch
office in Anderson.  This increase in salaries was responsible for approximately
84% of the change in noninterest expense from 2005 to 2006.


Income Taxes

         Income tax expense for 2007  decreased by $181 from the 2006 amount due
to lower amounts of taxable income. Income from nontaxable investment securities
increased  by $285 over the 2006  amount.  The  effective  tax rates were 36.1%,
35.1% and 32.8% in 2007,  2006 and 2005,  respectively.  The effective tax rates
increased in 2007 and 2006  primarily due to increased  nondeductible  expenses,
including share-based compensation recorded for incentive stock options granted.


Investment Portfolio

         As of December 31, 2007,  the Bank's  investment  portfolio,  excluding
investments  required for  membership  in the Federal Home Loan Bank of Atlanta,
was  approximately  17% of total assets.  The  following  table  summarizes  the
carrying  value amounts of  investments  held as of December 31, 2007,  2006 and
2005. The Bank had no trading or held-to-maturity securities at any of the dates
shown.

         During 2007, the Bank  significantly  increased the amounts invested in
state,  county and municipal bonds and in  mortgage-backed  securities issued by
government-sponsored   enterprises  as  management  sought  to  increase  income
production  from these  instruments.  As a result,  in 2007 interest income from
investment  securities was $827 more than for 2006 (interest  amounts and yields
are not stated on a taxable-equivalent basis).


                                       8
<PAGE>

                           Securities Portfolio Composition

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                              ------------
                                                                                                  2007           2006         2005
                                                                                                  ----           ----         ----
                                                                                                     (Dollars in thousands)
Available-for-sale
<S>                                                                                              <C>           <C>           <C>
Government-sponsored
     enterprises (GSEs) ..................................................................       $19,544       $22,469       $14,289
State, county and municipal ..............................................................        13,289         3,339           461
Mortgage-backed securities
    issued by GSEs .......................................................................        26,734        15,838        13,410
                                                                                                 -------       -------       -------
        Total available-for-sale .........................................................       $59,567       $41,646       $28,160
                                                                                                 =======       =======       =======
</TABLE>

         The following table presents  maturities and weighted average yields of
securities  at  December  31,  2007.  Yields on  tax-exempt  state,  county  and
municipal obligations have not been computed on a taxable-equivalent basis.

  Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                    December 31, 2007
                                                              After               After
                                                             One Year           Five Years
                                          Within              Through            Through             After
                                       One Year (1)        Five Years (1)       Ten Years (1)     Ten Years (1)          Total
                                       ------------        --------------       -------------     -------------          -----
                                    Amount     Yield       Amount   Yield     Amount    Yield    Amount    Yield     Amount   Yield
                                    ------     -----       ------   -----     ------    -----    ------    -----     ------   -----
                                         (Dollars in thousands)
<S>                                 <C>        <C>       <C>         <C>     <C>        <C>    <C>         <C>      <C>        <C>
Government-sponsored
     enterprises ................   $ 2,004    4.51%     $ 11,181    5.42%   $ 4,359    5.91%   $ 2,000    6.25%    $ 19,544   5.52%
State, county and municipal .....         -    0.00%            -    0.00%       467    4.01%    12,822    4.21%      13,289   4.20%
Mortgage-backed securities
     issued by GSEs .............     1,112    5.71%        2,717    4.31%     4,739    4.09%    18,166    5.75%      26,734   5.31%
                                    -------              --------            -------           --------             --------
         Total ..................   $ 3,116    4.94%     $ 13,898    5.20%   $ 9,565    4.92%  $ 32,988    5.75%    $ 59,567   5.13%
                                    =======              ========            =======           ========             ========
</TABLE>

----------------------------
(1)  Maturity  categories  based  upon  final  stated  maturity  dates.  Average
     maturity  is  substantially  shorter  because  of  the  monthly  return  of
     principal on certain securities.

         Government-sponsored enterprises ("GSEs") are agencies and corporations
established by the U.S.  Government,  including,  among others, the Federal Home
Loan  Banks,  Federal  National  Mortgage  Association,  and  Federal  Home Loan
Mortgage Corporation. Securities issued by these enterprises are not obligations
of the U.S.  Government  and are not  backed by the full faith and credit of the
U.S. Government or otherwise guaranteed by the U.S.  Government.  Evidencing the
high-quality of the issuers, however, these securities generally are eligible to
be used as  security  for  public  deposits  of the  U.S.  Treasury,  government
agencies  and  corporations  and states and other  political  subdivisions.  The
Company  believes  that its  investment  in these  securities at these levels is
prudent,   given  the  excellent   credit  ratings  enjoyed  by  the  GSEs.  The
mortgage-backed  securities  in  the  Company's  portfolio  are  not  backed  by
sub-prime mortgages.

         On an ongoing basis,  management  assigns securities upon purchase into
one of three categories (trading,  available-for-sale or held-to-maturity) based
on intent,  taking into consideration  other factors including  expectations for
changes in market rates of interest, liquidity needs, asset/liability management
strategies, and capital requirements.  The Company has never held securities for
trading   purposes.   During  2007,  the  Company  realized  losses  of  $24  on
dispositions of  available-for-sale  investment  securities and in 2005 gains of
$18 were  realized.  No  transfers  of  available-for-sale  or  held-to-maturity
securities to other categories were made in any of the years 2005 through 2007.

         As of December 31, 2007, the Company did not have any concentrations in
debt  securities that are payable from and secured by the same source of revenue
or taxing  authority  of any state,  county and  municipal  issuers in an amount
equal to 10% or more of shareholders' equity.


                                       9
<PAGE>

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no concentrations of loans in any particular individual,  industry or groups
of  related  individuals  or  industries,  and there are no foreign  loans.  The
Company's loan portfolio is, however,  dependent upon economic and other factors
that affect its local market areas.

         The amounts of loans outstanding as of the end of each of the last five
years,  and the  percentage  of each  category to total loans,  are shown in the
following tables according to type of loan:

              Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                           ------------
                                                              2007            2006             2005            2004            2003
                                                              ----            ----             ----            ----            ----
                                                                                      (Dollars in thousands)
<S>                                                         <C>             <C>             <C>             <C>             <C>
Commercial, financial and agricultural .............        $ 44,640        $ 35,783        $ 41,915        $ 33,644        $ 30,500
Real estate - construction .........................          84,458          65,096          39,895          39,170          15,814
Real estate - mortgage .............................         128,633         120,673         110,694          96,984          94,391
Consumer installment ...............................           4,998           5,209           7,858           6,660           9,691
                                                            --------        --------        --------        --------        --------
       Total loans .................................        $262,729        $226,761        $200,362        $176,458        $150,396
                                                            ========        ========        ========        ========        ========
</TABLE>

        Percentage Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                           ------------
                                                              2007            2006             2005            2004           2003
                                                              ----            ----             ----            ----           ----
<S>                                                          <C>             <C>              <C>             <C>            <C>
Commercial, financial and agricultural ...............        17.0%           15.8%            20.9%           19.1%          20.3%
Real estate - construction ...........................        32.1%           28.7%            19.9%           22.2%          10.5%
Real estate - mortgage ...............................        49.0%           53.2%            55.2%           55.0%          62.8%
Consumer installment .................................         1.9%            2.3%             4.0%            3.7%           6.4%
                                                             -----           -----            -----           -----          -----
       Total loans ...................................       100.0%          100.0%           100.0%          100.0%         100.0%
                                                             =====           =====            =====           =====          =====
</TABLE>
         A certain degree of risk taking is inherent in the extension of credit.
Management has established  loan and credit  policies and practices  designed to
control  both the types and amounts of risks  assumed,  and to minimize  losses.
Such policies and practices include limitations on loan-to-collateral values for
various  types  of  collateral,  requirements  for  appraisals  of  real  estate
collateral,  problem loan management  practices and collection  procedures,  and
nonaccrual and charge-off guidelines.

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

         Real estate  construction  loans  generally  consist of  financing  the
construction of 1-4 family  dwellings and nonfarm,  nonresidential  real estate.
Generally,  loan-to-cost  ratios are limited to 80% and the Bank  verifies  that
commitments  for permanent  financing are in place prior to the  advancement  of
construction loan proceeds. Due to the short-term nature of its funding sources,
the Bank generally does not provide  permanent  financing for these  properties.
The Bank experienced  significant growth in construction loans in 2007 and 2006.
In light of recent  developments in the housing and credit  markets,  management
currently expects that growth in construction lending will be constrained in the
near future,  but does not foresee  existing and  committed  construction  loans
experiencing unusually high rates of default.

                                       10
<PAGE>

         Loans secured by real estate mortgages comprised approximately 49%, 53%
and 55% of the  Company's  loan  portfolio  at the end of 2007,  2006 and  2005,
respectively.  Real estate  mortgage loans of all types grew $7,960 during 2007,
by $9,979 during 2006 and by $13,710 during 2005.  Residential real estate loans
consist mainly of first and second  mortgage loans on single family homes,  with
some  multifamily  home loans.  Loan-to-value  ratios for these  instruments are
generally limited to 80%.

         The Bank offers a variety of  fixed-rate  residential  real estate loan
products. Loans retained in-house generally establish repayment amounts based on
either  15 or 30 year  terms  and  include  5-year  balloon-payment  provisions.
Underwriting  for these loans is  performed  in-house  within the limits of loan
officers' lending  authorities and the loans typically are renegotiated near the
end of the balloon  period.  In addition,  conventional,  variable rate mortgage
loans may be originated and closed by the Bank in the name of another  financial
institution in exchange for an origination fee. Such loans are not funded by the
Bank.

         Nonfarm,  nonresidential  real estate loans are secured by business and
commercial  properties with loan-to-value ratios generally limited to 80%. These
loans  comprised  $78,095 of the  $128,633  in real  estate  loans  reported  at
December 31, 2007.  At December 31, 2007,  the Bank had 5 loans in this category
with loan-to-value ratios exceeding 100%.

         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.  The Company
does not originate high-risk mortgage loans such as so-called option ARMs, loans
with high  debt-to-worth  ratios  (without  requiring  the  purchaser  to obtain
private mortgage  insurance),  loans with fixed monthly payment amounts that are
less than the interest  accrued on the loan,  or loans with low initial  monthly
payments that increase to much higher levels at some future time.

         Real  estate  values  in  the  Company's  market  areas,   particularly
residential real properties, have so far remained relatively steady and have not
suffered  the  precipitous  decreases  seen in some areas,  though  there can no
assurances that this stability will continue.  High foreclosure rates drive down
property values, are related to higher crime rates, displace families,  and have
other negative effects on the local and national  economies.  National political
and industry  leaders  recently  have been  working to encourage  private-sector
programs  whereby  lenders  and  mortgage  servicers  would be able to work with
distressed borrowers to prevent a glut of foreclosures. By reworking loan terms,
including  eliminating or reducing to a manageable  level the payment shock that
often results when certain adjustable-rate loans "reset," it may be possible for
borrowers to continue  making  monthly  payments  and remain in their homes.  In
addition,  the Federal Reserve  recently has initiated a series of interest rate
cuts to provide  stimulus to the national  economy and has on several  occasions
proactively provided liquidity to the banking system.


Maturity and Interest Sensitivity Distribution of Loans

         The  following  table  sets  forth  the  maturity  distribution  of the
Company's  commercial,  financial and  agricultural  loans and its real estate -
construction  loans,  as of December 31,  2007,  as well as the type of interest
requirement on such loans.

<TABLE>
<CAPTION>
                                                                                                December 31, 2007
                                                                                                -----------------
                                                                               Due in        Due after
                                                                              One Year        One through   Due after
                                                                              or Less        Five Years     Five Years        Total
                                                                              -------        ----------     ----------        -----
                                                                                              (Dollars in thousands)
<S>                                                                             <C>            <C>            <C>            <C>
Commercial, financial and industrial ...................................        $36,844        $ 7,796        $     -        $44,640
Real estate - construction .............................................         41,958         38,769          3,731         84,458

Above loans with fixed rate and due after one year .....................                                                     $23,059
                                                                                                                             =======
Above loans with variable rate and due after one year ..................                                                     $27,237
                                                                                                                             =======
</TABLE>


                                       11
<PAGE>

Nonperforming Loans; Assets Acquired in Settlement of Loans

         Generally,  when a loan is 90 days past due as to interest or principal
or when payment in full is not  anticipated,  the accrual of interest  income is
discontinued.  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.  When it is probable  the Bank will be
unable to collect all amounts due in  accordance  with the loan  agreement,  the
principal  balance is  reduced to the  estimated  fair  value of  collateral  by
charge-off to the allowance for loan losses of the difference between book value
and estimated fair value.  Any subsequent  collections are credited first to the
remaining  principal  balance  and then to the  allowance  for loan  losses as a
recovery.

         As of December 31, 2007,  2006 and 2005, the Bank had $1,127,  $834 and
$2,551, respectively, of nonaccrual loans. The increase in 2007 was attributable
primarily to one large loan secured by commercial  real estate that was added to
nonaccrual  loans during the year. The decrease in nonaccrual loans from the end
of 2005 to the end of 2006 was attributable  primarily to the charge-off in 2006
of  more  than  $2,000  of  loans  that  were   previously   nonaccrual   loans.
Additionally,  the Bank acquired an asset in  settlement of a loan of $149.  The
amount of interest  income that would have been included in income in 2007, 2006
and 2005,  if  nonaccrual  loans had  performed  in  accordance  with the loans'
original terms was $164, $318 and $96, respectively. Interest income recorded on
nonaccrual loans was $34, $68 and $172,  respectively.  At December 31, 2007 and
2006,  there were no loans that were 90 days or more past due and still accruing
interest and there were no restructured loans.

         Included in nonaccrual  loans at December 31, 2005 were $1,660 in loans
to one customer for which the Company specifically reserved $500 in anticipation
of  charge-offs.  At the time of filing of the 2005 Annual  Report on Form 10-K,
the Company believed that the business remained a going concern with enough cash
flows to service the debt, or was saleable for an amount sufficient to repay its
debts.  However,  events occurred in 2006 that were not foreseeable and included
the loss of the debtor's largest customer which accounted for  approximately 65%
of  sales.   Realizing  that  full  collectibility  was  improbable,   the  Bank
charged-off $1,360.

           Nonaccrual and Past Due Loans; Assets Acquired in Settlement of Loans

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                              ------------
                                                                     2007           2006          2005         2004           2003
                                                                     ----           ----          ----         ----           ----
                                                                                         (Dollars in thousands)

Nonaccrual loans
<S>                                                                  <C>           <C>           <C>           <C>           <C>
      Commercial, financial and agricultural .................       $  266        $  435        $  329        $    -        $   56
      Real estate - construction .............................            -             -             -            10            16
      Real estate - mortgage .................................          833           378         2,210         1,394         1,052
      Installment loans to individuals .......................           28            21            12            93           107
                                                                     ------        ------        ------        ------        ------
          Total nonaccrual loans .............................        1,127           834         2,551         1,497         1,231
Accruing loans 90 days or more past due ......................            -             -             -             -           393
                                                                     ------        ------        ------        ------        ------
          Total nonperforming loans ..........................       $1,127        $  834        $2,551        $1,497        $1,624
                                                                     ======        ======        ======        ======        ======

Nonperforming loans as a percent of total loans ..............          0.4%          0.4%          1.3%          0.8%          1.1%

Assets acquired in settlement of loans .......................       $1,752        $  149        $  630        $  881        $  411
                                                                     ======        ======        ======        ======        ======
</TABLE>

         As of December 31, 2007, there were no irrevocable  commitments to lend
additional funds to debtors owing amounts on nonaccrual loans.

         There were no restructured loans during any of the periods in the table
above.

         During the fourth quarter of 2007, the Bank  foreclosed on and obtained
title to real  properties  that were  collateral  for  previously  nonperforming
loans. A total of $74 was charged off when the properties  were obtained.  Those
properties  include  4  single  family  residences  now  carried  at $307  and a
multifamily residential property now carried at $1,445.



                                       12
<PAGE>

Potential Problem Loans

         Management  has  identified  and maintains a list of potential  problem
loans that are not included in nonperforming loans (nonaccrual or loans past due
90 days or more and still accruing).  Management  monitors this list closely and
maintains  dialogue  with the  customers to determine if and when  circumstances
arise that warrant removal of the loan from this list or establishing a specific
loan loss  allowance for it. A loan is added to the potential  problem list when
management  becomes  aware of  information  about  possible  credit  problems of
borrowers  that causes doubts as to the ability of such borrowers to comply with
the current loan repayment  terms. At December 31, 2007,  loans in the amount of
$828,  or .3% of total loans,  were  determined  by  management  to be potential
problem loans. This amount does not represent management's estimate of potential
losses  since a large  proportion  of such loans is secured by various  types of
collateral.  As of December 31, 2006, potential problem loans totaled $1,050, or
..5% of total loans.


Allowance for Loan Losses

         The  allowance  for  loan  losses  is  based  on  management's  ongoing
evaluation of the loan  portfolio  and reflects an amount which in  management's
opinion is sufficient to absorb  probable losses in the existing loan portfolio.
Loan losses are charged  against,  and recoveries are credited to the allowance.
Provisions for loan losses charged to expense are credited to the allowance. The
amounts  of loan  loss  provisions  are  based  on  various  factors  which,  in
management's  judgment,  merit current  recognition in estimating  losses.  Such
factors  include  the  market  value of any  underlying  collateral,  growth and
composition of credit risk within the loan portfolio, loss experience, review of
problem loans,  delinquency trends, and local and regional economic  conditions.
Management evaluates the carrying value of loans quarterly and the allowance for
loan losses is adjusted  accordingly.  While  management uses the best available
information in making its evaluations,  future  adjustments to the allowance may
be needed if conditions differ substantially from the assumptions used in making
the  current  evaluation.  The  allowance  for loan  losses is also  subject  to
evaluation by various regulatory authorities and may be subject to adjustment as
a result of those evaluations.

         The evaluation of the allowance is segregated into general  allocations
and specific allocations.  For general allocations,  the portfolio is segregated
into  risk-similar  segments for which historical loss ratios are calculated and
adjusted for identified trends or changes in current portfolio  characteristics.
Historical loss ratios are calculated by risk grade.  The resulting  percentages
are then applied to the dollar amounts of the loans in each segment to arrive at
each  segment's  probable loss amount.  The general  allocation  also includes a
component for probable losses  inherent in the portfolio,  based on management's
analysis, that is not fully captured otherwise in the allowance.  This component
serves to address  inherent  imprecision  in the estimation  methodology  and to
recognize  management's  evaluation of other factors or conditions not otherwise
directly  measured in the  evaluation  of the general and specific  allocations.
Such factors or conditions may include  evaluation of current  general  economic
and business conditions; geographic, collateral or other concentrations; system,
procedural,  policy or underwriting changes;  experience of lending staff; entry
into new  markets or new  product  offerings;  and  results  from  internal  and
external portfolio examinations.

         Assessing  the adequacy of the  allowance  is a process  that  requires
considerable  judgment.  No  assurance  can be given that loan  losses in future
periods will not exceed the current  allowance  or that future  increases in the
allowance will not be required. Nor can any assurance be given that management's
ongoing  evaluation  of the  loan  portfolio,  in  light  of  changing  economic
conditions  and  other  relevant  information,   will  not  require  significant
additions  to the  allowance  for loan  losses,  thus  adversely  affecting  the
Company's  operating  results.  Management  believes that the allowance for loan
losses currently is sufficient.

         Certain  nonperforming  and potential  problem  loans are  individually
assessed for impairment  under SFAS 114,  "Accounting for Impairment of a Loan,"
and assigned specific allocations.

         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.


                                       13
<PAGE>

               Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                                          ------------------------
                                                                         2007         2006         2005         2004         2003
                                                                         ----         ----         ----         ----         ----
                                                                                          (Dollars in thousands)

<S>                                                                    <C>          <C>          <C>          <C>          <C>
Total loans outstanding at end of period ..........................    $262,729     $226,761     $200,362     $176,458     $150,396
Average amount of loans outstanding ...............................     250,024      215,673      183,576      162,044      130,448

Balance of allowance for loan losses - beginning ..................    $  2,423     $  3,050     $  2,293     $  2,345     $  1,395
                                                                       --------     --------     --------     --------     --------
Loans charged off
     Commercial, financial and agricultural .......................         532          787          123          135           90
     Real estate -construction ....................................          90            -            -            -           82
     Real estate - mortgage .......................................         689        1,375          347          466          120
     Installment loans to individuals .............................          18           17           13          475           97
                                                                       --------     --------     --------     --------     --------
          Total charge-offs .......................................       1,329        2,179          483        1,076          389
                                                                       --------     --------     --------     --------     --------
Recoveries of loans previously charged off
     Commercial, financial and agricultural .......................         382          342           25            -            -
     Real estate -construction ....................................           -            -            -            -            -
     Real estate - mortgage .......................................         419           54           76            1            -
     Installment loans to individuals .............................           3           46           14           23            -
                                                                       --------     --------     --------     --------     --------
          Total recoveries ........................................         804          442          115           24            -
                                                                       --------     --------     --------     --------     --------
Net charge-offs ...................................................         525        1,737          368        1,052          389
                                                                       --------     --------     --------     --------     --------
Additions to allowance charged to expense .........................       1,045        1,110        1,125        1,000        1,339
                                                                       --------     --------     --------     --------     --------
Balance of allowance for loan losses - ending .....................    $  2,943     $  2,423     $  3,050     $  2,293     $  2,345
                                                                       ========     ========     ========     ========     ========

Ratios
     Net charge-offs to average loans .............................        0.21%        0.81%        0.20%        0.65%        0.30%
     Net charge-offs to loans at end of period ....................        0.20%        0.77%        0.18%        0.60%        0.26%
     Allowance for loan losses to average loans ...................        1.18%        1.12%        1.66%        1.42%        1.80%
     Allowance for loan losses to loans at end of period ..........        1.12%        1.07%        1.52%        1.30%        1.56%
     Net charge-offs to allowance for loan losses .................       17.84%       71.69%       12.07%       45.88%       16.59%
     Net charge-offs to provision for loan losses .................       50.24%      156.49%       32.71%      105.20%       29.05%
</TABLE>

         The  following  tables show the  allocation  of the  allowance for loan
losses to various  types of loans and the  percentage  of loans in each category
for each of the last three years.  For years prior to 2005,  the Company did not
allocate the allowance for loan losses to the various loan categories.



                                       14
<PAGE>

         Allocation of Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                                      ------------
                                                                                      2007                 2006               2005
                                                                                      ----                 ----               ----
                                                                                                (Dollars in thousands)
Amount allocated to loan category
<S>                                                                                 <C>                  <C>                  <C>
Commercial, financial and agricultural ..............................               $1,255               $  884               $1,104
Real estate - construction ..........................................                  191                  228                  100
Real estate - mortgage ..............................................                  880                  790                  624
Installment loans to individuals ....................................                   19                   33                   26
Unallocated .........................................................                  598                  488                1,196
                                                                                    ------               ------               ------
     Total ..........................................................               $2,943               $2,423               $3,050
                                                                                    ======               ======               ======
</TABLE>

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                                      ------------
                                                                                      2007                 2006               2005
                                                                                      ----                 ----               ----
Percentage of loans in category
<S>                                                                                 <C>                  <C>                  <C>
Commercial, financial and agricultural ..............................                17.0%                15.8%                20.9%
Real estate - construction ..........................................                32.1%                28.7%                19.9%
Real estate - mortgage ..............................................                49.0%                53.2%                55.2%
Installment loans to individuals ....................................                 1.9%                 2.3%                 4.0%
                                                                                    -----                -----                -----
     Total ..........................................................               100.0%               100.0%               100.0%
                                                                                    =====                =====                =====
</TABLE>

Although the allowance has been  allocated  internally as indicated  above,  all
amounts within the allowance are available for any and all loan losses incurred.


Deposits

         The average amounts and percentage  composition of deposits held by the
Company for the years ended  December 31, 2007,  2006 and 2005,  are  summarized
below:

                                Average Deposits

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                            ------------------------
                                                      2007                             2006                             2005
                                                      ----                             ----                             ----
                                              Average       Average           Average       Average           Average        Average
                                              Balance         Cost            Balance        Cost             Balance         Cost
                                              -------         ----            -------        ----             -------         ----
<S>                                         <C>               <C>            <C>              <C>            <C>              <C>
Noninterest-bearing demand ...............  $  15,970             -          $  14,296            -          $  12,107            -
NOW Accounts .............................      3,924         1.58%              2,934        0.27%              3,022        0.23%
Savings ..................................        616         0.49%                656        0.46%                765        0.52%
Money market accounts ....................     92,373         4.27%             66,774        4.20%             53,837        2.64%
Time deposits ............................    180,340         5.16%            160,594        4.50%            130,419        3.29%
                                            ---------                        ---------                       ---------
Total average deposits ...................  $ 293,223                        $ 245,254                       $ 200,150
                                            =========                        =========                       =========
</TABLE>

         As of December 31, 2007,  the Bank had $83,516 in time deposits of $100
or more.  Approximately $17,176 mature within three months,  $20,337 mature over
three  through six months,  $24,291  mature over six through  twelve  months and
$21,712 mature after one year. This level of large time deposits, as well as the
growth in other  deposits,  is attributed to growth planned by  management.  The
majority of time deposits $100 and over are acquired within the Company's market
areas in the ordinary  course of business from customers  with standing  banking
relationships.  As of December 31, 2007,  time deposits of $100 or more included
$16,759 obtained from deposit brokers.  It is a common industry  practice not to
consider time deposits of $100 or more as core  deposits  since their  retention
can be influenced  heavily by rates offered.  Therefore,  such deposits have the
characteristics  of shorter-term  purchased funds.  Certificates of deposit $100
and over require that the Company  achieve and maintain an appropriate  matching
of  maturity  distributions  and a  diversification  of  sources  to  achieve an
appropriate level of liquidity.


                                       15
<PAGE>

Return on Equity and Assets

         The following  table shows the return on assets (net income  divided by
average total 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 each period indicated.

                                              Years Ended December 31,
                                              ------------------------
                                          2007           2006              2005
                                          ----           ----              ----

          Return on assets ............   0.86%           1.16%            1.02%
          Return on equity ............  13.34%          18.16%           18.34%
          Dividend payout ratio .......   9.64%           8.25%            8.43%
          Equity to assets ratio ......   6.43%           6.41%            5.55%

Liquidity

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loan  originations and deposit  withdrawals in the most timely and
economical  manner.  Some  liquidity is ensured by  maintaining  assets that are
convertible  immediately  into cash at minimal cost  (amounts due from banks and
federal funds sold).  Asset  liquidity is also provided from funds from maturing
or redeemed  securities  available-for-sale,  maturing loans and other scheduled
loan repayments.  However, the most manageable sources of liquidity are composed
of  liabilities,  with the primary  focus of liquidity  management  being on the
ability to obtain  deposits within the Bank's service area. Core deposits (total
deposits  less time deposits of $100 and over and brokered  deposits)  provide a
relatively stable funding base, and were equal to 64% of total assets as of each
of December 31, 2007 and December 31, 2006.

         Because of the potentially  volatile nature of its funding sources, the
Bank maintains  membership in the Federal Home Loan Bank of Atlanta (the "FHLB")
in order to gain access to its credit  programs.  During 2007, the Bank obtained
approximately $5,000 of short-term  borrowings from the FHLB. As of December 31,
2007, the Bank is eligible to borrow up to an additional  $19,740 from the FHLB.
Such borrowings are secured by a lien on the Bank's investment in FHLB stock and
all qualifying  first mortgage  residential  loans and certain  commercial  real
estate  loans.  Assets  actually  or  potentially  subject to this lien  totaled
approximately  $33,051  as of  December  31,  2007.  In  addition,  the Bank has
available  unused  short-term  lines of credit to purchase  up to an  additional
$9,400 of federal funds from  unrelated  correspondent  institutions.  The lines
generally  limit  the  period  of  time  that  any  related  borrowings  may  be
outstanding and are cancelable at any time in the sole discretion of the lender.

         The  Company's  ability  to meet  its  cash  obligations  or to pay any
possible  future cash dividends to  shareholders  is dependent  primarily on the
successful  operation  of the Bank and its ability to pay cash  dividends to the
Company.  Any of the Bank's cash dividends in excess of the amount of the Bank's
current year-to-date earnings of $3,226 are subject to the prior approval of the
South Carolina Commissioner of Banking. In addition,  dividends paid by the Bank
to the Company would be prohibited if the effect  thereof would cause the Bank's
capital to be reduced below applicable  minimum regulatory  requirements.  Under
Federal  Reserve  Board  regulations,  the amounts of loans or advances from the
Bank to the Company are also restricted.

         Management  believes  that the  overall  liquidity  sources of both the
Company the Bank are adequate to meet their operating needs.


Short-Term Borrowings

Short-term  borrowings consist primarily of Federal Home Loan Bank advances with
an  original  maturity  of one  year  or  less.  The  following  table  presents
information  about  short-term  Federal Home Loan Bank  advances for each of the
years indicated.

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                                   ------------
                                                                                   2007                 2006                  2005
                                                                                   ----                 ----                  ----
                                                                                             (Dollars in thousands)
<S>                                                                               <C>                 <C>                   <C>
Outstanding at end of period .........................................            $ 5,000             $       -             $ 8,500
Weighted average rate, end of period .................................               4.40%                 0.00%               4.34%
Maximum amount outstanding at any month end ..........................            $ 5,000             $   8,500             $16,500
Average amount outstanding during the period .........................            $   169             $   6,905             $11,392
Weighted average rate during the period ..............................               5.92%                 4.36%               4.03%
</TABLE>

Off-Balance Sheet Arrangements

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

         Commitments to extend credit are legally enforceable agreements to lend
money to customers at  predetermined  interest  rates for a specified  period of
time. At December 31, 2007, the Bank had issued  commitments to extend credit of
$76,874  through  various  types of lending.  Commitments  at variable  rates of
interest  totaled  $76,866  and  commitments  at fixed  rates  totaled  $8.  The
commitments  generally  expire within one year. Past  experience  indicates that
many  of  these  commitments  will  expire  unused.  However,  as  described  in
"Liquidity,"  the Company  believes that it has adequate sources of liquidity to
fund commitments that are drawn upon by the borrower.

         In  addition  to  commitments  to extend  credit,  the Bank also issues
standby  letters of credit which are  assurances to a third party that they will
not  suffer  a loss  if the  Bank's  customer  fails  to  meet  its  contractual
obligation to the third party.  If these standby letters of credit are utilized,
they become loans on the Bank's books. Standby letters of credit totaled $897 at
December 31,  2007.  Past  experience  indicates  that many of these  letters of
credit will expire unused.  Management believes the Bank's liquidity sources are
sufficient to meet any funding requirements under these instruments.

         Neither  the Company  nor the Bank are  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  significantly   affect  earnings.   Obligations  under  noncancelable
operating lease agreements  totaled  approximately $310 as of December 31, 2007.
These  obligations  are payable  over  several  years as shown in Note 10 to the
Company's consolidated financial statements.

Contractual Obligations

         The following table provides  information  about amounts required to be
paid by the  Company  in each of the  periods  indicated  under the terms of its
contractual obligations.

<TABLE>
<CAPTION>
                                                                                     December 31, 2007
                                                                                     -----------------
                                                                                         Payments due by period
                                                                                         ----------------------
                                                                        Less than 1     Over 1 to 3      Over 3 to 5         After 5
                                                          Total            Year             Years            Years           Years
                                                          -----            ----             -----            -----           -----
                                                                                   (Dollars in thousands)
Contractual Obligations
<S>                                                     <C>              <C>              <C>              <C>              <C>
Time deposits .................................         $185,187         $150,436         $ 31,379         $  3,369         $      3
Long-term debt ................................            8,247                -                -                -            8,247
Operating lease obligations ...................              310               23               46               46              195
                                                        --------         --------         --------         --------         --------
Total .........................................         $193,744         $150,459         $ 31,425         $  3,415         $  8,445
                                                        ========         ========         ========         ========         ========
</TABLE>


                                       17
<PAGE>

Capital Resources

         Shareholders'  equity  increased by $2,997 during 2007. The increase in
shareholders'  equity  is the  result of $2,799  in  earnings  generated  by the
Company, an increase in accumulated other  comprehensive  income of $322, $25 in
proceeds from the exercise of stock options and $121 in capital generated by the
recognition of the expense of granting of stock options,  offset by dividends of
$270.

         The  Company  and the Bank  are  each  subject  to  regulatory  capital
adequacy standards.  Under these standards, bank holding companies and banks 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  Improvement Act of 1991,  federal bank  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  fell  below  certain  levels,   increasingly   stringent
regulatory corrective actions are mandated.  Unrealized holding gains and losses
on  available-for-sale   securities  are  generally  excluded  for  purposes  of
calculating  regulatory  capital ratios.  However,  the extent of any unrealized
appreciation  or  depreciation  on securities  will continue to be a factor that
regulatory examiners consider in their overall assessment of capital adequacy.

         It is  management's  intention to maintain the capital levels such that
the Bank will continue to be considered well capitalized.  However, no assurance
can be given that this objective will be achieved.  The Company anticipates that
it will  maintain  capital at levels that will allow the Company and the Bank to
qualify as being adequately capitalized as defined by the regulation,  and as of
December 31, 2007,  the Company and the Bank exceed the minimum  capital  levels
that are  required  to be  maintained.  There are no  conditions  or events that
management believes would cause the Company's or the Bank's category to be other
than that resulting from meeting the minimum ratio requirements.

         Company and Bank capital  levels at December 31, 2007 are  presented in
the following  table,  compared with the "well  capitalized"  and minimum ratios
under the Federal Reserve and FDIC regulatory definitions and guidelines.

<TABLE>
<CAPTION>
                                                                                    Minimum for                   Minimum to be
                                                          Actual                  Capital Adequacy              Well Capitalized
                                                          ------                  ----------------              ----------------
                                                  Amount          Ratio         Amount          Ratio          Amount         Ratio
                                                  ------          -----         ------          -----          ------         -----
December 31, 2007                                                              (Dollars in thousands)
     Tier 1 Capital (to Average Assets)
<S>                                                <C>              <C>         <C>               <C>         <C>             <C>
         Company ...............................   $ 28,850          8.4%       $ 13,750          4.0%              NA            NA
         GrandSouth Bank .......................     27,526          8.6%         12,869          4.0%        $ 16,087          5.0%

     Tier 1 Capital (to Risk Weighted Assets)
         Company ...............................   $ 28,850         10.1%       $ 11,414          4.0%              NA            NA
         GrandSouth Bank .......................     27,526          9.6%         11,432          4.0%        $ 17,148          6.0%

     Total Capital (to Risk Weighted Assets)
         Company ...............................   $ 32,489         11.4%       $ 22,828          8.0%              NA            NA
         GrandSouth Bank .......................     30,469         10.7%         22,864          8.0%        $ 28,580         10.0%

December 31, 2006
     Tier 1 Capital (to Average Assets)
         Company ...............................   $ 26,079          9.3%       $ 11,199          4.0%              NA            NA
         GrandSouth Bank .......................     25,200          8.5%         11,812          4.0%        $ 14,765          5.0%

     Tier 1 Capital (to Risk Weighted Assets)
         Company ...............................   $ 26,079         10.7%        $ 9,788          4.0%              NA            NA
         GrandSouth Bank .......................     25,200         10.3%          9,777          4.0%        $ 14,666          6.0%

     Total Capital (to Risk Weighted Assets)
         Company ...............................   $ 30,031         12.3%       $ 19,576          8.0%              NA            NA
         GrandSouth Bank .......................     27,623         11.3%         19,555          8.0%        $ 24,443         10.0%
</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.


                                       18
<PAGE>

         While the effect of inflation  on banks is normally not as  significant
as is its influence on those  businesses  having 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.

Impact of Recent Accounting Changes

Fair Value  Measurements - The  provisions of Statement of Financial  Accounting
Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements," are effective for
fiscal  years  beginning  after  November  15,  2007  (January  1,  2008 for the
Company). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles,  and expands disclosures
about fair value measurements. This standard eliminates inconsistencies found in
various  prior   pronouncements   but  does  not  require  any  new  fair  value
measurements. The adoption of SFAS No. 157 in 2008 will not impact the Company's
accounting measurements but it is expected to result in additional disclosures.

Fair  Value  Option - The  provisions  of  Statements  of  Financial  Accounting
Standards No. 159 ("SFAS No. 159") , "The Fair Value Option for Financial Assets
and Financial  Liabilities  Including an Amendment of FASB  Statement  115," are
effective for fiscal years  beginning  after  November 15, 2007 (January 1, 2008
for the Company).  This Statement  provides an entity the option to measure many
financial instruments and certain other items at fair value. Changes in the fair
values of items  for  which the  option  is  selected  will be  recorded  in the
entity's earnings.  The objective is to improve financial  reporting by allowing
entities  to  mitigate  the  earnings  volatility  that  has  resulted  from the
previously required application of different measurement  attributes without the
need to apply complex hedge accounting  provisions.  The Company has not elected
to apply the Statement's  provisions to any items held as of January 1, 2008 and
does not currently  expect that it will apply the Statement's  provisions to any
items acquired  subsequently.  Therefore,  the adoption of the Statement in 2008
has  not  had,  and is  not  expected  to  have,  any  effect  on the  Company's
consolidated financial statements.

Accounting  for  Uncertainty  in Income  Taxes - In June 2006,  the FASB  issued
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes," to
clarify the  accounting and  disclosure  for  uncertainty  in tax positions,  as
defined.  FIN 48 seeks to reduce  the  diversity  in  practice  associated  with
certain aspects of the  recognition  and  measurement  related to accounting for
income taxes. The Company  implemented the provisions of FIN 48 as of January 1,
2007,  and  has  analyzed  filing  positions  in all of the  federal  and  state
jurisdictions  where it is required to file income tax  returns,  as well as all
open tax years in these jurisdictions.  The Company believes that its income tax
filing  positions  taken or expected to be taken in an its tax returns will more
likely than not be sustained upon audit by the taxing  authorities  and does not
anticipate any adjustments  that will result in a material adverse impact on the
Company's financial condition,  results of operations,  or cash flow. Therefore,
no reserves for uncertain  income tax positions  have been recorded  pursuant to
FIN 48. In addition,  the Company did not record a cumulative  effect adjustment
related to the adoption of FIN 48.

Accounting for Bank Owned Life Insurance - In September  2006, the FASB ratified
the  consensuses  reached  by the FASB's  Emerging  Issues  Task Force  ("EITF")
relating  to  EITF  06-4,   "Accounting  for  the  Deferred   Compensation   and
Postretirement  Benefit  Aspects  of  Endorsement  Split-Dollar  Life  Insurance
Arrangements"  ("EITF  06-4").  Entities  purchase  life  insurance  for various
reasons  including  protection  against  loss  of  key  employees  and  to  fund
postretirement   benefits.   The  two  most  common  types  of  life   insurance
arrangements are endorsement  split dollar life and collateral  assignment split
dollar life. EITF 06-4 covers the former and EITF 06-10 (discussed below) covers
the latter.  EITF 06-4 states that entities with endorsement  split-dollar  life
insurance  arrangements  that  provide a benefit to an employee  that extends to
postretirement  periods  should  recognize  a liability  for future  benefits in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," (if, in substance,  a postretirement  benefit plan exists)
or Accounting  Principles Board ("APB") Opinion No. 12, "Omnibus  Opinion--1967"
(if the  arrangement  is, in  substance,  an  individual  deferred  compensation
contract).  Entities should recognize the effects of applying this Issue through
either  (a)  a  change  in  accounting  principle  through  a  cumulative-effect
adjustment to retained  earnings or to other  components of equity or net assets
in the  statement  of  financial  position  as of the  beginning  of the year of
adoption  or  (b)  a  change  in  accounting  principle  through   retrospective
application  to all prior  periods.  EITF 06-4 is  effective  for the Company on
January 1, 2008.  The Company  does not  believe the  adoption of EITF 06-4 will
have a material impact on its financial position,  results of operations or cash
flows.

In  September  2006,  the FASB  ratified  the  consensus  reached  on EITF 06-5,
"Accounting for Purchases of Life  Insurance--Determining  the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4,  Accounting for

                                       19
<PAGE>

Purchases of Life Insurance" ("EITF 06-5"). EITF 06-5 states that a policyholder
should consider any additional  amounts included in the contractual terms of the
insurance  policy other than the cash surrender  value in determining the amount
that could be realized under the insurance contract.  EITF 06-5 also states that
a policyholder should determine the amount that could be realized under the life
insurance   contract   assuming   the   surrender  of  an   individual-life   by
individual-life  policy (or certificate by certificate in a group policy).  EITF
06-5 is  effective  for the  Company on January 1, 2008.  The  Company  does not
believe the adoption of EITF 06-5 will have a material  impact on its  financial
position, results of operations or cash flows.

In  March  2007,  the  FASB  ratified  the  consensus  reached  on  EITF  06-10,
"Accounting for Collateral Assignment  Split-Dollar Life Insurance Arrangements"
("EITF 06-10"). The postretirement  aspect of this EITF is substantially similar
to EITF 06-4 discussed above and requires that an employer recognize a liability
for the postretirement  benefit related to a collateral assignment  split-dollar
life insurance  arrangement in accordance  with either FASB Statement No. 106 or
APB Opinion No. 12, as  appropriate,  if the  employer  has agreed to maintain a
life insurance  policy during the employee's  retirement or provide the employee
with a death benefit based on the  substantive  agreement with the employee.  In
addition,  a consensus was reached that an employer should recognize and measure
an  asset  based  on the  nature  and  substance  of the  collateral  assignment
split-dollar life insurance arrangement. EITF 06-10 is effective for the Company
on January 1, 2008. The Company does not believe the adoption of EITF 06-10 will
have a material impact on its financial position,  results of operations or cash
flows.

Accounting for Income Tax Benefits of Dividends on Share-Based  Payment Awards -
In June 2007,  the FASB ratified the consensus  reached by the EITF with respect
to EITF 06-11,  "Accounting  for Income Tax Benefits of Dividends on Share-Based
Payment Awards" ("EITF 06-11").  Under EITF 06-11, a realized income tax benefit
from dividends or dividend equivalents that are charged to retained earnings and
are paid to employees for equity-classified  nonvested equity shares,  nonvested
equity share units and outstanding  equity share options should be recognized as
an  increase  in  additional  paid-in  capital.  This  EITF  is  to  be  applied
prospectively  to  the  income  tax  benefits  that  result  from  dividends  on
equity-classified   employee   share-based  payment  awards  that  are  declared
beginning  in 2008,  and  interim  periods  within  those  fiscal  years.  Early
application  is  permitted.  The Company  does not believe the  adoption of EITF
06-11  will  have a  material  impact  on its  financial  position,  results  of
operations or cash flows.

Business  Combinations  - In December  2007,  the FASB  issued SFAS No.  141(R),
"Business  Combinations,"  ("SFAS  141(R)") which replaces SFAS 141. SFAS 141(R)
establishes  principles  and  requirements  for how an  acquirer  in a  business
combination recognizes and measures in its financial statements the identifiable
assets  acquired,   the  liabilities  assumed,  and  any  controlling  interest;
recognizes and measures goodwill acquired in the business  combination or a gain
from a bargain  purchase;  and determines what information to disclose to enable
users of the financial  statements to evaluate the nature and financial  effects
of the business  combination.  FAS 141(R) is effective for  acquisitions  by the
Company taking place on or after January 1, 2009.  Early adoption is prohibited.
Accordingly,  a calendar  year-end  company is required  to record and  disclose
business  combinations  following existing  accounting guidance until January 1,
2009.  The  Company  will  assess the impact of SFAS 141(R) if and when a future
acquisition occurs.


                                       20
<PAGE>

Management's Report on Internal Control Over Financial Reporting

Management  of the  Company is  responsible  for  establishing  and  maintaining
adequate internal control over financial  reporting as defined in Rule 13a-15(f)
of the  Securities  Exchange Act of 1934 as amended (the  "Exchange  Act").  The
Company's  internal  control over financial  reporting is a process  designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with accounting  principles  generally accepted in the United States of America.
The Company's internal control over financial  reporting includes those policies
and  procedures  that  (1)  pertain  to the  maintenance  of  records,  that  in
reasonable   detail,   accurately  and  fairly  reflect  the   transactions  and
dispositions  of the Company's  assets;  (2) provide  reasonable  assurance that
transactions  are recorded as necessary to permit the  preparation  of financial
statements in accordance with generally accepted accounting  principles and that
receipts and  expenditures  of the Company are made only in accordance  with the
authorizations  of the  Company's  management  and  directors;  and (3)  provide
reasonable  assurance  regarding  prevention or timely detection of unauthorized
acquisition,  use or  disposition  of the  Company's  assets  that  could have a
material impact on the financial statements.

Under the supervision and with the  participation  of management,  including the
Chief Executive Officer and the Chief Financial  Officer,  the Company conducted
an evaluation of the effectiveness of internal control over financial  reporting
as of December 31, 2007 based on the criteria  established in a report  entitled
"Internal  Control -  Integrated  Framework"  promulgated  by the  Committee  of
Sponsoring  Organizations  of  the  Treadway  Commission  and  the  interpretive
guidance  issued by the  Securities  and  Exchange  Commission  in  Release  No.
34-55929.  Based on this  evaluation,  management  concluded  that the Company's
internal control over financial reporting was effective as of December 31, 2007.

This  annual  report  does not include an  attestation  report of the  Company's
independent  registered public  accounting firm regarding  internal control over
financial  reporting because  management's report was not subject to attestation
by the Company's  registered  public accounting firm pursuant to temporary rules
of the  Securities  and Exchange  Commission  that permit the Company to provide
only management's report in this annual report.


                                       21
<PAGE>


Report of Independent Registered Public Accounting Firm




The Shareholders and Board of Directors
    of GrandSouth Bancorporation

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
GrandSouth  Bancorporation  and Subsidiary as of December 31, 2007 and 2006, and
the related consolidated  statements of income,  changes in shareholders' equity
and  comprehensive  income,  and cash  flows for each of the three  years in the
period ended December 31, 2007. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material  respects,  the financial position of GrandSouth
Bancorporation  and Subsidiary as of December 31, 2007 and 2006, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended  December 31, 2007, in  conformity  with U. S.  generally  accepted
accounting principles.

         We were  not  engaged  to  examine  management's  assertion  about  the
effectiveness of GrandSouth  Bancorporation  and  Subsidiary's  internal control
over  financial  reporting as of December 31, 2007 included in the  accompanying
Management's   Report  on  Internal   Control  Over  Financial   Reporting  and,
accordingly, we do not express an opinion thereon.

/s/ Elliott Davis, LLC

Elliott Davis, LLC
Greenville, South Carolina
March 28, 2008



                                       22
<PAGE>


GRANDSOUTH BANCORPORATION
Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                       December 31,     December 31,
                                                                                                           2007             2006
                                                                                                           -----            ----
                                                                                                           (Dollars in thousands)
Assets
<S>                                                                                                     <C>               <C>
      Cash and due from banks .................................................................         $   4,585         $   6,145
      Federal funds sold ......................................................................             4,420            13,659
                                                                                                        ---------         ---------
          Cash and cash equivalents ...........................................................             9,005            19,804
      Securities available-for-sale ...........................................................            59,567            41,646
      Other investments, at cost ..............................................................               765               504
      Loans, net of allowance for loan losses of $2,943 for 2007 and
          $2,423 for 2006 .....................................................................           259,786           224,338
      Premises and equipment, net .............................................................             4,896             5,120
      Bank owned life insurance ...............................................................             4,753             4,576
      Assets acquired in settlement of loans ..................................................             1,752               149
      Interest receivable .....................................................................             2,313             1,770
      Deferred income taxes ...................................................................               544               427
      Goodwill ................................................................................               737               737
      Other assets ............................................................................             1,006             1,239
                                                                                                        ---------         ---------

              Total assets ....................................................................         $ 345,124         $ 300,310
                                                                                                        =========         =========

Liabilities
      Deposits
          Noninterest bearing .................................................................         $  15,037         $  15,215
          Interest bearing ....................................................................           290,602           253,708
                                                                                                        ---------         ---------
              Total deposits ..................................................................           305,639           268,923
      Short-term borrowings ...................................................................             5,000                 -
      Junior subordinated debentures ..........................................................             8,247             8,247
      Interest payable ........................................................................               754               685
      Other liabilities .......................................................................             3,017             2,985
                                                                                                        ---------         ---------
              Total liabilities ...............................................................           322,657           280,840
                                                                                                        ---------         ---------

Commitments and Contingencies - Note 10

Shareholders' equity
      Common stock - no par value; 20,000,000 shares authorized; issued and
          outstanding - 3,381,488 at December 31, 2007 and
          3,373,846 at December 31, 2006 ......................................................            19,200            19,054
      Retained earnings .......................................................................             3,083               554
      Accumulated other comprehensive income (loss) ...........................................               184              (138)
                                                                                                        ---------         ---------
              Total shareholders' equity ......................................................            22,467            19,470
                                                                                                        ---------         ---------

              Total liabilities and shareholders' equity ......................................         $ 345,124         $ 300,310
                                                                                                        =========         =========
</TABLE>

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


                                       23
<PAGE>

GRANDSOUTH BANCORPORATION
Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                                                   Years ended December 31,
                                                                                                   ------------------------
                                                                                            2007             2006             2005
                                                                                            ----             ----             ----
                                                                                           (Dollars in thousands, except per share)

Interest income
<S>                                                                                      <C>               <C>              <C>
      Interest and fees on loans ...............................................         $ 23,826          $ 21,338         $ 14,917
      Investment securities
      Taxable ..................................................................            2,052             1,510              843
      Nontaxable ...............................................................              351                66               14
      Dividends ................................................................               32                46               38
      Other, principally federal funds sold ....................................              583               651              311
                                                                                         --------          --------         --------
          Total interest income ................................................           26,844            23,611           16,123
                                                                                         --------          --------         --------

Interest expense
      Deposits .................................................................           13,311            10,045            5,720
      Short-term borrowings ....................................................               10               106              205
      Junior subordinated debt .................................................              599               690              575
                                                                                         --------          --------         --------
          Total interest expense ...............................................           13,920            10,841            6,500
                                                                                         --------          --------         --------

Net interest income ............................................................           12,924            12,770            9,623
Provision for loan losses ......................................................            1,045             1,110            1,125
                                                                                         --------          --------         --------
Net interest income after provision for loan losses ............................           11,879            11,660            8,498
                                                                                         --------          --------         --------

Noninterest income
      Service charges on deposit accounts ......................................              419               388              311
      (Loss) gain on sale of investment securities .............................              (24)                -               18
      Gain on sale of assets acquired in settlement of loans ...................                6               119                -
      Other ....................................................................              261               252              251
                                                                                         --------          --------         --------
          Total noninterest income .............................................              662               759              580
                                                                                         --------          --------         --------

Noninterest expenses
      Salaries and employee benefits ...........................................            4,956             4,628            3,095
      Premises and equipment ...................................................              827               796              647
      Data processing ..........................................................              494               408              336
      Insurance ................................................................              492               411              200
      Printing, postage and supplies ...........................................              229               222              140
      Professional fees ........................................................              573               347              332
      Miscellaneous loan expense ...............................................              193               153              483
      Other operating ..........................................................              398               433              329
                                                                                         --------          --------         --------
          Total noninterest expenses ...........................................            8,162             7,398            5,562
                                                                                         --------          --------         --------

Income before income taxes .....................................................            4,379             5,021            3,516
Income tax expense .............................................................            1,580             1,761            1,155
                                                                                         --------          --------         --------
Net income .....................................................................         $  2,799          $  3,260         $  2,361
                                                                                         ========          ========         ========

Per share*
      Net income ...............................................................         $   0.83          $   0.97         $   0.83
      Net income, assuming dilution ............................................             0.77              0.89             0.69
--------
</TABLE>
* Per share  amounts  have been  retroactively  adjusted  to reflect a 10% stock
dividend declared July 19, 2006.

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

                                       24
<PAGE>

GRANDSOUTH BANCORPORATION
Consolidated  Statements of Changes in  Shareholders'  Equity and  Comprehensive
Income

<TABLE>
<CAPTION>
                                                                    Common Stock
                                                                    ------------                          Accumulated
                                                           Number of                        Retained  Other Comprehensive
                                                             Shares           Amount        Earnings    Income (Loss)       Total
                                                             ------           ------        --------    -------------       -----
                                                                        (Dollars in thousands, except per share)
<S>                                                         <C>            <C>            <C>             <C>             <C>
Balance, January 1, 2005 .............................      2,382,357      $  10,840      $       -       $     (43)      $  10,797
                                                                                                                          ---------
Comprehensive income:
    Net income .......................................              -              -          2,361               -           2,361
                                                                                                                          ---------
    Unrealized holding gains and losses
      on available-for-sale securities
      arising during the period, net of
      income taxes of $180 ...........................              -              -              -            (307)           (307)
    Less: Reclassification adjustment for
      securities gains included in net income,
      net of income taxes of $7 ......................              -              -              -             (11)            (11)
                                                                                                                          ---------
          Total other comprehensive income ...........              -              -              -               -            (318)
                                                                                                                          ---------
            Total comprehensive income ...............              -              -              -               -           2,043
                                                                                                                          ---------
Conversion of subordinated debentures
    into common stock, including cash paid
    in lieu of issuing fractional shares .............        683,369          3,500             (2)              -           3,498
Cash dividend declared, $.07 per share* ..............              -              -           (210)              -            (210)
                                                            ---------      ---------      ---------       ---------       ---------
Balance, December 31, 2005 ...........................      3,065,726         14,340          2,149            (361)         16,128

Comprehensive income:
    Net income .......................................              -              -          3,260               -           3,260
                                                                                                                          ---------
    Unrealized holding gains and losses
      on available-for-sale securities
      arising during the period, net of
      income taxes of $141 ...........................              -              -              -             223             223
                                                                                                                          ---------
        Total other comprehensive income .............              -              -              -               -             223
                                                                                                                          ---------
          Total comprehensive income .................              -              -              -               -           3,483
                                                                                                                          ---------
Share-based compensation .............................              -            110              -               -             110
Issuance of 10% stock dividend, including
    cash payment for fractional shares ...............        306,166          4,592         (4,597)              -              (5)
Exercise of stock options ............................          1,954             12              -               -              12
Cash dividend declared, $.08 per share ...............              -              -           (258)              -            (258)
                                                            ---------      ---------      ---------       ---------       ---------
Balance, December 31, 2006 ...........................      3,373,846         19,054            554            (138)         19,470

Comprehensive income:
    Net income .......................................              -              -          2,799               -           2,799
                                                                                                                          ---------
    Unrealized holding gains and losses
      on available-for-sale securities
      arising during the period, net of
      income taxes of $157 ...........................              -              -              -             306             306
    Add: Reclassification adjustment for
      securities losses included in net income,
      net of income taxes of $8 ......................              -              -              -              16              16
                                                                                                                          ---------
    Total other comprehensive income .................              -              -              -               -             322
                                                                                                                          ---------
    Total comprehensive income .......................              -              -              -               -           3,121
                                                                                                                          ---------
Share-based compensation .............................              -            121              -               -             121
Exercise of stock options ............................          7,642             25              -               -              25
Cash dividend declared, $.08 per share ...............              -              -           (270)              -            (270)
                                                            ---------      ---------      ---------       ---------       ---------
Balance, December 31, 2007 ...........................      3,381,488      $  19,200      $   3,083       $     184       $  22,467
                                                            =========      =========      =========       =========       =========
</TABLE>

* Per share  amounts  have been  retroactively  restated  to reflect a 10% stock
dividend declared July 19, 2006.

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

                                       25
<PAGE>

GRANDSOUTH BANCORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                                    Years Ended December 31,
                                                                                                    ------------------------
                                                                                                2007           2006           2005
                                                                                                ----           ----           ----
                                                                                                      (Dollars in thousands)
Operating activities
<S>                                                                                          <C>            <C>            <C>
      Net income ......................................................................      $  2,799       $  3,260       $  2,361
      Adjustments to reconcile net income to net
          cash provided by operating activities
              Provision for loan losses ...............................................         1,045          1,110          1,125
              Writedowns of assets acquired in settlement of loans ....................             -             15            251
              Depreciation ............................................................           380            388            329
              Deferred income tax expense (benefit) ...................................          (282)           273           (361)
              Net securities (accretion) and premium amortization .....................             2             (6)            19
              Loss (gain) on sale of available-for-sale securities ....................            24              -            (18)
              Gain on sale or other disposition of fixed assets .......................             -            (14)            (1)
              (Gain) loss on sale of assets acquired in settlement of loans ...........            (6)          (119)             1
              Increase in cash surrender value of bank owned life insurance ...........          (177)          (168)          (161)
              Increase in interest receivable .........................................          (543)          (325)          (539)
              Increase (decrease) in interest payable .................................            69            170           (132)
              Decrease (increase) in prepaid expenses and other assets ................           231           (693)           307
              Increase in accrued expenses and other liabilities ......................            32          1,733            317
              Share-based compensation expense ........................................           121            110              -
                                                                                             --------       --------       --------
                  Net cash provided by operating activities ...........................         3,695          5,734          3,498
                                                                                             --------       --------       --------
Investing activities
      Purchases of available-for-sale securities ......................................       (37,310)       (21,338)       (16,046)
      Maturities and calls of available-for-sale securities ...........................        14,015          5,000              -
      Paydowns of available-for-sale mortgage-backed securities .......................         3,386          3,222          2,769
      Proceeds from sale of available-for-sale securities .............................         2,449              -            962
      Purchases of other investments ..................................................          (261)             -              -
      Proceeds of redemptions of other investments ....................................             -            294            157
      Investment in capital trust .....................................................             -           (247)             -
      Net increase in loans made to customers .........................................       (38,580)       (28,300)       (24,582)
      Purchases of premises and equipment .............................................          (156)        (1,151)        (1,101)
      Proceeds from sale of premises and equipment ....................................             -             37             22
      Proceeds from sale of assets acquired in settlement of loans ....................           490            749            309
      Cash equivalents acquired, net of payment for purchase acquisition ..............             -              -           (737)
                                                                                             --------       --------       --------
                  Net cash used by investing activities ...............................       (55,967)       (41,734)       (38,247)
                                                                                             --------       --------       --------
Financing activities
      Net increase in deposits ........................................................        36,716         47,262         45,515
      Net increase in short-term borrowings ...........................................         5,000              -              -
      Proceeds from Federal Home Loan Bank Advances ...................................             -              -         11,000
      Repayment of Federal Home Loan Bank Advances ....................................             -         (8,500)       (16,000)
      Proceeds from issuance of junior subordinated debentures ........................             -          8,247              -
      Proceeds from other borrowings ..................................................             -            100          3,900
      Repayment of other borrowings ...................................................             -         (4,000)        (2,500)
      Cash dividends paid .............................................................          (268)          (252)          (192)
      Payment of cash in lieu of fractional shares ....................................             -             (5)            (2)
      Exercise of stock options .......................................................            25             12              -
                                                                                             --------       --------       --------
                  Net cash provided by financing activities ...........................        41,473         42,864         41,721
                                                                                             --------       --------       --------
(Decrease) increase in cash and cash equivalents ......................................       (10,799)         6,864          6,972
Cash and cash equivalents, beginning ..................................................        19,804         12,940          5,968
                                                                                             --------       --------       --------
Cash and cash equivalents, ending .....................................................      $  9,005       $ 19,804       $ 12,940
                                                                                             ========       ========       ========
</TABLE>

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


                                       26
<PAGE>

GRANDSOUTH BANCORPORATION
Consolidated Statements of Cash Flows - continued
<TABLE>
<CAPTION>
                                                                                                   Years Ended December 31,
                                                                                                   ------------------------
                                                                                              2007            2006             2005
                                                                                              ----            ----             ----
                                                                                                    (Dollars in thousands)
Supplemental  Disclosure  of Cash Flow  Information
  Cash paid during the period for:
<S>                                                                                         <C>             <C>             <C>
          Interest ................................................................         $13,851         $10,671         $ 6,632
          Income taxes ............................................................           1,502           1,548           1,225
      Noncash investing and financing activities:
          Transfer of loans to assets acquired in settlement of loans .............           2,087             164             310
          Subordinated debentures converted into common stock .....................               -               -           3,500
          Dividends declared but unpaid ...........................................              69              67              61
          Other comprehensive income (loss), before tax ...........................             487             364            (505)
          Stock dividend ..........................................................               -           4,592               -
</TABLE>

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


Notes to Consolidated Financial Statements
GrandSouth Bancorporation

(Dollars in thousands, except per share data)

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

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

Basis of  presentation  - The  accounting  and  reporting  policies  conform  to
accounting  principles generally accepted in the United States of America and to
general  practices  within the banking  industry.  The Company  uses the accrual
basis of  accounting.  In certain  instances,  amounts  reported in prior years'
consolidated  financial  statements  have been  reclassified  to  conform to the
current  presentation.  Such  reclassifications  had  no  effect  on  previously
reported shareholders' equity or net income.

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

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  amounts of income and expenses  during the reporting  periods.  Actual
results could differ from those estimates.

                                       27
<PAGE>

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

In  addition  to  monitoring  potential  concentrations  of loans to  particular
borrowers or groups of borrowers,  industries and geographic regions, management
monitors exposure to credit risks that could arise from potential concentrations
of lending  products  and  practices  such as loans that  subject  borrowers  to
substantial  payment increases (e.g.,  principal  deferral  periods,  loans with
initial interest-only periods,  etc.), and loans with high loan-to-value ratios.
Additionally,  there are industry  practices  that could  subject the Company to
increased  credit risk should  economic  conditions  change over the course of a
loan's life.  For example,  the Company makes variable rate loans and fixed rate
principal-amortizing  loans with  maturities  prior to the loan being fully paid
(i.e.,  balloon payment loans).  These loans are  underwritten  and monitored to
manage  the  associated  risks.  Management  has  determined  that  there  is no
concentration of credit risk associated with its lending policies or practices.

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

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

     1.   Available-for-sale:  These are  securities  that are not classified as
          either held-to-maturity or as trading securities. These securities are
          reported at fair value which is determined using quoted market prices.
          Unrealized  gains and losses are  reported,  net of income  taxes,  as
          separate   components  of  shareholders'   equity  (accumulated  other
          comprehensive  income  (loss)).  Gains or  losses on  dispositions  of
          securities  are based on the  difference  between the net proceeds and
          the  adjusted  carrying  amounts  of the  securities  sold  using  the
          specific  identification method.  Premiums and discounts are amortized
          into interest income by a method that approximates a level yield.
     2.   Held-to-maturity:  These  are  securities  that  the  Company  has the
          ability and intent to hold until maturity. These securities are stated
          at cost,  adjusted for the  amortization of premiums and the accretion
          of discounts.  Premiums and discounts are included in interest  income
          using a method that  approximates  a level  yield.  The Company has no
          held-to-maturity securities.
     3.   Trading: These are securities that are bought and held principally for
          the  purpose of selling in the near  future.  Trading  securities  are
          reported at fair value,  and related  unrealized  gains and losses are
          recognized  in the  income  statement.  The  Company  has  no  trading
          securities.

Other investments - Other investments consist of Federal Home Loan Bank stock, a
restricted security, and are carried at cost. Management  periodically evaluates
this  stock  for  impairment  and  makes  any  appropriate   downward  valuation
adjustments when necessary.

Loans and interest  income on loans- Loans are stated at the  principal  balance
outstanding,  increased  or reduced  by  deferred  net loan  costs or fees.  The
allowance  for loan  losses is  deducted  from total  loans in the  consolidated
balance  sheets.  Loan  origination  and commitment fees and certain direct loan
origination costs (principally  salaries and employee benefits) are deferred and
amortized as an adjustment of the related loan's yield. Generally, these amounts
are amortized  over the  contractual  life of the related loans or  commitments.
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  nonaccrual  status when  principal  or interest
becomes ninety days past due, or when payment in full is not anticipated. When a
loan is placed on  nonaccrual  status,  interest  accrued  but not  received  is
generally  reversed against interest income. If collectibility is in doubt, cash
receipts on nonaccrual 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.

Allowance for loan losses - The  provision for loan losses  charged to operating
expense  reflects the amount  deemed  appropriate  by management to establish an
adequate  allowance to meet the present  estimated loss  characteristics  of the


                                       28
<PAGE>

current loan portfolio.  Management's  estimate is based on periodic and regular
evaluation of individual loans, the overall risk  characteristics of the various
portfolio segments,  past experience with losses, and prevailing and anticipated
economic  conditions.  Loans that are determined to be uncollectible are charged
against the  allowance.  The provision  for loan losses and  recoveries on loans
previously charged off are added to the allowance.

The  Company  accounts  for  impaired  loans in  accordance  with SFAS No.  114,
"Accounting by Creditors for Impairment of a Loan." This standard  requires that
all lenders  value  loans at the loan's  fair value if it is  probable  that the
lender will be unable to collect all amounts due in accordance with 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 recoveries
of any amounts previously charged off.

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

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

Bank owned life  insurance  - The Company has  entered  into  arrangements  that
provide  for  deferred  compensation  for  certain  officers.  Bank  owned  life
insurance  policies  provide an informal and indirect  method for funding  those
arrangements.  The  amounts  recorded  as  bank  owned  life  insurance  in  the
consolidated  balance sheets represent the cash surrender value of the policies.
The  deferred  compensation  liability is included in other  liabilities  at the
present value of the obligation.

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 fair value,
less  estimated  costs to sell, at the date of  foreclosure,  establishing a new
cost basis. Loan losses arising from the acquisition of such property as of that
date  are  charged  against  the  allowance  for  loan  losses.   Subsequent  to
foreclosure,  valuations are periodically performed by management and the assets
are  carried at the lower of the new cost basis or fair  value,  less  estimated
costs  to sell.  Revenues  and  expenses  from  operations  and  changes  in any
subsequent  valuation  allowance are included in other noninterest income in the
Consolidated  Statements  of Income.  The carrying  value of  foreclosed  assets
included in the balance  sheets was $1,752 and $149 as of December  31, 2007 and
2006, respectively.

Goodwill - Goodwill is evaluated  for  impairment on at least an annual basis by
comparing the fair value of the  operating  unit(s) from which it arose to their
carrying  value(s).  If the carrying value of an operating unit exceeds its fair
value,  the Company  considers  whether the implied fair value of the  goodwill,
determined using a discounted cash flow analysis,  exceeds the carrying value of
the  goodwill.  If the carrying  value of the goodwill  exceeds the implied fair
value of the goodwill, an impairment loss is recorded in an amount equal to that
excess. To date, the Company has not recorded any impairments of its goodwill.

Income taxes - The Company uses an asset and  liability  approach for  financial
accounting  and  reporting  of deferred  income  taxes.  Deferred tax assets and
liabilities  are  determined  based  on the  difference  between  the  financial
statement  and income tax bases of assets and  liabilities  as  measured  by the
currently  enacted  tax rates  which are  assumed  will be in effect  when these
differences reverse. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized,  a valuation  allowance is  recognized.
Deferred  income tax expense or credit is the result of changes in deferred  tax
assets and liabilities.

The Company  adopted the  provisions  of Financial  Accounting  Standards  Board
("FASB")  Interpretation  48 ("FIN 48"),  "Accounting  for Uncertainty in Income
Taxes,  an  Interpretation  of FASB  Statement  109," during  2007.  The Company
analyzed  its filing  positions in all open tax years in each of the federal and
state income tax  jurisdictions  where it is required to file income tax returns
and believes that those  positions  will more likely than not be sustained  upon
audit  by  the  taxing  authorities.  The  Company  anticipates  that  no  audit
adjustments by such  authorities will result in a material adverse impact on the
Company's financial condition,  results of operations or cash flows.  Therefore,


                                       29
<PAGE>

no reserves for uncertain income tax adjustments have been recorded  pursuant to
FIN 48.  The  adoption  of FIN 48 had no  effect on the  Company's  consolidated
financial statements.


Advertising  and  public  relations  expense - The  Company  generally  expenses
advertising and promotion costs as they are 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 share - Net  income  per share is  computed  on the basis of the
weighted average number of common shares outstanding in accordance with SFAS No.
128,  "Earnings  per Share." The  treasury  stock  method is used to compute the
effect of stock  options and  convertible  subordinated  debentures  outstanding
during 2005 on the weighted  average  number of common  shares  outstanding  for
diluted earnings per share. On July 19, 2006, the Company declared a ten percent
stock dividend.  Per share and share amounts have been retroactively restated to
reflect the effects of this stock dividend on 2005 amounts.

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

Retirement  plan - The  Company  has a  salary  reduction  profit  sharing  plan
pursuant to Section 401(k) of the Internal  Revenue Code as more fully described
in Note 14. The Company also sponsors  certain  supplemental  benefits that were
provided to certain  executive  officers by the Board of Directors  in 2001,  as
more fully described in Note 14.

Fair values of financial  instruments  - SFAS No. 107,  "Disclosures  About Fair
Values of Financial Instruments," requires disclosures of fair value information
for financial instruments, whether or not recognized in the consolidated balance
sheets,  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  and  other
nonfinancial  instruments  such as property and  equipment  and other assets and
liabilities. See Note 17 for fair value disclosures.

Risks  and  uncertainties  - In  the  normal  course  of  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  reprice  or  mature  at  different  times,  or on
different bases, than its  interest-earning  assets.  Credit risk is the risk of
default on the Company's loan and investment  securities portfolios that results
from a borrower's  inability or  unwillingness  to make  contractually  required
payments.  Market risk reflects  changes in the value of  collateral  underlying
loans receivable and the valuation of real estate held by the Company.

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

Share-Based  Compensation - The Company has a share-based employee  compensation
plan, which is described more fully in Note 15.  Effective  January 1, 2006, the
Company  adopted  Statement of Financial  Accounting  Standards No. 123 (revised
2004) ("SFAS 123(R)")"  Share-Based  Payment." Prior to adoption of SFAS 123(R),
the Company  accounted  for those plans under the  recognition  and  measurement
principles of Accounting  Principles  Board ("APB") Opinion No. 25,  "Accounting
for Stock Issued to Employees," and related interpretations.  Accordingly, prior
to  adoption of SFAS  123(R),  no  share-based  employee  compensation  cost was
reflected  in net  income,  as all  options  granted  under  those  plans had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant.

The  following  table  illustrates  the  effect on net income and net income per
share as if the Company had applied  the fair value  recognition  provisions  of
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting for
Stock-Based Compensation," to stock-based employee compensation awarded in 2005.
Per share amounts and weighted average shares  outstanding have been restated to
reflect the 10% stock dividend declared as of July 19, 2006.


                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                                                                         Year ended
                                                                                                       December 31, 2005
                                                                                                       -----------------
                                                                                                    (Dollars in thousands,
                                                                                                     except per share amounts)
<S>                                                                                                         <C>
Net income, as reported .........................................................................           $ 2,361
Add:  Share-based compensation expense included in
                  net income, net of income tax effects .........................................                 -
Deduct:  Total share-based employee compensation
                  expense determined under fair value based method
                  for all awards, net of related income tax effects .............................              (124)
                                                                                                            -------
                  Pro forma net income - basic ..................................................             2,237
Add:  Interest savings, net of tax, on weighted average
                 incremental shares assumed on conversion of
                 subordinated debentures ........................................................                73
                                                                                                            -------
Pro forma net income ............................................................................           $ 2,310
                                                                                                            =======

Net income per common share
Basic - as reported .............................................................................           $   .83
                                                                                                            =======
Basic - pro forma ...............................................................................           $   .79
                                                                                                            =======

Diluted - as reported ...........................................................................           $   .69
                                                                                                            =======
Diluted - pro forma .............................................................................           $   .65
                                                                                                            =======
</TABLE>

Comprehensive  Income - Comprehensive  income consists of net income or loss for
the current period and other comprehensive income, defined as income,  expenses,
gains and  losses  that  bypass  the  consolidated  statement  of income and are
reported directly in a separate  component of shareholders'  equity. The Company
classifies and reports items of other  comprehensive  income  according to their
nature, reports total comprehensive income or loss in the consolidated statement
of changes in shareholders' equity and displays the accumulated balance of other
comprehensive  income or loss separately in the shareholders'  equity section of
the consolidated balance sheet. See Note 16 for further discussion.


NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required by  regulation to maintain  average cash reserve  balances,
computed by applying  prescribed  percentages  to its various types of deposits,
either at the Bank or in an account  maintained  with the Federal  Reserve Bank.
The average amounts of the cash reserve  balances  required at December 31, 2007
and 2006 were approximately $287 and $168, respectively.


NOTE 3 - INVESTMENT SECURITIES

The aggregate amortized cost and estimated fair values of securities, as well as
gross unrealized gains and losses of securities were as follows:

                                       31
<PAGE>

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                                  ------------
                                                                   2007                                      2006
                                                                   ----                                      ----
                                                             Gross     Gross                            Gross     Gross
                                                          Unrealized Unrealized Estimated            Unrealized Unrealized Estimated
                                               Amortized    Holding   Holding     Fair     Amortized   Holding    Holding     Fair
                                                  Cost       Gains     Losses     Value      Cost       Gains      Losses     Value
                                                  ----       -----     ------     -----      ----       -----      ------     -----
                                                                               (Dollars in thousands)
Available-for-sale
<S>                                             <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
      Government-sponsored
          enterprises (GSEs) ...............    $19,250    $   296    $     2    $19,544    $22,500    $    72    $   103    $22,469
      State, county and
          municipal ........................     13,406         32        149     13,289      3,332         23         16      3,339
      Mortgage-backed
          securities
          issued by GSEs ...................     26,633        266        165     26,734     16,023         79        264     15,838
                                                -------    -------    -------    -------    -------    -------    -------    -------
             Total .........................    $59,289    $   594    $   316    $59,567    $41,855    $   174    $   383    $41,646
                                                =======    =======    =======    =======    =======    =======    =======    =======
</TABLE>

Securities issued by  government-sponsored  enterprises include debt instruments
issued by the Federal Home Loan Banks,  Federal Home Loan Mortgage Company,  and
the Federal National Mortgage Association. The amortized cost and estimated fair
value of securities by contractual maturity are shown below. 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.


                                                        December 31, 2007
                                                        -----------------
                                                       Available-for-sale
                                                  Amortized        Estimated
                                                     Cost          Fair Value
                                                     ----          ----------
                                                      (Dollars in thousands)

Due within one year ...........................     $ 3,105         $ 3,116
Due after one through five years ..............      13,737          13,898
Due after five through ten years ..............       9,557           9,565
Due after ten years ...........................      32,890          32,988
                                                    -------         -------
                                                    $59,289         $59,567
                                                    =======         =======

The estimated  fair values and gross  unrealized  losses of all of the Company's
investment  securities whose estimated fair values were less than amortized cost
as  of  December  31,  2007  and  2006  which  had  not  been  determined  to be
other-than-temporarily  impaired,  are presented below. The securities have been
aggregated  by  investment  category  and the  length  of time  that  individual
securities have been in a continuous unrealized loss position.

                                       32
<PAGE>

<TABLE>
<CAPTION>
                                                                                   December 31, 2007
                                                                                   -----------------
                                                             Continuously in Unrealized Loss Position for a Period of
                                                             --------------------------------------------------------
                                                   Less than 12 Months             12 Months or more                 Total
                                                   -------------------             -----------------                 -----
                                                 Estimated     Unrealized     Estimated      Unrealized     Estimated     Unrealized
Available-for-sale                               Fair Value        Loss       Fair Value        Loss        Fair Value        Loss
                                                 ----------        ----       ----------        ----        ----------        ----
                                                                                (Dollars in thousands)
<S>                                               <C>            <C>            <C>            <C>            <C>            <C>
Government-sponsored
enterprises (GSEs) .......................        $     -        $     -        $   998        $     2        $   998        $     2
State, county and
municipal securities .....................          6,955            117          1,634             32          8,589            149
Mortgage-backed securities
issued by GSEs ...........................          3,021             29          8,579            136         11,600            165
                                                  -------        -------        -------        -------        -------        -------
                     Total ...............        $ 9,976        $   146        $11,211        $   170        $21,187        $   316
                                                  =======        =======        =======        =======        =======        =======
</TABLE>
<TABLE>
<CAPTION>
                                                                                   December 31, 2006
                                                                                   -----------------
                                                             Continuously in Unrealized Loss Position for a Period of
                                                             --------------------------------------------------------
                                                   Less than 12 Months             12 Months or more                 Total
                                                   -------------------             -----------------                 -----
                                                 Estimated     Unrealized     Estimated      Unrealized     Estimated     Unrealized
Available-for-sale                               Fair Value        Loss       Fair Value        Loss        Fair Value        Loss
                                                 ----------        ----       ----------        ----        ----------        ----
                                                                                (Dollars in thousands)
<S>                                               <C>            <C>            <C>            <C>            <C>            <C>
Government-sponsored
  enterprises (GSEs) .....................        $     -        $     -        $11,404        $   103        $11,404        $   103
State, county and
municipal securities .....................          1,946             16              -              -          1,946             16
Mortgage-backed securities
issued by GSEs ...........................            823              4          9,891            260         10,714            264
                                                  -------        -------        -------        -------        -------        -------
                     Total ...............        $ 2,769        $    20        $21,295        $   363        $24,064        $   383
                                                  =======        =======        =======        =======        =======        =======
</TABLE>
At December 31, 2007, 18 securities had been  continuously in an unrealized loss
position for less than 12 months and 21 securities had been  continuously  in an
unrealized  loss  position for 12 months or more.  The Company does not consider
these investments to be  other-than-temporarily  impaired because the unrealized
losses  resulted  primarily  from higher  interest  rates and there have been no
downgrades  of the  credit  ratings of the  issuers.  The  contractual  terms of
securities issued by  government-sponsored  enterprises do not permit the issuer
to settle the securities at a price less than the face amount of the securities.
Although the Company classifies its investment securities as available-for-sale,
management has not determined  that any specific  securities will be disposed of
prior to  maturity  and  believes  that the Company has both the ability and the
intent to hold those investments until a recovery of fair value, including until
maturity.  Also,  there have been no significant  adverse  changes in the credit
ratings of any of the security issuers that would indicate that the Company will
be unable to collect all principal and interest amounts according to contractual
terms.  Substantially  all  of  the  issuers  of  state,  county  and  municipal
securities held were rated at least  "investment  grade" as of December 31, 2007
and 2006.

The Bank is a member of the  Federal  Home Loan Bank of  Atlanta  ("FHLB")  and,
accordingly,  is required to own restricted stock in that institution in amounts
that may vary from time to time. Because of the restrictions  imposed, the stock
may not be sold to  other  parties,  but is  redeemable  by the FHLB at the same
price as that at which it was acquired by the Bank.  The Company  evaluates this
security for impairment based on the probability of ultimate  recoverability  of
the recorded amount of the investment.  No impairment has been recognized  based
on this evaluation.

During 2007, the Company sold available-for-sale securities with amortized costs
totaling  $2,473 for proceeds of $2,449,  resulting in gross realized  losses of
$24. The income tax provision credited to expense applicable to the net realized
losses was $8.  During  2006,  the Company  did not sell any  available-for-sale
securities.  During 2005, the Company sold  available-for-sale  securities  with
amortized costs totaling $944 for proceeds of $962,  resulting in gross realized
gains of $20 and gross realized  losses of $2. The income tax provision  charged
to expense  applicable  to the net  realized  gains of $18 was $7. There were no
transfers of available-for-sale  securities to other categories in 2007, 2006 or
2005.

At December 31, 2007 and 2006,  securities  with a carrying  value of $2,199 and
$2,227,  respectively,  were pledged as collateral to secure public deposits and
other purposes.

                                       33
<PAGE>

NOTE 4 - LOANS

Loans consisted of the following:

                                                             December 31,
                                                          2007            2006
                                                          ----            ----
                                                        (Dollars in thousands)

Commercial, financial and agricultural .........      $  44,640       $  35,783
Real estate- construction ......................         84,458          65,096
Real estate - mortgage .........................        128,633         120,673
Installment loans to individuals ...............          4,998           5,209
                                                      ---------       ---------
      Loans, gross .............................        262,729         226,761
Allowance for possible loan losses .............         (2,943)         (2,423)
                                                      ---------       ---------
      Loans - net ..............................      $ 259,786       $ 224,338
                                                      =========       =========

At  December  31,  2007 and 2006,  nonaccrual  loans  totaled  $1,127  and $834,
respectively.  The gross interest income that would have been recorded under the
original terms of the nonaccrual  loans was $164, $318 and $96 in 2007, 2006 and
2005,  respectively.  The average amounts of impaired loans were $1,255,  $2,171
and $3,338 for 2007, 2006 and 2005, respectively.  Interest income recognized on
impaired loans was $34, $68, and $172 in 2007, 2006 and 2005, respectively.  The
Bank had no  loans  with  payments  past due  ninety  days or more and  accruing
interest as of December  31, 2007 and 2006.  Variable  rate and fixed rate loans
totaled $147,186 and $115,543, respectively, at December 31, 2007.

Following is a summary of the Company's impaired loans:

                                                                  December 31,
                                                                  ------------
                                                                2007       2006
                                                                ----       ----
                                                          (Dollars in thousands)
Impaired loans
      No valuation allowance required ......................    $  184    $  790
      Valuation allowance required .........................       990       358
                                                                ------    ------
          Total impaired loans .............................    $1,174    $1,148
                                                                ======    ======

Allowance for loan losses on impaired loans at year end ....    $  391    $  199
                                                                ======    ======

There were no irrevocable  commitments to lend additional funds to debtors owing
amounts on impaired loans at December 31, 2007.

Transactions in the allowance for loan losses are summarized below:

                                                   Years Ended December 31,
                                                   ------------------------
                                              2007          2006           2005
                                              ----          ----           ----
                                                   (Dollars in thousands)

Balance at January 1 .................      $ 2,423       $ 3,050       $ 2,293
Provision charged to expense .........        1,045         1,110         1,125
Recoveries ...........................          804           442           115
Charge-offs ..........................       (1,329)       (2,179)         (483)
                                            -------       -------       -------
Balance at December 31 ...............      $ 2,943       $ 2,423       $ 3,050
                                            =======       =======       =======

                                       34
<PAGE>

NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consisted of the following:

                                                                December 31,
                                                                ------------
                                                           2007            2006
                                                           ----            ----
                                                          (Dollars in thousands)

Land and land improvements .......................       $ 1,214        $ 1,214
Building and leasehold improvements ..............         3,743          3,728
Furniture and equipment ..........................         1,765          1,638
Vehicles .........................................           298            284
                                                         -------        -------
      Total ......................................         7,020          6,864
Accumulated depreciation .........................        (2,124)        (1,744)
                                                         -------        -------
      Premises and equipment, net ................       $ 4,896        $ 5,120
                                                         =======        =======

Depreciation  expense for the years ended  December 31, 2007,  2006 and 2005 was
$380,  $388,  and $329,  respectively.  Estimated  useful  lives and  methods of
depreciation for the principal items follow:

Type of Asset                        Life in Years        Depreciation Method
-------------                        -------------        -------------------
Software                             3                    Straight-line
Furniture and equipment              5 to 7               Straight-line
Buildings and improvements           5 to 40              Straight-line
Vehicles                             3                    Straight-line

NOTE 6 - DEPOSITS

A summary of deposits follows:

                                                                December 31,
                                                                ------------
                                                             2007          2006
                                                             ----          ----
                                                          (Dollars in thousands)

Noninterest bearing demand ...........................     $ 15,037     $ 15,215
Interest bearing:
     Demand accounts .................................        5,312        3,224
     Money market accounts ...........................       99,496       82,538
     Savings .........................................          607          571
                                                           --------     --------
                                                            120,452      101,548
                                                           --------     --------
Time certificates of deposit, less than $100,000 .....      101,671       91,165
Time certificates of deposit, $100,000 and over ......       83,516       76,210
                                                           --------     --------
                                                            185,187      167,375
                                                           --------     --------
        Total deposits ...............................     $305,639     $268,923
                                                           ========     ========

Interest expense on time deposits greater than $100,000 was $4,182,  $3,294, and
$2,226 in 2007, 2006 and 2005, respectively.  Brokered deposits were $16,857 and
$18,393 as of December 31, 2007 and 2006, respectively.

As of December 31, 2007 and 2006, $17 and $27, respectively, of overdrawn demand
deposit balances were reclassified as loans.

At December 31, 2007, the scheduled maturities of time deposits are as follows:

                                       35
<PAGE>

                Year                        Amount
                ----                        ------
                                        (Dollars in thousands)

                 2008                        $ 150,436
                 2009                           23,676
                 2010                            7,703
                 2011                            1,775
                 2012                            1,594
           Thereafter                                3
                                             ---------
                 Total time deposits         $ 185,187
                                             =========

NOTE 7 - SHORT-TERM BORROWINGS

Short-term  borrowings  as of  December  31, 2007  consist of advances  from the
Federal  Home Loan Bank of  Atlanta  ("FHLB"),  repayable  on  January  2, 2008.
Short-term FHLB advances are secured as discussed in Note 8.

The following table presents information about short-term FHLB advances for each
of the years indicated.

<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                               ------------------------
                                                                                     2007                 2006             2005
                                                                                     ----                 ----             ----
                                                                                              (Dollars in thousands)
<S>                                                                               <C>                 <C>                <C>
Outstanding at end of period .........................................            $ 5,000             $       -          $ 8,500
Weighted average rate, end of period .................................               4.40%                 0.00%            4.34%
Maximum amount outstanding at any month end ..........................            $ 5,000             $   8,500          $16,500
Average amount outstanding during the period .........................            $   169             $   6,905          $11,392
Weighted average rate during the period ..............................               5.92%                 4.36%            4.03%
</TABLE>

As of December 31, 2007,  the banking  subsidiary had unused  short-term  credit
accommodations available from unrelated banks which allow the banking subsidiary
to purchase up to $9,400 of federal  funds.  These lines of credit are available
generally on a one to fourteen day basis for general  corporate  purposes of the
Bank and impose  various  other  conditions.  The  lenders  reserve the right to
withdraw the lines at their option.


NOTE 8 - LONG-TERM DEBT

At December 31, 2007, the Bank had unused credit  availability  under the FHLB's
blanket  lien  agreement  of up to  $19,740  under  the  FHLB's  various  credit
programs,  subject to pledging  and other  requirements.  The amount of eligible
collateral  instruments  available  as  of  December  31,  2007  to  secure  any
additional FHLB borrowings totaled approximately $33,051.


NOTE 9 - CAPITAL TRUST AND JUNIOR SUBORDINATED DEBENTURES

On May 3, 2006,  the Company  sponsored  the  creation  of a Delaware  statutory
trust,  GrandSouth  Capital  Trust I, (the "Trust") and is the sole owner of the
$247 of common securities issued by the Trust. On May 10, 2006, the Trust issued
$8,000 in floating rate capital securities.  The proceeds of this issuance,  and
the amount of the Company's  investment in the common  securities,  were used to
acquire  $8,247  principal   amount  of  the  Company's   floating  rate  junior
subordinated debt securities due in 2036 ("Debentures").  These securities,  and
the accrued  interest  thereon,  now  constitute  the Trust's sole  assets.  The
interest rate associated with the debt securities,  and the distribution rate on
the common  securities of the Trust,  is  adjustable  quarterly at 3 month LIBOR
plus 185 basis  points  (6.73% at  December  31,  2007).  The  Company may defer
interest payments on the Debentures for up to 20 consecutive  quarters,  but not
beyond the stated  maturity of the  Debentures.  In the event that such interest
payments are deferred by the Company,  the Trust may defer  distributions on the
capital and common securities. In such an event, the Company would be restricted
in  its  ability  to pay  dividends  on  its  common  stock  and  perform  under
obligations that are not senior to the Debentures.

The Debentures  are redeemable at par at the option of the Company,  in whole or
in part, on any interest  payment date on or after June 23, 2011.  Prior to that
date,  the Debentures are redeemable at par plus a premium of up to 4.40% of par


                                       36
<PAGE>

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

Junior subordinated debentures consisted of:

<TABLE>
<CAPTION>
                                                                                                                   December 31,
                                                                                                                   ------------
                                                                                                               2007            2006
                                                                                                               ----            ----
                                                                                                              (Dollars in thousands)

<S>                                                                                                           <C>             <C>
Junior Subordinated Debt due to Unconsolidated Trust (1),
  dated May 10, 2006 maturing May 10, 2036, with variable
  interest rate based on 3-month LIBOR .............................................................          $8,247          $8,247
                                                                                                              ======          ======
</TABLE>
(1) Securities qualify as Tier 1 capital under the regulatory risk-based capital
guidelines, subject to certain limitations.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

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

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

The future minimum lease payments due under the current  operating leases are as
follows:

                             Year                             Amount
                             ----                             ------
                                                        (Dollars in thousands)

                             2008                              $  23
                             2009                                 23
                             2010                                 23
                             2011                                 23
                             2012                                 23
                        Thereafter                               195
                                                               -----
                                  Total                        $ 310
                                                               =====

NOTE 11 - 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
revenues and expense for tax and financial reporting purposes:

                                       37
<PAGE>

<TABLE>
<CAPTION>
                                                                                                     Years Ended December 31,
                                                                                                     ------------------------
                                                                                                  2007           2006         2005
                                                                                                  ----           ----         ----
                                                                                                      (Dollars in thousands)
Current
<S>                                                                                              <C>           <C>          <C>
     Federal ..............................................................................      $ 1,717       $ 1,323      $ 1,400
     State ................................................................................          145           165          116
                                                                                                 -------       -------      -------
             Total current ................................................................        1,862         1,488        1,516

Deferred
     Federal provision (benefit) ..........................................................         (282)          273         (361)
                                                                                                 -------       -------      -------
             Total income tax expense .....................................................      $ 1,580       $ 1,761      $ 1,155
                                                                                                 =======       =======      =======
</TABLE>

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

                                                                December 31,
                                                                ------------
                                                              2007        2006
                                                              ----        ----
                                                          (Dollars in thousands)
Deferred tax assets
     Allowance for loan losses ...........................   $   628    $   412
     Nonaccrual loan interest ............................        32         57
     Unrealized net holding losses on
       available-for-sale securities .....................         -         71
     State net operating loss carryforward ...............       113         80
     Writedown of assets acquired in settlement of loans .         -          -
     Deferred compensation ...............................       109        108
     Other ...............................................       147          5
                                                             -------    -------
             Gross deferred tax assets ...................     1,029        733
     Valuation allowance .................................      (113)       (80)
                                                             -------    -------
             Total .......................................       916        653
                                                             -------    -------

Deferred tax liabilities
     Unrealized net holding gains on
       available-for-sale securities .....................        94          -
     Accelerated depreciation ............................       171        191
     Other ...............................................       107         35
                                                             -------    -------
             Gross deferred tax liabilities ..............       372        226
                                                             -------    -------
Net deferred income tax assets ...........................   $   544    $   427
                                                             =======    =======

The  valuation  allowance  is related  to the  Company's  stand-alone  state net
operating  loss  carryforwards.  The portion of the change in net  deferred  tax
assets or liabilities which is related to unrealized holding gains and losses on
available-for-sale   securities  is  charged  or  credited   directly  to  other
comprehensive  income or loss.  The  balance of the change in net  deferred  tax
assets is charged or credited  to income tax  expense.  In 2007,  2006 and 2005,
$165 was charged,  $141 was  credited,  and $187 was charged,  respectively,  to
other  comprehensive  income or loss. In 2007, 2006 and 2005, $282 was credited,
$273 was charged, and $361 was credited, respectively, to income tax expense.

The  provision  for  income  taxes is  reconciled  to the  amount of income  tax
computed at the federal  statutory  rate of 34% on income before income taxes as
follows:

                                       38
<PAGE>

<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                                          ------------------------
                                                                                 2007                  2006                   2005
                                                                                 ----                  ----                   ----
                                                                                           (Dollars in thousands)

<S>                                                                           <C>                    <C>                    <C>
Tax expense at statutory rate .................................               $ 1,489                $ 1,707                $ 1,196
State income tax, net of federal
     income tax benefit .......................................                    96                    107                     77
Tax-exempt interest income ....................................                  (119)                   (22)                    (5)
Bank-owned life insurance increase ............................                   (60)                   (57)                   (55)
Other, net ....................................................                   174                     26                    (58)
                                                                              -------                -------                -------
             Total ............................................               $ 1,580                $ 1,761                $ 1,155
                                                                              =======                =======                =======
</TABLE>

NOTE 12 - RELATED PARTY TRANSACTIONS

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

                                                               Years ended
                                                               December 31,
                                                               ------------
                                                          2007              2006
                                                          ----              ----
                                                       (Dollars in thousands)

Balance, beginning of year ...................         $ 2,946          $ 1,646
New loans ....................................             611            1,924
Less - loan payments .........................          (1,130)            (624)
                                                       -------          -------
Balance, end of year .........................         $ 2,427          $ 2,946
                                                       =======          =======

Deposits of directors and their related  interests at December 31, 2007 and 2006
approximated $2,140 and $1,425, respectively.

During the third quarter of 2007,  the  Company's  Chief  Executive  Officer and
Chairman  of the  Board  purchased  from  the Bank a 100%  participation  in two
nonaccrual loans of an unaffiliated  borrower totaling $811. Interest of $33 was
collected in connection with the sale of the  participation  interest.  The Bank
has made no commitments or entered into any other  agreements that would make it
contingently liable to repurchase the participated interest.

The Company leases land from a relative of a director, shareholder and executive
officer of the Company (see Note 10). Lease expenses charged to operations under
these arrangements totaled $9, $9 and $10 in 2007, 2006 and 2005, respectively.


NOTE 13 - 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 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
sheets.  The  contract  amounts  of those  instruments  reflect  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 statndby
letters  of  credit  is  represented  by  the   contractual   amounts  of  those
instruments.  The Bank uses the same credit  policies in making  commitments and


                                       39
<PAGE>

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,  2007  and  2006,  unfunded
commitments  to extend credit were $76,874 and $71,053,  respectively.  The Bank
evaluates each customer's credit worthiness on a case-by-case  basis. The amount
of  collatereal  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,  and commercial and residential real estate. At December 31, 2007 and
2006,  there  were  outstanding  letters  of credit  totaling  $897 and  $1,318,
respectively.


NOTE 14 - EMPLOYEE BENEFIT PLAN

The Bank sponsors the GrandSouth  Bank Profit  Sharing  Section 401(k) Plan (the
"Plan")  for  the  benefit  of all  eligible  employees.  The  Bank  contributes
seventy-five  percent of the first four percent of the  employee's  compensation
contributed to the Plan.  Contributions  made to the Plan in 2007, 2006 and 2005
were $118, $67 and $56, respectively.

In 2001,  supplemental  benefits  were  approved by the Board of  Directors  for
certain  executive  officers of the Bank. These benefits are not qualified under
the Internal Revenue Code and they are not funded.  However,  certain funding is
provided informally and indirectly by life insurance policies owned by the Bank.
The Company recorded net expense related to these benefits of $4, $61 and $61 in
2007, 2006 and 2005, respectively.


NOTE 15 - STOCK OPTION PLAN

During 1998, the Board of Directors approved a stock option plan for the benefit
of the  directors,  officers  and  employees.  The Board may grant up to 856,028
options (after the shareholders  approved an amendment to increase the number of
shares in the plan at the 2005 Annual  Meeting)  at an exercise  price per share
not less than the fair market value on the date of grant. All options granted to
directors,  officers and employees  vest 20 percent each year for five years and
expire  10 years  from the grant  date.  The  related  compensation  expense  is
recognized over the vesting period.  The Company measures the fair value of each
option award on the date of grant using the Black-Scholes  option-pricing  model
with the following  assumptions  used for awards granted in 2007, 2006 and 2005,
as indicated in the following table:

                                                     Years Ended December 31,
                                                     ------------------------
                                                    2007       2006       2005
                                                    ----       ----       ----
Assumptions:
Dividend yield ...............................      0.72%      0.64%      0.89%
Weighted average risk-free interest rate .....      4.55%      5.04%      4.24%
Weighted average expected volatility .........     60.30%     31.14%     20.09%
Weighted average expected life in years ......      6.00       8.00       8.00

Weighted average grant date fair value ....... $    6.35  $    5.42  $    2.79

The Company determines the assumptions used in the Black-Scholes  option-pricing
model as follows:  the dividend yield is based on the historical  dividend yield
of the Company's stock, adjusted to reflect the expected dividend yield over the
expected life of the option,  the  risk-free  interest rate is based on the U.S.
Treasury yield curve in effect at the time of the grant;  volatility is based on
historical  volatility adjusted to reflect the ways in which current information
indicates  that the future is reasonably  expected to differ from the past;  and
the simplified method of Staff Accounting  Bulletin 107 was used to estimate the
average life.

The following table summarizes the activity during 2007 related to stock options
awarded by the Company:

                                       40
<PAGE>

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31, 2007
                                                                                   ----------------------------
                                                                                                       Weighted Average
                                                                                          Weighted         Remaining
                                                                                      Average Exercise   Contrctual Life  Intrinsic
                                                                       Shares          Price Per Share       (Years)         Value
                                                                       ------          ---------------       -------         -----
                                                                                (Dollars in thousands, except per share)
<S>                                                                   <C>                 <C>                  <C>          <C>
Outstanding at beginning of year ........................             472,038             $    5.53
Granted .................................................              25,000                 14.84
Exercised ...............................................              (7,642)                 3.25
Forfeited or expired ....................................                   -                     -
                                                                      -------
Outstanding at end of year ..............................             489,396             $    6.04            4.19         $  2,221
                                                                      =======                                               ========

Options outstanding .....................................             489,396             $    6.04            4.19         $  2,221
  and expected to vest

Options exercisable at year-end .........................             361,115             $    4.56            2.89         $  2,065
</TABLE>

The weighted  average grant date fair values of options granted in 2007 and 2006
were  $6.35 and  $5.42,  respectively.  The  total  intrinsic  value of  options
exercised in 2007 and 2006 was $57 and $33, respectively.

As of December 31, 2007, total  compensation costs of unvested options that have
not yet been recognized were $471. Those  compensation  costs will be recognized
over the remaining weighted average vesting period of 1.7 years.

Intrinsic value is calculated in the aggregate for shares  granted,  outstanding
and exercisable by taking the closing price of the Company's  common stock as of
December   31,   2007,   as  reported  by  the  OTCBB,   and   subtracting   the
weighted-average exercise price of the respective category of stock option. That
result is then multiplied by the number of options outstanding.

Intrinsic value for shares  exercised  represents the closing price of the stock
on the date of exercise as reported by the OTCBB less the actual  exercise price
of the options exercised  multiplied by the number of options  exercised.  These
intrinsic  values  are  calculated  for each  exercise  during  the year and the
resulting total is presented.

All share and per share  values have been  retroactively  restated for all stock
dividends since the date the options were granted. The Company issues authorized
but unissued shares to satisfy option exercises.  As of December 31, 2007, there
were 358,990 shares available for grant under the Plan.


NOTE 16 - SHAREHOLDERS' EQUITY

Restrictions on Subsidiary Dividends, Loans or Advances - South Carolina banking
regulations restrict the amount of dividends that banks can pay to shareholders.
Any of the banking subsidiary's  dividends to the parent company which exceed in
amount the subsidiary's  current  year-to-date  earnings ($3,226 at December 31,
2007) are subject to the prior  approval of the South Carolina  Commissioner  of
Banking.  Therefore,  $25,221 of the  Company's  equity in the net assets of the
Bank was restricted as of December 31, 2007. In addition,  dividends paid by the
banking  subsidiary  to the parent  company  would be  prohibited  if the effect
thereof would cause the Bank's  capital to be reduced below  applicable  minimum
capital  requirements.  Under Federal Reserve Board regulations,  the amounts of
loans  or  advances  from the  banking  subsidiary  to the  parent  company  are
generally  limited to 10% of the Bank's  capital  stock and surplus on a secured
basis.  Furthermore,   in  the  event  that  interest  payments  on  the  junior
subordinated  debentures  (see Note 9) are deferred by the Company,  the Company
would be restricted in its ability to pay dividends on its common stock.

Stock Dividends - The Company's Board of Directors declared a 10% stock dividend
on July 19, 2006. All per share information has been  retroactively  adjusted to
give effect to the stock dividend.

Accumulated  Other  Comprehensive  Income  (Loss) - As of December  31, 2007 and
2006,  accumulated other comprehensive  income (loss) included as a component of
shareholders' equity in the consolidated balance sheets consisted of accumulated
changes in the  unrealized  holding  gains and  (losses)  on  available-for-sale
securities, net of income tax effects, amounting to $322 and $223 respectively.

                                       41
<PAGE>

Earnings  per Share - Net income  per share and net  income per share,  assuming
dilution, were computed as follows:

<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                                               ------------------------
                                                                                      2007               2006               2005
                                                                                      ----               ----               ----
                                                                                    (Dollars in thousands, except per share amounts)
Net income per share, basic
<S>                                                                                 <C>                <C>                <C>
Numerator - net income ....................................................         $    2,799         $    3,260         $    2,361
                                                                                    ==========         ==========         ==========
Denominator
Weighted average common shares
issued and outstanding ....................................................          3,373,909          3,372,065          2,840,528
                                                                                    ==========         ==========         ==========

Net income per share, basic ...............................................         $      .83         $      .97         $      .83
                                                                                    ==========         ==========         ==========


Net income per share, assuming dilution
Numerator
Net income, as reported ...................................................         $    2,799         $    3,260         $    2,361
Add:  Interest savings, net of tax, on weighted average
incremental shares assumed on conversion of
subordinated debentures ...................................................                  -                  -                 73
                                                                                    ----------         ----------         ----------
Net income (2007 and 2006) and pro forma net income (2005) ................         $    2,799         $    3,260         $    2,434
                                                                                    ==========         ==========         ==========
Denominator
Weighted average common shares
issued and outstanding ....................................................          3,373,909          3,372,065          2,840,528
Effect of assumed conversion of subordinated debentures ...................                  -                  -            532,356
Effect of dilutive stock options ..........................................            251,042            281,784            168,001
                                                                                    ----------         ----------         ----------
                 Total shares .............................................          3,624,951          3,653,849          3,540,885
                                                                                    ==========         ==========         ==========

Net income per share, assuming dilution ...................................         $      .77         $      .89         $      .69
                                                                                    ==========         ==========         ==========
</TABLE>

Weighted average common shares outstanding have been  retroactively  restated to
reflect a 10% stock dividend declared on July 19, 2006.

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company and its banking  subsidiary to maintain  minimum amounts and
ratios set forth in the table  below of Total and Tier 1 Capital,  as defined in
the regulations,  to risk weighted assets, as defined, and of Tier 1 Capital, as
defined, to average assets, as defined.  Management believes, as of December 31,
2007 and 2006,  that the Company and its  subsidiary  bank  exceeded all capital
adequacy minimum requirements.

As of December 31, 2007, the most recent  notification from the FDIC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective  action.  To be  categorized  as well  capitalized  as defined in the
Federal Deposit  Insurance Act, the Bank must maintain minimum total risk-based,
Tier 1 risk-based,  and Tier 1 leverage ratios as set forth in the table.  There
are no conditions or events since that  notification  that  management  believes
have changed the Bank's category.  Bank holding  companies with higher levels of
risk, or that are experiencing or anticipating  significant growth, are expected


                                       42
<PAGE>

by the  Federal  Reserve  to  maintain  capital  well  above the  minimums.  The
Company's and Bank's actual capital amounts and ratios are also presented in the
table.

<TABLE>
<CAPTION>
                                                                                   Minimum for                     Minimum to be
                                                          Actual                 Capital Adequacy                Well Capitalized
                                                          ------                 ----------------                ----------------
                                                  Amount          Ratio         Amount          Ratio          Amount         Ratio
                                                  ------          -----         ------          -----          ------         -----
December 31, 2007                                                             (Dollars in thousands)
     Tier 1 Capital (to Average Assets)
<S>                                              <C>               <C>         <C>                <C>         <C>             <C>
         Company ..............................  $ 28,850           8.4%       $ 13,750           4.0%              NA            NA
         GrandSouth Bank ......................    27,526           8.6%         12,869           4.0%        $ 16,087          5.0%

     Tier 1 Capital (to Risk Weighted Assets)
         Company ..............................  $ 28,850          10.1%       $ 11,414           4.0%              NA            NA
         GrandSouth Bank ......................    27,526           9.6%         11,432           4.0%        $ 17,148          6.0%

     Total Capital (to Risk Weighted Assets)
         Company ..............................  $ 32,489          11.4%       $ 22,828           8.0%              NA            NA
         GrandSouth Bank ......................    30,469          10.7%         22,864           8.0%        $ 28,580         10.0%

December 31, 2006
     Tier 1 Capital (to Average Assets)
         Company ..............................  $ 26,079           9.3%       $ 11,199           4.0%              NA            NA
         GrandSouth Bank ......................    25,200           8.5%         11,812           4.0%        $ 14,765          5.0%

     Tier 1 Capital (to Risk Weighted Assets)
         Company ..............................  $ 26,079          10.7%        $ 9,788           4.0%              NA            NA
         GrandSouth Bank ......................    25,200          10.3%          9,777           4.0%        $ 14,666          6.0%

     Total Capital (to Risk Weighted Assets)
         Company ..............................  $ 30,031          12.3%       $ 19,576           8.0%              NA            NA
         GrandSouth Bank ......................    27,623          11.3%         19,555           8.0%        $ 24,443         10.0%
</TABLE>

NOTE 17 - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

SFAS No. 107,  "Disclosures  about Fair  Values of  Financial  Instruments,"  as
amended, requires disclosure of the estimated fair value of on-balance sheet and
off-balance sheet financial  instruments.  A financial  instrument is defined by
SFAS No.  107 as cash,  evidence  of an  ownership  interest  in an  entity or a
contract  that creates a  contractual  obligation or right to deliver or receive
cash or  another  financial  instrument  from a  second  entity  on  potentially
favorable or unfavorable terms.

Fair  value  estimates  are made at a specific  point in time based on  relevant
market  information  about the  financial  instrument.  These  estimates  do not
reflect any premium or discount  that could result from offering for sale at one
time the Company's  entire  holdings of a particular  financial  instrument.  No
active  trading  market  exists  for a  significant  portion  of  the  Company's
financial  instruments.  Fair value estimates for these instruments are based on
management's  judgments  regarding  future  expected  loss  experience,  current
economic conditions, risk characteristics of various financial instruments,  and
other   factors.   These   estimates  are   subjective  in  nature  and  involve
uncertainties  and  matters of  significant  judgment  and  therefore  cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.

Fair value  estimates are based on existing  on-and-off  balance sheet financial
instruments  without  attempting  to estimate  the value of  anticipated  future
business  and the  value of  assets  and  liabilities  that  are not  considered
financial instruments.  Significant assets and liabilities that are specifically
excluded  from the  disclosure  requirements  include net  deferred  tax assets,
interest  receivable and payable,  assets acquired in settlement of loans,  bank
owned life insurance,  goodwill, other assets and liabilities,  and premises and
equipment.  In addition, the income tax ramifications related to the realization
of the unrealized  gains and losses can have a significant  effect on fair value
estimates and have not been considered in the estimates.

The following methods and assumptions were used by the Company in estimating the
fair values of its financial instruments:

For cash and due  from  banks  and  federal  funds  sold,  the  carrying  amount
approximates fair value because these instruments generally mature in 90 days or
less.

                                       43
<PAGE>

The fair value of debt securities issued by government-sponsored  enterprises is
estimated based on published closing quotations. The fair value of state, county
and municipal  securities is generally not available from published  quotations;
consequently,  their fair values estimates are based on matrix pricing or quoted
market prices of similar  instruments  adjusted for credit  quality  differences
between the quoted  instruments and the securities being valued.  Fair value for
mortgage-backed securities is estimated primarily using dealers' quotes.

The fair value of other investments approximates the carrying amount.

Fair values are estimated for loans using  discounted cash flow analyses,  using
interest  rates  currently  offered  for loans  with  similar  terms and  credit
quality.  The Company  does not engage in  originating,  holding,  guaranteeing,
servicing or investing in loans where the terms of the loan product give rise to
a concentration of credit risk.

The fair value of deposits with no stated maturity  (noninterest bearing demand,
interest  bearing demand and money market  accounts and savings) is estimated as
the  amount  payable  on  demand,  or  carrying  amount.  The fair value of time
deposits is estimated  using a  discounted  cash flow  calculation  that applies
rates currently offered to aggregate expected maturities.

The  fair  values  of the  Company's  short-term  borrowings  approximate  their
carrying amounts.

The fair values of variable rate long-term debt instruments are estimated at the
carrying amount.

The estimated fair values of  off-balance-sheet  financial  instruments  such as
loan  commitments  and standby  letters of credit are generally  based upon fees
charged to enter into  similar  agreements,  taking into  account the  remaining
terms  of the  agreements  and the  counterparties'  creditworthiness.  The vast
majority  of the  banking  subsidiary's  loan  commitments  do not  involve  the
charging of a fee,  and fees  associated  with  outstanding  standby  letters of
credit are not material. For loan commitments and standby letters of credit, the
committed  interest rates are either  variable or approximate  current  interest
rates offered for similar commitments.  Therefore,  the estimated fair values of
these off-balance-sheet financial instruments are nominal.

The following is a summary of the carrying  amounts and estimated fair values of
the Company's financial assets and liabilities:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------
                                                                              2007                               2006
                                                                              ----                               ----
                                                                     Carrying       Estimated           Carrying       Estimated
                                                                      Amount        Fair Value           Amount        Fair Value
                                                                    of Assets       of Assets          of Assets       of Assets
                                                                   (Liabilities)   (Liabilities)      (Liabilities)   (Liabilities)
                                                                   -------------   -------------      -------------   -------------
                                                                                          (Dollars in thousands)
Financial Assets:
<S>                                                                <C>                <C>                <C>                <C>
Cash and due from banks ................................           $  4,585           $  4,585           $  6,145           $  6,145
Federal funds sold .....................................              4,420              4,420             13,659             13,659
Securities available-for-sale ..........................             59,567             59,567             41,646             41,646
Other investments ......................................                765                765                504                504
Loans, net .............................................            259,786            259,911            224,338            224,206

Financial Liabilities:
Deposits ...............................................            305,639            306,514            268,923            268,737
Short-term borrowings ..................................              5,000              5,000                  -                  -
Long-term debt .........................................              8,247              8,247              8,247              8,247
</TABLE>

<TABLE>
<CAPTION>
                                                                    Notional          Estimated           Notional       Estimated
                                                                     Amount           Fair Value           Amount        Fair Value
                                                                     ------           ----------           ------        ----------
Off-balance-sheet commitments
<S>                                                                 <C>                  <C>              <C>                <C>
Loan commitments .......................................            $76,874              $ -              $71,053            $ -
Standby letters of credit ..............................                897                -                1,318              -
</TABLE>



                                       44
<PAGE>


RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Impact of Recent Accounting Changes

Fair Value  Measurements - The  provisions of Statement of Financial  Accounting
Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements," are effective for
fiscal  years  beginning  after  November  15,  2007  (January  1,  2008 for the
Company). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles,  and expands disclosures
about fair value measurements. This standard eliminates inconsistencies found in
various  prior   pronouncements   but  does  not  require  any  new  fair  value
measurements. The adoption of SFAS No. 157 in 2008 will not impact the Company's
accounting measurements but it is expected to result in additional disclosures.

Fair  Value  Option - The  provisions  of  Statements  of  Financial  Accounting
Standards No. 159 ("SFAS No. 159") , "The Fair Value Option for Financial Assets
and Financial  Liabilities  Including an Amendment of FASB  Statement  115," are
effective for fiscal years  beginning  after  November 15, 2007 (January 1, 2008
for the Company).  This Statement  provides an entity the option to measure many
financial instruments and certain other items at fair value. Changes in the fair
values of items  for  which the  option  is  selected  will be  recorded  in the
entity's earnings.  The objective is to improve financial  reporting by allowing
entities  to  mitigate  the  earnings  volatility  that  has  resulted  from the
previously required application of different measurement  attributes without the
need to apply complex hedge accounting  provisions.  The Company has not elected
to apply the Statement's  provisions to any items held as of January 1, 2008 and
does not currently  expect that it will apply the Statement's  provisions to any
items acquired  subsequently.  Therefore,  the adoption of the Statement in 2008
has  not  had,  and is  not  expected  to  have,  any  effect  on the  Company's
consolidated financial statements.

Accounting  for  Uncertainty  in Income  Taxes - In June 2006,  the FASB  issued
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes," to
clarify the  accounting and  disclosure  for  uncertainty  in tax positions,  as
defined.  FIN 48 seeks to reduce  the  diversity  in  practice  associated  with
certain aspects of the  recognition  and  measurement  related to accounting for
income taxes. The Company  implemented the provisions of FIN 48 as of January 1,
2007,  and  has  analyzed  filing  positions  in all of the  federal  and  state
jurisdictions  where it is required to file income tax  returns,  as well as all
open tax years in these jurisdictions.  The Company believes that its income tax
filing  positions  taken or expected to be taken in an its tax returns will more
likely than not be sustained upon audit by the taxing  authorities  and does not
anticipate any adjustments  that will result in a material adverse impact on the
Company's financial condition,  results of operations,  or cash flow. Therefore,
no reserves for uncertain  income tax positions  have been recorded  pursuant to
FIN 48. In addition,  the Company did not record a cumulative  effect adjustment
related to the adoption of FIN 48.

Accounting for Bank Owned Life Insurance - In September  2006, the FASB ratified
the  consensuses  reached  by the FASB's  Emerging  Issues  Task Force  ("EITF")
relating  to  EITF  06-4,   "Accounting  for  the  Deferred   Compensation   and
Postretirement  Benefit  Aspects  of  Endorsement  Split-Dollar  Life  Insurance
Arrangements"  ("EITF  06-4").  Entities  purchase  life  insurance  for various
reasons  including  protection  against  loss  of  key  employees  and  to  fund
postretirement   benefits.   The  two  most  common  types  of  life   insurance
arrangements are endorsement  split dollar life and collateral  assignment split
dollar life. EITF 06-4 covers the former and EITF 06-10 (discussed below) covers
the latter.  EITF 06-4 states that entities with endorsement  split-dollar  life
insurance  arrangements  that  provide a benefit to an employee  that extends to
postretirement  periods  should  recognize  a liability  for future  benefits in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," (if, in substance,  a postretirement  benefit plan exists)
or Accounting  Principles Board ("APB") Opinion No. 12, "Omnibus  Opinion--1967"
(if the  arrangement  is, in  substance,  an  individual  deferred  compensation
contract).  Entities should recognize the effects of applying this Issue through
either  (a)  a  change  in  accounting  principle  through  a  cumulative-effect
adjustment to retained  earnings or to other  components of equity or net assets
in the  statement  of  financial  position  as of the  beginning  of the year of
adoption  or  (b)  a  change  in  accounting  principle  through   retrospective
application  to all prior  periods.  EITF 06-4 is  effective  for the Company on
January 1, 2008.  The Company  does not  believe the  adoption of EITF 06-4 will
have a material impact on its financial position,  results of operations or cash
flows.

In  September  2006,  the FASB  ratified  the  consensus  reached  on EITF 06-5,
"Accounting for Purchases of Life  Insurance--Determining  the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4,  Accounting for
Purchases of Life Insurance" ("EITF 06-5"). EITF 06-5 states that a policyholder
should consider any additional  amounts included in the contractual terms of the
insurance  policy other than the cash surrender  value in determining the amount
that could be realized under the insurance contract.  EITF 06-5 also states that
a policyholder should determine the amount that could be realized under the life
insurance   contract   assuming   the   surrender  of  an   individual-life   by
individual-life  policy (or certificate by certificate in a group policy).  EITF
06-5 is  effective  for the  Company on January 1, 2008.  The  Company  does not
believe the adoption of EITF 06-5 will have a material  impact on its  financial
position, results of operations or cash flows.

                                       45
<PAGE>

In  March  2007,  the  FASB  ratified  the  consensus  reached  on  EITF  06-10,
"Accounting for Collateral Assignment  Split-Dollar Life Insurance Arrangements"
("EITF 06-10"). The postretirement  aspect of this EITF is substantially similar
to EITF 06-4 discussed above and requires that an employer recognize a liability
for the postretirement  benefit related to a collateral assignment  split-dollar
life insurance  arrangement in accordance  with either FASB Statement No. 106 or
APB Opinion No. 12, as  appropriate,  if the  employer  has agreed to maintain a
life insurance  policy during the employee's  retirement or provide the employee
with a death benefit based on the  substantive  agreement with the employee.  In
addition,  a consensus was reached that an employer should recognize and measure
an  asset  based  on the  nature  and  substance  of the  collateral  assignment
split-dollar life insurance arrangement. EITF 06-10 is effective for the Company
on January 1, 2008. The Company does not believe the adoption of EITF 06-10 will
have a material impact on its financial position,  results of operations or cash
flows.

Accounting for Income Tax Benefits of Dividends on Share-Based  Payment Awards -
In June 2007,  the FASB ratified the consensus  reached by the EITF with respect
to EITF 06-11,  "Accounting  for Income Tax Benefits of Dividends on Share-Based
Payment Awards" ("EITF 06-11").  Under EITF 06-11, a realized income tax benefit
from dividends or dividend equivalents that are charged to retained earnings and
are paid to employees for equity-classified  nonvested equity shares,  nonvested
equity share units and outstanding  equity share options should be recognized as
an  increase  in  additional  paid-in  capital.  This  EITF  is  to  be  applied
prospectively  to  the  income  tax  benefits  that  result  from  dividends  on
equity-classified   employee   share-based  payment  awards  that  are  declared
beginning  in 2008,  and  interim  periods  within  those  fiscal  years.  Early
application  is  permitted.  The Company  does not believe the  adoption of EITF
06-11  will  have a  material  impact  on its  financial  position,  results  of
operations or cash flows.

Business  Combinations  - In December  2007,  the FASB  issued SFAS No.  141(R),
"Business  Combinations,"  ("SFAS  141(R)") which replaces SFAS 141. SFAS 141(R)
establishes  principles  and  requirements  for how an  acquirer  in a  business
combination recognizes and measures in its financial statements the identifiable
assets  acquired,   the  liabilities  assumed,  and  any  controlling  interest;
recognizes and measures goodwill acquired in the business  combination or a gain
from a bargain  purchase;  and determines what information to disclose to enable
users of the financial  statements to evaluate the nature and financial  effects
of the business  combination.  FAS 141(R) is effective for  acquisitions  by the
Company taking place on or after January 1, 2009.  Early adoption is prohibited.
Accordingly,  a calendar  year-end  company is required  to record and  disclose
business  combinations  following existing  accounting guidance until January 1,
2009.  The  Company  will  assess the impact of SFAS 141(R) if and when a future
acquisition occurs.



                                       46
<PAGE>


NOTE 19 - GRANDSOUTH BANCORPORATION (PARENT COMPANY ONLY)


                                                                 December 31,
                                                                 ------------
                                                              2007         2006
                                                              ----         ----
                                                          (Dollars in thousands)
Condensed Balance Sheets
     Assets
         Cash ............................................    $   343    $   350
         Investment in banking subsidiary ................     28,447     25,799
         Due from subsidiary .............................        968        848
         Investment in capital trust .....................        247        247
         Deferred tax asset ..............................        787        549
                                                              -------    -------
            Total assets .................................    $30,792    $27,793
                                                              =======    =======
     Liabilities
         Other liabilities ...............................    $    78    $    76
         Junior subordinated debt ........................      8,247      8,247
     Shareholders' equity ................................     22,467     19,470
                                                              -------    -------
            Total liabilities and shareholders' equity ...    $30,792    $27,793
                                                              =======    =======


<TABLE>
<CAPTION>
                                                                                                Years Ended December 31,
                                                                                                ------------------------
                                                                                         2007             2006               2005
                                                                                         ----             ----               ----
                                                                                                  (Dollars in thousands)
Condensed Statements of Income
     Income
<S>                                                                                     <C>               <C>               <C>
         Dividends received from banking subsidiary ..........................          $   900           $     -           $     -
         Other income ........................................................               18                12                 -
                                                                                        -------           -------           -------
            Total income .....................................................              918                12                 -
                                                                                        -------           -------           -------
     Expenses
         Interest expense ....................................................              599               495               320
         Other expenses ......................................................               84                76                67
                                                                                        -------           -------           -------
            Total expenses ...................................................              683               571               387
                                                                                        -------           -------           -------
     Income before income taxes and equity in
         undistributed earnings of banking subsidiary ........................              235              (559)             (387)
     Income tax benefit ......................................................             (238)             (188)             (142)
     Equity in undistributed earnings of banking subsidiary ..................            2,326             3,631             2,606
                                                                                        -------           -------           -------
     Net income ..............................................................          $ 2,799           $ 3,260           $ 2,361
                                                                                        =======           =======           =======
</TABLE>


                                       47
<PAGE>

<TABLE>
<CAPTION>
                                                                                                      Years Ended December 31,
                                                                                                      ------------------------
                                                                                                2007           2006            2005
                                                                                                ----           ----            ----
                                                                                                       (Dollars in thousands)
Condensed Statements of Cash Flows
     Operating activities
<S>                                                                                           <C>            <C>            <C>
         Net income ...................................................................       $ 2,799        $ 3,260        $ 2,361
            Adjustments to reconcile net income to net
                cash provided (used) by operating activities
                    Deferred income taxes .............................................          (238)          (175)          (132)
                    Other liabilities .................................................             -             28             50
                    Share-based compensation ..........................................           121            110              -
                    Increase in due from subsidiary ...................................          (120)          (111)          (841)
                    Equity in undistributed net income of
                    banking subsidiary ................................................        (2,326)        (3,631)        (2,606)
                                                                                              -------        -------        -------
                      Net cash provided provided by (used for)
                         operating activities .........................................           236           (519)        (1,168)
                                                                                              -------        -------        -------
     Investing activities
         Investment in banking subsidiary .............................................             -         (3,050)          (200)
         Investment in capital trust ..................................................             -           (247)             -
                                                                                              -------        -------        -------
                      Net cash used for investing activities ..........................             -         (3,297)          (200)
                                                                                              -------        -------        -------
     Financing activities
         Proceeds of issuance of junior subordinated debentures .......................             -          8,247              -
         Proceeds from other borrowings ...............................................             -            100          1,400
         Repayments of other borrowings ...............................................             -         (4,000)             -
         Exercise of stock options ....................................................            25             12              -
         Cash dividends paid ..........................................................          (268)          (252)          (192)
         Cash paid in lieu of fractional shares .......................................             -             (5)            (2)
                                                                                              -------        -------        -------
                      Net cash (used for) provided by financing activities ............          (243)         4,102          1,206
                                                                                              -------        -------        -------
     (Decrease) increase in cash and cash equivalents .................................            (7)           286           (162)
     Cash and cash equivalents, beginning .............................................           350             64            226
                                                                                              -------        -------        -------
     Cash and cash equivalents, ending ................................................       $   343        $   350        $    64
                                                                                              =======        =======        =======


Supplemental Schedule of Non-Cash Investing and Financing Activities
Dividends declared but unpaid .........................................................       $    69        $    67        $    61
                                                                                              =======        =======        =======
Subordinated debentures converted into common stock ...................................       $     -        $     -        $ 3,500
                                                                                              =======        =======        =======
Stock dividend ........................................................................       $     -        $ 4,592        $     -
                                                                                              =======        =======        =======
</TABLE>

                                       48