# UNITED STATES SECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-KSB

| | Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
| | ------------------------------------------------------------------------------

| | For the fiscal year ended December 31, 2006
| | -------------------------------------------

| | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
| | ----------------------------------------------------------------------------------
| | For the transition period from __________ to ________                             

Commission File Number
333-117053

| | CommunitySouth Bancshsares, Inc. | 
| | -------------------------------- | 

| | (Name of small business issuer in its charter) | 
| | ---------------------------------------------- | 

|South Carolina                    |  | 20-0934786         
|--------------------------------- |  | -------------------
|(State or other jurisdiction      |  | (I.R.S. Employer   
|of incorporation or organization) |  | Identification No.)

|6602 Calhoun Memorial Highway            |  |           
|---------------------------------------- |  | ----------
|Easley, South Carolina                   |  | 29640     
|(Address of Principal Executive Offices) |  | (Zip Code)

Issuers telephone number:  (864) 306-2540

Securities registered pursuant to Section 12(b) of the Act: None

Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share

Check whether the issuer (1) filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days.      
Yes          No

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

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

The issuers revenues for the
year ended December 31, 2006 were $15,527,799.

The aggregate market value of the
common equity stock held by non-affiliates (shareholders holding less than 5% of an outstanding
class of stock, excluding directors and executive officers), as of March 23, 2007, was
approximately $62.2 million. This calculation was based on the closing price of
our common stock on March 23, 2007 of $15.50.

The number of shares outstanding of
the issuers common stock was 4,698,697 at March 23, 2007.

# DOCUMENTS INCORPORATED
BY REFERENCE

|                                                       | 
|------------------------------------------------------ | 
|Annual Report to Shareholders for the                  | 
|Year Ended December 31, 2006                           | 
|                                                       | 
|Proxy Statement for the Annual Meeting of Shareholders | 
|to be held on May 15, 2007                             | 

Transitional Small Business Disclosure Format.  (Check one):      
Yes          No

---

# Part I

# Item 1.   Description of
Business.

This
report contains statements which constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These statements are based on many assumptions and estimates and are not
guarantees of future performance. Our actual results may differ materially from those
anticipated in any forward-looking statements, as they will depend on many factors about
which we are unsure, including many factors which are beyond our control. The words
may, would, could, will,
expect, anticipate, believe, intend,
plan, and estimate, as well as similar expressions, are meant to
identify such forward-looking statements. Potential risks and uncertainties that could
cause our actual results may differ materially from those anticipated in any
forward-looking statements include, but are not limited to those described below under
Risk Factors and the following:

| |  | significant increases in
competitive pressure in the banking and financial services industries;
| | - | -----------------------------------------------------------------------------------------------

| |  | changes in the interest rate environment which could reduce anticipated or actual margins;
| | - | ------------------------------------------------------------------------------------------

| |  | changes in political conditions or the legislative or regulatory environment;
| | - | -----------------------------------------------------------------------------

| |  | general economic conditions, either nationally or regionally and especially in our primary service area,
becoming less favorable than expected resulting in, among other things, a deterioration in credit
quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------

| |  | changes in technology;
| | - | ----------------------

| |  | changes in monetary and tax policies;
| | - | -------------------------------------

| |  | the level of allowance for loan loss;
| | - | -------------------------------------

| |  | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------

| |  | the rates of loan growth;
| | - | -------------------------

| |  | adverse changes in asset quality and resulting credit risk-related losses and expenses;
| | - | ---------------------------------------------------------------------------------------

| |  | loss of consumer confidence and economic disruptions resulting from terrorist
activities;
| | - | -----------------------------------------------------------------------------------------

| |  | changes in the securities markets; and
| | - | --------------------------------------

| |  | other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------

# General

CommunitySouth
Bancshares, Inc. was incorporated in South Carolina in March 2004 for purposes of
operating as a bank holding company. Our wholly-owned subsidiary, CommunitySouth Bank
& Trust, commenced business on January 18, 2005, and is primarily engaged in the
business of accepting savings, demand, and time deposits and providing mortgage, consumer
and commercial loans to the general public.

# Marketing Focus

Most
of the banks in Anderson, Greenville, Pickens and Spartanburg Counties are now local
branches of large regional banks. Although size gives the larger banks certain advantages
in competing for business from large corporations, including higher lending limits and the
ability to offer services in all of South Carolina, we believe we have a niche in the
community banking market in our market area. As a result, we generally do not attempt to
compete for the banking relationships of large corporations, but concentrate our efforts
on small- to medium-sized businesses and professional concerns. The bank advertises to
emphasize the companys local ownership, community bank nature, and ability to
provide more personalized service than its competition.

2

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# Location and Service Area

Our
main office is located at 6602 Calhoun Memorial Highway, Easley, South Carolina 29640. Our
telephone number is (864) 306-2540. Our site is approximately 1.2 acres in size, and the
building is approximately 10,000 square feet. We have four full service branch sites in
addition to the main office. The branch sites are in the towns of Anderson, Greer, Mauldin
and Spartanburg, South Carolina. Our full service branches service the entire upstate of
South Carolina, which we refer to as the Upstate, but primarily the counties
of Anderson, Greenville, Pickens and Spartanburg.

Pickens
County is located in the northwest portion of South Carolina along the I-85 corridor
between Atlanta, Georgia and Charlotte, North Carolina. Manufacturing is the countys
primary source of economic growth with approximately 150 facilities located in the
surrounding area. With its access to applied automobile materials research and technology
at Clemson University and location in the automobile hub of the southeast, the area is
also developing a reputation among leaders in the automobile industry. Major employers in
the area include Clemson University, Pickens County Schools, Aramark Campus, Inc., Alice
Manufacturing Company, and Palmetto Health Alliance. The Pickens County Commerce Park, a
new 310 acre industrial park with 6,000 feet of prime frontage on US Highway 123, should
also generate additional jobs, housing, and continued growth in the area.

Anderson
County is located in the northwest portion of South Carolina along the I-85 corridor west
of Pickens county. With over 230 manufacturers, including 22 international companies, in
the county, Anderson has a thriving business climate. Significant industries in Anderson
include manufacturers of automotive products, plastics, metal products, industrial
machinery, publishing and textiles. There are more than 27 BMW suppliers in the Upstate,
which is recognized internationally as an automotive supplier hub. The plastics industry
has a strong presence in the Upstate with 244 plastics companies located within the 10
counties of the northwest corner of SC. Anderson County, in particular, has 11 automotive
suppliers and is a major player in the plastics industry with 27 plastics companies
located within its borders

Greenville
County is located in the northwest portion of South Carolina, also along the I-85 corridor
between Atlanta and Charlotte, east of Pickens county. It is South Carolinas most
populous county with over 407,000 residents. Greenville is also one of the states
wealthiest counties, with average household income of $61,023 in 2004. In the time period
from 2001 to 2005 Greenville County has attracted more than $2.4 billion in new business
investments and 8,125 new jobs and is now considered the centerpiece of the region
considered to be the economic engine of South Carolina. In 2002, the
Greenville metropolitan area was ranked fifth out of Americas top 50 cities for
European business expansion. Greenville county is the home to more corporate headquarters
than any other region in South Carolina.

Spartanburg
County is also located in the northwest portion of South Carolina along the I-85
boom belt of the Upstate. Spartanburgs economic history is rooted in
agriculture and textiles. Today, the county is an internationally recognized business and
cultural center. More than 90 international firms representing 15 nations have joined the
business community. BMW Manufacturing Corporation, Milliken & Company, Extended Stay
America, and Dennys are just a few of the companies that call Spartanburg home. The
most well known of these companies is BMW, which began its assembly operation in
Spartanburg in 1994 and today is the sole producer of the Z4 and X5 vehicles for worldwide
distribution. Currently, BMW employs approximately 2,000 workers. The amenities and
opportunities Spartanburg County offers are wide-ranging from housing, education,
healthcare, shopping, recreation, and culture. We believe these factors make the quality
of life in the area attractive. Additionally, Spartanburgs mild climate and location
and access to the mountains, the coast, and larger cities such as Atlanta and Charlotte
add to the attractiveness of the area. The growth in the manufacturing base is
complemented by the countys population growth, which is expected to increase from
its current level of 254,000 to 282,000 in 2010.

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# Lending Activities

General.
          We emphasize a range of lending services, including real estate, commercial, and
          equity-line and consumer loans to individuals, small- to medium-sized
          businesses, and professional concerns that are located in or conduct a
          substantial portion of their business in our banks market area.

Real
Estate Loans. These loans generally fall into one of two categories: construction real
estate loans or mortgage loans. Each of these categories is discussed in more detail
below, including their specific risks. Interest rates for all categories may be fixed or
adjustable. We generally charge an origination fee for each loan.

Real
estate loans are subject to the same general risks as other loans. Real estate loans are
also sensitive to fluctuations in the value of the real estate securing the loan. On first
and second mortgage loans, we generally do not advance more than regulatory limits. We
require a valid mortgage lien on all real property loans along with a title lien policy
which insures the validity and priority of the lien. We also require borrowers to obtain
hazard insurance policies and flood insurance, if applicable. Additionally, certain types
of real estate loans have specific risk characteristics that vary according to the
collateral type securing the loan and the terms and repayment sources for the loan.

We
have the ability to originate some real estate loans for sale into the secondary market.
We can limit our interest rate and credit risk on these loans by locking the interest rate
for each loan with the secondary investor and receiving the investors underwriting
approval prior to originating the loan.

| |  | Real Estate Loans  Mortgage. Mortgage real estate loans generally have terms
of five years or less, although payments may be structured on a longer amortization basis.
Inherent in mortgage real estate loans credit risk is the risk that the primary
source of repayment, the operating commercial real estate company or residential borrower,
will be insufficient to service the debt. If a real estate loan is in default, we also run
the risk that the value of the real estate securing the loan will decrease, and thereby be
insufficient to satisfy the loan. To mitigate these risks, we evaluate each borrower on an
individual basis and attempt to determine its business risks and credit profile. We
attempt to reduce credit risk in the real estate portfolio by emphasizing loans on
owner-occupied office/residential and retail buildings where the loan-to-value ratio is
established by independent appraisals. We typically review the personal financial
statements of the principal owners/borrower and require their personal guarantees. These
reviews often reveal secondary sources of payment and liquidity to support a loan request. | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Real Estate Loans  Construction.We offer adjustable and fixed rate
residential and commercial construction loans to builders and developers and to consumers
who wish to build their own home. The term of construction and development loans generally
is limited to 18 months, although payments may be structured on a longer amortization
basis. Most loans mature and require payment in full upon the sale of the property.
Construction loans generally carry a higher degree of risk than long term financing of
existing properties. Repayment usually depends on the ultimate completion of the project
within cost estimates and on the sale of the property. Specific risks include:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | cost overruns;
| | - | --------------

| |  | mismanaged construction;
| | - | ------------------------

| |  | inferior or improper construction techniques;
| | - | ---------------------------------------------

| |  | economic changes or downturns during construction;
| | - | --------------------------------------------------

| |  | a downturn in the real estate market;
| | - | -------------------------------------

| |  | rising interest rates which may prevent sale of the property; and
| | - | -----------------------------------------------------------------

| |  | failure to sell completed projects in a timely manner.
| | - | ------------------------------------------------------

| | We attempt to reduce risk by obtaining personal guarantees where possible, and by keeping the
loan-to-value ratio of the completed project below specified percentages. We also reduce
risk by selling participations in larger loans to other institutions when possible.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4

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Commercial
Loans. We make loans for commercial purposes in various lines of businesses. Equipment
loans typically are made for a term of five years or less at fixed or variable rates, with
the loan fully amortized over the term and secured by the financed equipment. Working
capital loans typically have terms not exceeding one year and are usually secured by
accounts receivable, inventory, or personal guarantees of the principals of the business.
For loans secured by accounts receivable or inventory, principal is typically repaid as
the assets securing the loan are converted into cash, and in other cases principal is due
at maturity. Trade letters of credit, standby letters of credit, and foreign exchange are
handled through a correspondent bank as agent for the bank. Commercial loans primarily
have risk that the primary source of repayment, the borrowing business, will be
insufficient to service the debt. Often this occurs as the result of changes in local
economic conditions or in the industry in which the borrower operates which impact cash
flow or collateral value.

Consumer
Loans. We make a variety of loans to individuals for personal and household purposes,
including secured and unsecured installment loans and revolving lines of credit such as
credit cards. Installment loans typically carry balances of less than $50,000 and are
amortized over periods up to 60 or more months. Consumer loans are offered on a single
maturity basis where a specific source of repayment is available. Revolving loan products
typically require monthly payments of interest and a portion of the principal.

Consumer
loans are generally considered to have greater risk than first or second mortgages on real
estate because the value of the secured property may depreciate rapidly, they are often
dependent on the borrowers employment status as the sole source of repayment, and
some of them are unsecured. To mitigate these risks, we analyze selective underwriting
criteria for each prospective borrower, which may include the borrowers employment
history, income history, credit bureau reports, or debt to income ratios. If the consumer
loan is secured by property, such as an automobile loan, we also attempt to offset the
risk of rapid depreciation of the collateral with a shorter loan amortization period.
Despite these efforts to mitigate our risks, consumer loans have a higher rate of default
than real estate loans. For this reason, we attempt to reduce our loss exposure to these
types of loans by limiting their sizes relative to other types of loans.

We
also offer home equity loans. Our underwriting criteria for and assessment of the risks
associated with home equity loans and lines of credit are generally the same as those for
first mortgage loans. Home equity lines of credit typically have terms of 10 years or
less, carry balances less than $125,000, and may extend up to 90% of the available equity
of each property.

We
also have the ability to offer small business loans utilizing government enhancements such
as the Small Business Administrations 7(a) program and SBAs 504 and
LowDoc programs. These loans will typically be partially guaranteed by the
government which may help to reduce the banks risk. Government guarantees of SBA
loans will not exceed 80% of the loan value, and will generally be less.

Relative
Risks of Loans. Each category of loan has a different level of credit risk. Real
estate loans are generally safer than loans secured by other assets because the value of
the underlying security, real estate, is generally ascertainable and does not fluctuate as
much as some other assets. Certain real estate loans are less risky than others.
Residential real estate loans are generally the least risky type of real estate loans,
followed by commercial real estate loans and construction and development loans.
Commercial loans, which can be secured by real estate or other assets, or which can be
unsecured, are generally more risky than real estate loans, but less risky than consumer
loans. Finally, consumer loans, which can also be secured by real estate or other assets,
or which can also be unsecured, are generally considered to be the most risky of these
categories of loans. Any type of loan which is unsecured is generally more risky than
secured loans. These levels of risk are general in nature, and many factors including the
creditworthiness of the borrower or the particular nature of the secured asset may cause
any type of loan to be more or less risky than another. Additionally, these levels of risk
are limited to an analysis of credit risk, and they do not take into account other risk
factors associated with making loans such as the interest rate risk inherent in long-term,
fixed-rate loans.

Loan
Approval and Review. Our loan approval policies provide for various levels of officer
lending authority. When the amount of aggregate loans to a single borrower exceeds that
individual officers lending authority, the loan request is considered and approved
by an officer with a higher lending limit, the management

5

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loan committee or the board of
directors loan committee. We do not make any loans to any director of the bank
unless the loan is approved by the board of directors of the bank and is made on terms not
more favorable to the person than would be available to a person not affiliated with the
bank. We adhere to Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation guidelines in its mortgage loan review process, but we may choose to alter
this policy in the future.

Lending
Limits. Our lending activities are subject to a variety of lending limits imposed by
federal law. In general, we are subject to a legal limit on loans to a single borrower
equal to 15% of the banks capital and unimpaired surplus. Different limits may apply
based on the type of loan or the nature of the borrower, including the borrowers
relationship to the bank. These limits will increase or decrease as the banks
capital increases or decreases.

# Banking Services

We
offer a full range of deposit services that are typically available in most banks and
savings and loan associations, including checking accounts, NOW accounts, commercial
accounts, savings accounts, and other time deposits of various types, ranging from daily
money market accounts to longer-term certificates of deposit. The transaction accounts and
time certificates are tailored to our principal market area at rates competitive to those
offered in the upstate South Carolina region. In addition, we offer certain retirement
account services, including IRAs.

# Other Banking Services

We
also offer safe deposit boxes, cashiers checks, banking by mail, direct deposit of
payroll and social security checks, U.S. Savings Bonds, and travelers checks. Our bank is
associated with the Star and Plus ATM networks that may be used by our customers
throughout the country. We believe that by being associated with a shared network of ATMs,
we will be better able to serve our customers and will be able to attract customers who
are accustomed to the convenience of using ATMs. We also offer a debit card and credit
card services through a correspondent bank as an agent for the bank.

# Competition

The
banking business is highly competitive. We compete as a financial intermediary with other
commercial banks, savings banks, credit unions, finance companies, and money market mutual
funds operating in Anderson, Greenville, Pickens and Spartanburg Counties. The competition
among the various financial institutions is based upon a variety of factors, including
interest rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality of services rendered, the convenience of banking facilities
and, in the case of loans to large commercial borrowers, relative lending limits. In
addition to banks and savings associations, we compete with other financial institutions
including securities firms, insurance companies, credit unions, leasing companies and
finance companies. Size gives larger banks certain advantages in competing for business
from large corporations. These advantages include higher lending limits and the ability to
offers services in other areas of South Carolina. As a result, we do not generally attempt
to compete for the banking relationships of large corporations, but concentrate our
efforts on small- to medium-sized businesses and individuals. We believe we have competed
effectively in this market by offering quality and personal service.

# Employees

As
of March 23, 2007, we had 57 full-time employees and 10 part-time employees.

6

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# SUPERVISION AND
REGULATION

Both
CommunitySouth Bancshares, Inc., and CommunitySouth Bank and Trust are subject to
extensive state and federal banking regulations that impose restrictions on and provide
for general regulatory oversight of their operations. These laws generally are intended to
protect depositors and not shareholders. The following summary is qualified by reference
to the statutory and regulatory provisions discussed. Changes in applicable laws or
regulations may have a material effect on our business and prospects. Our operations may
be affected by legislative changes and the policies of various regulatory authorities. We
cannot predict the effect that fiscal or monetary policies, economic control, or new
federal or state legislation may have on our business and earnings in the future.

The
following discussion is not intended to be a complete list of all the activities regulated
by the banking laws or of the impact of such laws and regulations on our operations. It is
intended only to briefly summarize some material provisions.

# CommunitySouth
Bancshares, Inc.

We
own 100% of the outstanding capital stock of the bank, and therefore we are considered to
be a bank holding company under the federal Bank Holding Company Act of 1956 (the
Bank Holding Company Act). As a result, we are primarily subject to the
supervision, examination and reporting requirements of the Board of Governors of the
Federal Reserve (the Federal Reserve) under the Bank Holding Company Act and
its regulations promulgated thereunder. As a bank holding company located in South
Carolina, the South Carolina Board of Financial Institutions also regulates and monitors
all significant aspects of our operations.

Permitted
Activities. Under the Bank Holding Company Act, a bank holding company is
generally permitted to engage in, or acquire direct or indirect control of more than 5% of
the voting shares of any company engaged in, the following activities:

| |  | banking or managing or controlling banks; and
| | - | ---------------------------------------------

| |  | furnishing services to or performing services for our subsidiaries; and
| | - | -----------------------------------------------------------------------

| |  | any activity that the Federal Reserve determines to be so closely related to banking as to
be a proper incident to the business of banking.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

Activities
that the Federal Reserve has found to be so closely related to banking as to be a proper
incident to the business of banking include:

| |  | factoring accounts receivable;
| | - | ------------------------------

| |  | making, acquiring, brokering or servicing loans and usual related activities;
| | - | -----------------------------------------------------------------------------

| |  | leasing personal or real property;
| | - | ----------------------------------

| |  | operating a non-bank depository institution, such as a savings association;
| | - | ---------------------------------------------------------------------------

| |  | trust company functions;
| | - | ------------------------

| |  | financial and investment advisory activities;
| | - | ---------------------------------------------

| |  | conducting discount securities brokerage activities;
| | - | ----------------------------------------------------

| |  | underwriting and dealing in government obligations and money market instruments;
| | - | --------------------------------------------------------------------------------

| |  | providing specified management consulting and counseling activities;
| | - | --------------------------------------------------------------------

7

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| |  | performing selected data processing services and support services;
| | - | ------------------------------------------------------------------

| |  | acting as agent or broker in selling credit life insurance and other types of insurance in connection with
                 credit transactions; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | performing selected insurance underwriting activities.
| | - | ------------------------------------------------------

As
a bank holding company we also can elect to be treated as a financial holding
company, which would allow us engage in a broader array of activities. In sum, a
financial holding company can engage in activities that are financial in nature or
incidental or complementary to financial activities, including insurance underwriting,
sales and brokerage activities, providing financial and investment advisory services,
underwriting services and limited merchant banking activities. We have not sought
financial holding company status, but may elect such status in the future as our business
matures. If we were to elect in writing for financial holding company status, each insured
depository institution we control would have to be well capitalized, well managed and have
at least a satisfactory rating under the CRA (discussed below).

The
Federal Reserve has the authority to order a bank holding company or its subsidiaries to
terminate any of these activities or to terminate its ownership or control of any
subsidiary when it has reasonable cause to believe that the bank holding companys
continued ownership, activity or control constitutes a serious risk to the financial
safety, soundness or stability of it or any of its bank subsidiaries.

Change
in Control.In addition, and subject to certain exceptions, the Bank
Holding Company Act and the Change in Bank Control Act, together with regulations
promulgated there under, require Federal Reserve approval prior to any person or company
acquiring control of a bank holding company. Moreover, the South Carolina
Board of Financial Institutions also must approve an acquisition of a South Carolina bank
holding company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of a bank holding company. Control
is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of
any class of voting securities and either:

| |  | the company has registered securities under Section 12 of the Securities Exchange Act of 1934; or
| | - | -------------------------------------------------------------------------------------------------

| |  | no other person owns a greater percentage of that class of voting securities immediately
after the transaction.
| | - | ---------------------------------------------------------------------------------------------------------------

Our
common stock is registered under Section 12 of the Securities Exchange Act of 1934. Any
shareholder of 10% or more, but less than 25% of any class of our voting securities would
be required to either file as a controlling shareholder of the company or rebut the
presumption of control in accordance with Federal Reserve regulations. The
regulations provide a procedure for rebutting control when ownership of any class of
voting securities is below 25%.

Source
of Strength. In accordance with Federal Reserve Board policy, we are
expected to act as a source of financial strength to the bank and to commit resources to
support the bank in circumstances in which we might not otherwise do so. Under the bank
Holding Company Act, the Federal Reserve Board may require a bank holding company to
terminate any activity or relinquish control of a nonbank subsidiary, other than a nonbank
subsidiary of a bank, upon the Federal Reserve Boards determination that such
activity or control constitutes a serious risk to the financial soundness or stability of
any depository institution subsidiary of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding company to
divest itself of any bank or nonbank subsidiaries if the agency determines that
divestiture may aid the depository institutions financial condition.

Capital
Requirements. The Federal Reserve Board imposes certain capital
requirements on the bank holding company under the bank Holding Company Act, including a
minimum leverage ratio and a minimum ratio of qualifying capital to
risk-weighted assets. These requirements are described below under CommunitySouth
Bank and Trust  Capital Regulations. Subject to our capital requirements and
certain other restrictions, we are able to borrow money to make a capital contribution to
the bank, and these loans may be repaid from dividends paid

8

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from the bank to the Company. Our
ability to pay dividends is subject to regulatory restrictions as described below in
CommunitySouth Bank and Trust Dividends. We are also able to raise
capital for contribution to the bank by issuing securities without having to receive
regulatory approval, subject to compliance with federal and state securities laws.

South
Carolina State Regulation. As a South Carolina bank holding company under
the South Carolina Banking and Branching Efficiency Act, we are subject to limitations on
sale or merger and to regulation by the South Carolina Board of Financial Institutions. We
are not required to obtain the approval of the S.C. Board prior to acquiring the capital
stock of a national bank, but we must notify them at least 15 days prior to doing so. We
must receive the Boards approval prior to engaging in the acquisition of a South
Carolina state chartered bank or another South Carolina bank holding company.

# CommunitySouth Bank and
Trust

The
bank operates as a state bank incorporated under the laws of the State of South Carolina
and is subject to examination by the South Carolina Board of Financial Institutions.

The
South Carolina Board of Financial Institutions and the FDIC regulate or monitor virtually
all areas of the banks operations, including:

| |  | security devices and procedures;
| | - | --------------------------------

| |  | adequacy of capitalization and loss reserves;
| | - | ---------------------------------------------

| |  | loans;
| | - | ------

| |  | investments;
| | - | ------------

| |  | borrowings;
| | - | -----------

| |  | deposits;
| | - | ---------

| |  | mergers;
| | - | --------

| |  | issuances of securities;
| | - | ------------------------

| |  | payment of dividends;
| | - | ---------------------

| |  | interest rates payable on deposits;
| | - | -----------------------------------

| |  | interest rates or fees chargeable on loans;
| | - | -------------------------------------------

| |  | establishment of branches;
| | - | --------------------------

| |  | corporate reorganizations;
| | - | --------------------------

| |  | maintenance of books and records; and
| | - | -------------------------------------

| |  | adequacy of staff training to carry on safe lending and deposit gathering practices.
| | - | ------------------------------------------------------------------------------------

The
South Carolina Board of Financial Institutions requires the bank to maintain specified
capital ratios and imposes limitations on the banks aggregate investment in real
estate, bank premises, and furniture and fixtures. The South Carolina Board of Financial
Institutions also requires the bank to prepare quarterly reports on the banks
financial condition in compliance with its minimum standards and procedures.

All
insured institutions must undergo regular on site examinations by their appropriate
banking agency.

9

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The cost of examinations of insured
depository institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate. Insured
institutions are required to submit annual reports to the FDIC, their federal regulatory
agency, and their state supervisor when applicable. The FDIC has developed a method for
insured depository institutions to provide supplemental disclosure of the estimated fair
market value of assets and liabilities, to the extent feasible and practicable, in any
balance sheet, financial statement, report of condition or any other report of any insured
depository institution. The FDIC Improvement Act also requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating, among other things, to
the following:

| |  | internal controls;
| | - | ------------------

| |  | information systems and audit systems;
| | - | --------------------------------------

| |  | loan documentation;
| | - | -------------------

| |  | credit underwriting;
| | - | --------------------

| |  | interest rate risk exposure; and
| | - | --------------------------------

| |  | asset quality.
| | - | --------------

Prompt
Corrective Action.As an insured depository institution, the bank is
required to comply with the capital requirements promulgated under the Federal Deposit
Insurance Act and the regulations thereunder, which set forth five capital categories,
each with specific regulatory consequences. Under these regulations, the categories are:

| |  | Well Capitalized  The institution exceeds the required minimum level for each
relevant capital measure. A well capitalized institution is one (i) having a total
capital ratio of 10% or greater, (ii) having a tier 1 capital ratio of 6% or greater,
(iii) having a leverage capital ratio of 5% or greater and (iv) that is not
subject to any order or written directive to meet and maintain a specific capital level
for any capital measure.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Adequately Capitalized  The institution meets the required minimum level for each
relevant capital measure. No capital distribution may be made that would result in the
institution becoming undercapitalized. An adequately capitalized institution is one
(i) having a total capital ratio of 8% or greater, (ii) having a tier 1 capital
ratio of 4% or greater and (iii) having a leverage capital ratio of 4% or greater or
a leverage capital ratio of 3% or greater if the institution is rated composite 1 under
the CAMELS (Capital, Assets, Management, Earnings, Liquidity and Sensitivity to market
risk) rating system.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Undercapitalized  The institution fails to meet the required minimum level for any
relevant capital measure. An undercapitalized institution is one (i) having a total
capital ratio of less than 8% or (ii) having a tier 1 capital ratio of less than 4%
or (iii) having a leverage capital ratio of less than 4%, or if the institution is rated a
composite 1 under the CAMELS rating system, a leverage capital ratio of less than 3%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Significantly Undercapitalized  The institution is significantly below the required
minimum level for any relevant capital measure. A significantly undercapitalized
institution is one (i) having a total capital ratio of less than 6% or
(ii) having a tier 1 capital ratio of less than 3% or (iii) having a leverage
capital ratio of less than 3%.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Critically Undercapitalized  The institution fails to meet a critical capital level
set by the appropriate federal banking agency. A critically undercapitalized institution
is one having a ratio of tangible equity to total assets that is equal to or less than 2%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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If
the FDIC determines, after notice and an opportunity for hearing, that the bank is in an
unsafe or unsound condition, the regulator is authorized to reclassify the bank to the
next lower capital category (other than critically undercapitalized) and require the
submission of a plan to correct the unsafe or unsound condition.

If
the bank is not well capitalized, it cannot accept brokered deposits without prior FDIC
approval and, if approval is granted, cannot offer an effective yield in excess of 75
basis points on interests paid on deposits of comparable size and maturity in such
institutions normal market area for deposits accepted from within its normal market
area, or national rate paid on deposits of comparable size and maturity for deposits
accepted outside the banks normal market area. Moreover, if the bank becomes less
than adequately capitalized, it must adopt a capital restoration plan acceptable to the
FDIC. The bank also would become subject to increased regulatory oversight, and is
increasingly restricted in the scope of its permissible activities. Each company having
control over an undercapitalized institution also must provide a limited guarantee that
the institution will comply with its capital restoration plan. Except under limited
circumstances consistent with an accepted capital restoration plan, an undercapitalized
institution may not grow. An undercapitalized institution may not acquire another
institution, establish additional branch offices or engage in any new line of business
unless determined by the appropriate Federal banking agency to be consistent with an
accepted capital restoration plan, or unless the FDIC determines that the proposed action
will further the purpose of prompt corrective action. The appropriate federal banking
agency may take any action authorized for a significantly undercapitalized institution if
an undercapitalized institution fails to submit an acceptable capital restoration plan or
fails in any material respect to implement a plan accepted by the agency. A critically
undercapitalized institution is subject to having a receiver or conservator appointed to
manage its affairs and for loss of its charter to conduct banking activities.

An
insured depository institution may not pay a management fee to a bank holding company
controlling that institution or any other person having control of the institution if,
after making the payment, the institution, would be undercapitalized. In addition, an
institution cannot make a capital distribution, such as a dividend or other distribution
that is in substance a distribution of capital to the owners of the institution if
following such a distribution the institution would be undercapitalized. Thus, if payment
of such a management fee or the making of such would cause the bank to become
undercapitalized, it could not pay a management fee or dividend to us.

As
of December 31, 2006, the bank was deemed to be well capitalized.

FDIC
Assessments. Deposits at the bank are insured by the Deposit Insurance
Fund (the DIF) as administered by the FDIC, up to the applicable limits
established by law  generally $100,000 per accountholder and $250,000 for certain
retirement accountholders. In accordance with regulations adopted to implement the Federal
Deposit Insurance Reform Act of 2005 (FDIRA), deposit insurance premium
assessments are based upon perceived risks to the DIF, by evaluating an institutions
supervisory ratios and other financial ratios and then determining insurance premiums
based upon the likelihood an institution could be downgraded to a CAMELS 3 or worse in the
succeeding year. As a result, institutions deemed to pose less risk, pay lower premiums
than those institutions deemed to pose more risk, which pay more.

FDIRA
caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue cash
dividends, awarded on a historical basis, for the amount of the DIF over the 1.50% ratio.
Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, the FDIC is
required to issue cash dividends, awarded on a historical basis, for half of the amount of
the excess. Pursuant to the FDIRA, the FDIC will begin indexing deposit insurance coverage
levels for inflation beginning in 2012. Moreover, if we become undercapitalized we cannot
accept employee benefit plan deposits.

Transactions
with Affiliates and Insiders. The bank is subject to the provisions of
Section 23A of the Federal Reserve Act, which places limits on the amount of loans or
extensions of credit to, or investments in, or certain other transactions with, affiliates
and on the amount of advances to third parties collateralized by the securities or
obligations of affiliates. The aggregate of all covered transactions is limited in amount,
as to any one affiliate, to 10% of the banks capital and surplus and, as to all
affiliates combined, to 20% of the banks capital and surplus. Furthermore, within
the foregoing limitations as to amount, each covered transaction must meet specified
collateral requirements. Compliance is also required with certain provisions designed to
avoid the taking of low quality assets.

11

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The
bank also is subject to the provisions of Section 23B of the Federal Reserve Act which,
among other things, prohibits an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or its subsidiaries, as those prevailing at the
time for comparable transactions with nonaffiliated companies. The bank is subject to
certain restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable features.

The
Federal Reserve Board has issued Regulation W, which codifies prior regulations under
Sections 23A and 23B of the Federal Reserve Act and interpretative guidance with respect
to affiliate transactions. Regulation W incorporates the exemption from the affiliate
transaction rules but expands the exemption to cover the purchase of any type of loan or
extension of credit from an affiliate. In addition, under Regulation W:

| |  | a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;
| | - | -----------------------------------------------------------------------------------

| |  | covered transactions and other specified transactions between a bank or its subsidiaries
and an affiliate must be on terms and conditions that are consistent with safe and sound
banking practices; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | with some exceptions, each loan or extension of credit by a bank to an affiliate must be
secured by collateral with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Regulation
W generally excludes all non-bank and non-savings association subsidiaries of banks from
treatment as affiliates, except to the extent that the Federal Reserve Board decides to
treat these subsidiaries as affiliates. The regulation also limits the amount of loans
that can be purchased by a bank from an affiliate to not more than 100% of the banks
capital and surplus.

Branching.
          Under current South Carolina law, we may open branch offices throughout South
          Carolina with the prior approval of the South Carolina Board of Financial
          Institutions. In addition, with prior regulatory approval, the bank will be able
          to acquire existing banking operations in South Carolina. Furthermore, federal
          legislation has been passed that permits interstate branching by banks if
          allowed by state law, and interstate merging by banks.

Community
Reinvestment Act. The Community Reinvestment Act requires that, in
connection with examinations of financial institutions within their respective
jurisdictions, a financial institutions primary regulator, which is the FDIC for the
bank, shall evaluate the record of each financial institution in meeting the credit needs
of its local community, including low and moderate income neighborhoods. These factors are
also considered in evaluating mergers, acquisitions, and applications to open a branch or
facility. Failure to adequately meet these criteria could impose additional requirements
and limitations on our bank. Additionally, we must publicly disclose the terms of various
Community Reinvestment Act-related agreements.

Finance
Subsidiaries. Under the Gramm-Leach-Bliley Act (the GLBA),
subject to certain conditions imposed by their respective banking regulators, national and
state-chartered banks are permitted to form financial subsidiaries that may
conduct financial or incidental activities, thereby permitting bank subsidiaries to engage
in certain activities that previously were impermissible. The GLBA imposes several
safeguards and restrictions on financial subsidiaries, including that the parent
banks equity investment in the financial subsidiary be deducted from the banks
assets and tangible equity for purposes of calculating the banks capital adequacy.
In addition, the GLBA imposes new restrictions on transactions between a bank and its
financial subsidiaries similar to restrictions applicable to transactions between banks
and non-bank affiliates.

Other
Regulations. Interest and other charges collected or contracted for by the
bank are subject to state usury laws and federal laws concerning interest rates. The
banks loan operations are also subject to federal laws applicable to credit
transactions, such as the:

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| |  | The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
| | - | ----------------------------------------------------------------------------------------------

| |  | The Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the community
it serves;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | The Fair Credit Reporting Act of 1978, as amended by the Fair and Accurate Credit
Transactions Act, governing the use and provision of information to credit reporting
agencies, certain identity theft protections and certain credit and other disclosures;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Fair Debt Collection Act, governing the manner in which consumer debts may be
collected by collection agencies; and
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | The Rules and regulations of the various federal agencies charged with the responsibility
of implementing these federal laws.
| | - | -----------------------------------------------------------------------------------------------------------------------------

The
deposit operations of the bank also are subject to:

| |  | the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and | 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which governs automatic deposits to and withdrawals from deposit
accounts and customers rights and liabilities arising from the use of automated
teller machines and other electronic banking services. | 
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

Enforcement
Powers. The bank and its institution-affiliated parties,
including its management, employees, agents, independent contractors, and consultants such
as attorneys and accountants and others who participate in the conduct of the financial
institutions affairs, are subject to potential civil and criminal penalties for
violations of law, regulations or written orders of a government agency. These practices
can include the failure of an institution to timely file required reports or the filing of
false or misleading information or the submission of inaccurate reports. Civil penalties
may be as high as $1,000,000 a day for such violations. Criminal penalties for some
financial institution crimes have been increased to twenty years. In addition, regulators
are provided with greater flexibility to commence enforcement actions against institutions
and institution-affiliated parties. Possible enforcement actions include the termination
of deposit insurance. Furthermore, banking agencies power to issue cease-and-desist
orders were expanded. Such orders may, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution,
reimbursement, indemnifications or guarantees against loss. A financial institution may
also be ordered to restrict its growth, dispose of certain assets, rescind agreements or
contracts, or take other actions as determined by the ordering agency to be appropriate.

USA
PATRIOT Act.The USA PATRIOT Act became effective on
October 26, 2001, amended, in part, the bank Secrecy Act, and provides, in part, for
the facilitation of information sharing among governmental entities and financial
institutions for the purpose of combating terrorism and money laundering by enhancing
anti-money laundering and financial transparency laws, as well as enhanced information
collection tools and enforcement mechanics for the U.S. government, including:
(i) requiring standards for verifying customer identification at account opening;
(ii) rules to promote cooperation among financial institutions, regulators, and law
enforcement entities in identifying parties that may be involved in terrorism or money
laundering; (iii) reports by nonfinancial trades and businesses filed with the
Treasury Departments Financial Crimes Enforcement Network for transactions exceeding
$10,000; and (iv) filing suspicious activities reports by brokers and dealers if they
believe a customer may be violating U.S. laws and regulations and requires enhanced due
diligence requirements for financial institutions that administer, maintain, or manage
private bank accounts or correspondent accounts for non-U.S. persons.

13

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Under
the USA PATRIOT Act, the Federal Bureau of Investigation (FBI) can send our
banking regulatory agencies lists of the names of persons suspected of involvement in
terrorist activities. The bank can be requested, to search its records for any
relationships or transactions with persons on those lists. If the bank finds any
relationships or transactions, it must file a suspicious activity report and contact the
FBI.

The
Office of Foreign Assets Control (OFAC), which is a division of the U.S.
Department of the Treasury, is responsible for helping to insure that United States
entities do not engage in transactions with enemies of the United States, as
defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send,
our banking regulatory agencies lists of names of persons and organizations suspected of
aiding, harboring or engaging in terrorist acts. If the bank finds a name on any
transaction, account or wire transfer that is on an OFAC list, it must freeze such
account, file a suspicious activity report and notify the FBI. The bank has appointed an
OFAC compliance officer to oversee the inspection of its accounts and the filing of any
notifications. The bank actively checks high-risk OFAC areas such as new accounts, wire
transfers and customer files. The bank performs these checks utilizing software, which is
updated each time a modification is made to the lists provided by OFAC and other agencies
of Specially Designated Nationals and Blocked Persons.

Privacy
and Credit Reporting.Financial institutions are required to disclose their
policies for collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing nonpublic personal financial information with
nonaffiliated third parties except under narrow circumstances, such as the processing of
transactions requested by the consumer or when the financial institution is jointly
sponsoring a product or service with a nonaffiliated third party. Additionally, financial
institutions generally may not disclose consumer account numbers to any nonaffiliated
third party for use in telemarketing, direct mail marketing or other marketing to
consumers. It is the banks policy not to disclose any personal information unless
required by law.

Like
other lending institutions, the bank utilizes credit bureau data in its underwriting
activities. Use of such data is regulated under the Federal Credit Reporting Act on a
uniform, nationwide basis, including credit reporting, prescreening, sharing of
information between affiliates, and the use of credit data. The Fair and Accurate Credit
Transactions Act of 2003 (the FACT Act) authorizes states to enact identity
theft laws that are not inconsistent with the conduct required by the provisions of the
FACT Act.

Payment
of Dividends. A South Carolina state bank may not pay dividends from its
capital. All dividends must be paid out of undivided profits then on hand, after deducting
expenses, including reserves for losses and bad debts. The bank is authorized to pay cash
dividends up to 100% of net income in any calendar year without obtaining the prior
approval of the South Carolina Board of Financial Institutions, provided that the bank
received a composite rating of one or two at the last federal or state regulatory
examination. The bank must obtain approval from the South Carolina Board of Financial
Institutions prior to the payment of any other cash dividends. In addition, under the
FDICIA, the bank may not pay a dividend if, after paying the dividend, the bank would be
undercapitalized.

Check
21. The Check Clearing for the 21st Century Act gives substitute
checks, such as a digital image of a check and copies made from that image, the same
legal standing as the original paper check. Some of the major provisions include:

| |  | allowing check truncation without making it mandatory;
| | - | ------------------------------------------------------

| |  | demanding that every financial institution communicate to accountholders in writing a
description of its substitute check processing program and their rights under the law;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | legalizing substitutions for and replacements of paper checks without agreement from consumers;
| | - | -----------------------------------------------------------------------------------------------

| |  | retaining in place the previously mandated electronic collection and return of checks
between financial institutions only when individual agreements are in place;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | requiring that when accountholders request verification, financial institutions produce
the original check (or a copy that accurately represents the original) and demonstrate
that the account debit was accurate and valid; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| |  | requiring the re-crediting of funds to an individuals account on the next business
day after a consumer proves that the financial institution has erred.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Effect
of Governmental Monetary Policies. Our earnings are affected by domestic economic
conditions and the monetary and fiscal policies of the United States government and its
agencies. The Federal Reserve banks monetary policies have had, and are likely to
continue to have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to curb
inflation or combat a recession. The monetary policies of the Federal Reserve Board have
major effects upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities and through its regulation of the
discount rate on borrowings of member banks and the reserve requirements against member
bank deposits. It is not possible to predict the nature or impact of future changes in
monetary and fiscal policies.

Proposed
Legislation and Regulatory Action. New regulations and statutes are regularly
proposed that contain wide-ranging proposals for altering the structures, regulations, and
competitive relationships of the nations financial institutions. We cannot predict
whether or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or statute.

# Risk Factors

# We are dependent on key
individuals and the loss of one or more of these key individuals could curtail our growth
and adversely affect our prospects.

Allan
Ducker, our chief executive officer, and David Miller, our president, have extensive and
long-standing ties within our market area and substantial experience with our operations
which has contributed significantly to our growth. If we lose the services of Messrs.
Ducker or Miller, they would be difficult to replace and our business and development
could be materially and adversely affected. We maintain key man life insurance policies in
the amount of $1.0 million on each of Messrs. Ducker and Miller.

Our
success also depends, in part, on our continued ability to attract and retain experienced
loan originators, as well as other management personnel. Competition for personnel is
intense, and we may not be successful in attracting or retaining qualified personnel. Our
failure to compete for these personnel, or the loss of the services of several of such key
personnel, could adversely affect our growth strategy and seriously harm our business,
results of operations, and financial condition.

# The success of our growth
strategy depends on our ability to identify and retain individuals with experience and relationships
in the markets in which we intend to expand.

To expand our upstate franchise
successfully, we must identify and retain experienced key management members with local
expertise and relationships in these markets. We expect that competition for qualified
management in the markets in which we may expand will be intense and that there will be a
limited number of qualified persons with knowledge of and experience in the community
banking industry in these markets. Even if we identify individuals that we believe could
assist us in establishing a presence in a new market, we may be unable to recruit these
individuals away from more established financial institutions. In addition, the process of
identifying and recruiting individuals with the combination of skills and attributes
required to carry out our strategy requires both management and financial resources and is
often lengthy. Our inability to identify, recruit, and retain talented personnel to manage
new offices effectively would limit our growth and could materially adversely affect our
business, financial condition, and results of operations.

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# Our decisions regarding
credit risk and allowances for loan losses may materially and adversely affect our
business.

Making
loans and other extensions of credit is an essential element of our business. Although we
seek to mitigate risks inherent in lending by adhering to specific underwriting practices,
our loans and other extensions of credit may not be repaid. The risk of nonpayment is
affected by a number of factors, including:

| |  | the duration of the credit;
| | - | ---------------------------

| |  | credit risks of a particular customer;
| | - | --------------------------------------

| |  | changes in economic and industry conditions; and
| | - | ------------------------------------------------

| |  | in the case of a collateralized loan, risks resulting from uncertainties about the future
value of the collateral.
| | - | ------------------------------------------------------------------------------------------------------------------

We
attempt to maintain an appropriate allowance for loan losses to provide for potential
losses in our loan portfolio. We periodically determine the amount of the allowance based
on consideration of several factors, including:

| |  | an ongoing review of the quality, mix, and size of our overall loan portfolio;
| | - | ------------------------------------------------------------------------------

| |  | our historical loan loss experience;
| | - | ------------------------------------

| |  | evaluation of economic conditions;
| | - | ----------------------------------

| |  | regular reviews of loan delinquencies and loan portfolio quality; and
| | - | ---------------------------------------------------------------------

| |  | the amount and quality of collateral, including guarantees, securing the loans.
| | - | -------------------------------------------------------------------------------

There
is no precise method of predicting credit losses. Therefore, we face the risk that
charge-offs in future periods will exceed our allowance for loan losses and that
additional increases in the allowance for loan losses will be required. Additions to the
allowance for loan losses would result in a decrease of our net income, and possibly our
capital.

While we generally underwrite the
loans in our portfolio in accordance with our own internal underwriting guidelines and
regulatory supervisory guidelines, in certain circumstances we have made loans which
exceed either our internal underwriting guidelines, supervisory guidelines, or both. As of
December 31, 2006, approximately $16 million of our loans, or 53.7% of our companys
capital, had loan-to-value ratios that exceeded regulatory supervisory guidelines, of
which 17 loans totaling approximately $6 million had loan-to-value ratios of 100% or more.
At December 31, 2006, $7.6 million of our commercial loans, or 25.5% of our companys
capital, exceeded the supervisory loan to value ratio. The number of loans in our
portfolio with loan-to-value ratios in excess of supervisory guidelines, our internal
guidelines, or both could increase the risk of delinquencies and defaults in our
portfolio.

# A significant portion of
our loan portfolio is secured by real estate, and events that negatively impact the real
estate market could hurt our business.

A significant portion of our loan
portfolio is secured by real estate. As of December 31, 2006, approximately 91% of our
loans had real estate as a primary or secondary component of collateral. The real estate
collateral in each case provides an alternate source of repayment in the event of default
by the borrower and may deteriorate in value during the time the credit is extended. A
weakening of the real estate market in our primary market area could result in an increase
in the number of borrowers who default on their loans and a reduction in the value of the
collateral securing their loans, which in turn could have an adverse effect on our
profitability and asset quality. If we are required to liquidate the collateral securing a
loan to satisfy the debt during a period of reduced real estate values, our earnings and
capital could be adversely affected. Acts of nature, including hurricanes, tornados,
earthquakes, fires and floods, which may cause uninsured damage and other loss of value to
real estate that secures these loans, may also negatively impact our financial condition.

16

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# Lack of seasoning of our
loan portfolio may increase the risk of credit defaults in the future.

Due
to our short operating history, all of the loans in our loan portfolio and our lending
relationships are of relatively recent origin. In general, loans do not begin to show
signs of credit deterioration or default until they have been outstanding for some period
of time, a process we refer to as seasoning. As a result, a portfolio of older
loans will usually behave more predictably than a newer portfolio. Because our loan
portfolio is relatively new, the current level of delinquencies and defaults may not be
representative of the level that will prevail when the portfolio becomes more seasoned,
which may be higher than current levels. If delinquencies and defaults increase, we may be
required to increase our provision for loan losses, which would adversely affect our
results of operations and financial condition.

# An economic downturn,
especially one affecting Pickens, Greenville and Spartanburg Counties, could reduce our
customer base, our level of deposits, and demand for financial products such as loans.

Our
success will significantly depend upon the growth in population, income levels, deposits,
and housing starts in our market of Anderson, Pickens, Greenville and Spartanburg
Counties. If the community in which we operate does not grow or if prevailing economic
conditions locally or nationally are unfavorable, our business may not succeed. An
economic downturn would likely contribute to the deterioration of the quality of our loan
portfolio and reduce our level of deposits, which in turn would hurt our business. If an
economic downturn occurs in the economy as a whole, or in Anderson, Pickens, Greenville
and Spartanburg Counties, borrowers may be less likely to repay their loans as scheduled.
Moreover, the value of real estate or other collateral that may secure our loans could be
adversely affected. Unlike many larger institutions, we are not able to spread the risks
of unfavorable local economic conditions across a large number of diversified economies.
An economic downturn could, therefore, result in losses that materially and adversely
affect our business.

# Changes in prevailing
interest rates may reduce our profitability.

Our
results of operations depend in large part upon the level of our net interest income,
which is the difference between interest income from interest-earning assets, such as
loans and mortgage-backed securities, and interest expense on interest-bearing
liabilities, such as deposits and other borrowings. Depending on the terms and maturities
of our assets and liabilities, a significant change in interest rates could have a
material adverse effect on our profitability. Many factors cause changes in interest
rates, including governmental monetary policies and domestic and international economic
and political conditions. While we intend to manage the effects of changes in interest
rates by adjusting the terms, maturities, and pricing of our assets and liabilities, our
efforts may not be effective and our financial condition and results of operations could
suffer.

# We are subject to
extensive regulation that could limit or restrict our activities.

We
operate in a highly regulated industry and are subject to examination, supervision, and
comprehensive regulation by various regulatory agencies. Our compliance with these
regulations is costly and restricts certain of our activities, including payment of
dividends, mergers and acquisitions, investments, loans and interest rates charged,
interest rates paid on deposits, and locations of offices. We are also subject to
capitalization guidelines established by our regulators, which require us to maintain
adequate capital to support our growth.

The
laws and regulations applicable to the banking industry could change at any time, and we
cannot predict the effects of these changes on our business and profitability. Because
government regulation greatly affects the business and financial results of all commercial
banks and bank holding companies, our cost of compliance could adversely affect our
ability to operate profitably.

The
Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the
Securities and Exchange Commission that are now applicable to us, have increased the
scope, complexity, and cost of corporate governance, reporting, and disclosure practices.

17

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We
are in the process of evaluating our internal controls over financial reporting to allow
management to report on our internal controls over financial reporting for our fiscal year
2007, and for our independent registered public accounting firm to attest to our internal
controls for fiscal year 2008, as required by regulations relating to Section 404 of the
Sarbanes-Oxley Act. While we currently anticipate that we will be able to fully implement
the requirements relating to internal controls and other aspects of Section 404 in a
timely manner, we could identify deficiencies that we may not be able to remediate in time
to meet the applicable deadlines. If we are not able to implement or maintain the
requirements of Section 404 in a timely manner or with adequate compliance, we could be
subject to scrutiny by regulatory authorities and the trading price of our stock could
decline. Moreover, effective internal controls are necessary for us to produce reliable
financial reports and are important to helping prevent financial fraud. If we cannot
provide reliable financial reports or prevent fraud, our business and operating results
could be harmed, investors and regulators could lose confidence in our reported financial
information, and the trading price of our stock could drop significantly. We currently
anticipate that we will fully implement the requirements relating to internal controls and
all other aspects of Section 404 within the required time frames.

# We
face strong competition for customers, which could prevent us from obtaining customers
and may cause us to pay higher interest rates to attract customers.

The
banking business is highly competitive, and we experience competition in our market from
many other financial institutions. We compete with commercial banks, credit unions,
savings and loan associations, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market funds, and other mutual
funds, as well as other super-regional, national, and international financial institutions
that operate offices in our primary market areas and elsewhere. We compete with these
institutions both in attracting deposits and in making loans. In addition, we have to
attract our client base from other existing financial institutions and from new residents.
Many of our competitors are well-established, larger financial institutions. These
institutions offer some services, such as extensive and established branch networks, that
we do not currently provide. There is a risk that we will not be able to compete
successfully with other financial institutions in our market, and that we may have to pay
higher interest rates to attract deposits, resulting in reduced profitability. In
addition, competitors that are not depository institutions are generally not subject to
the extensive regulations that apply to us.

# We will face risks with
respect to future expansion and acquisitions or mergers.

Although
we do not have any current plans to do so, we may seek to acquire other financial
institutions or parts of those institutions. We may also expand into new markets or lines
of business or offer new products or services. These activities would involve a number of
risks, including:

| |  | taking additional time and creating expense associated with identifying and evaluating
potential acquisitions and merger partners;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | using inaccurate estimates and judgments to evaluate credit, operations, management, and
market risks with respect to the target institution or assets;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | diluting our existing shareholders in an acquisition;
| | - | -----------------------------------------------------

| |  | taking additional time and creating expense associated with evaluating new markets for
expansion, hiring experienced local management, and opening new offices, as there may be a
substantial time lag between these activities before we generate sufficient assets and
deposits to support the costs of the expansion;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | taking a significant amount of time negotiating a transaction or working on expansion
plans, resulting in managements attention being diverted from the operation of our
existing business;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | taking time and creating expense integrating the operations and personnel of the combined
businesses;
| | - | -----------------------------------------------------------------------------------------------------

| |  | creating an adverse short-term effect on our results of operations; and
| | - | -----------------------------------------------------------------------

| |  | losing key employees and customers as a result of an acquisition that is poorly received.
| | - | -----------------------------------------------------------------------------------------

18

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We have never acquired another
institution before, so we lack experience in handling any of these risks. There is also a
risk that any expansion effort will not be successful.

# Item 2.   Description of
Property.

Our
main office is located at 6602 Calhoun Memorial Highway, Easley, South Carolina 29640. Our
site is approximately 1.2 acres in size, and the building is approximately 10,000 square
feet. We own our main office and lease all others. We have four full service branch sites
in addition to the main office. The branch sites are in the towns of Anderson, Greer,
Mauldin and Spartanburg, South Carolina. Our full service branches service the entire
upstate of South Carolina, but primarily the counties of Anderson, Greenville, Pickens and
Spartanburg.

We
have a ten year lease that began November 15, 2005 for our Spartanburg office with an
initial monthly rental payment of $6,500, which increases over the term of the lease up to
$9,275 in the tenth year. The lease may be renewed for two consecutive five-year terms
with rental payments increasing 3% each year. The office is located at 531 East Main
Street, Spartanburg, SC 29302.

We
have a ten year lease that began November 15, 2005 for our Mauldin office with an initial
monthly rental payment of $2,417, which increases over the life of the lease up to $2,872
per month in years seven through ten. The lease may be renewed for one five-year term at a
monthly rent of $3,302. The office is located at 787 East Butler Road, Mauldin, SC 29662.

We
have a ten year lease that began June 1, 2006 for our Anderson office with an initial
monthly rental payment of $3,690, which increases over the term of the lease up to $4,803
in years six through ten. The lease may be renewed for two consecutive five-year terms
with rental payments increasing 2% each year. The office is located at 1510 North Main
Street, Anderson, SC 29621.

We
have a ten year lease that began November 20, 2006 for our Greer office with an initial
monthly rental payment of $4,600, which increases over the term of the lease up to $5,000
in years six through ten. The lease may be renewed for two consecutive five-year terms
with rental payments increasing 2% each year. The office is located at 530 West Wade
Hampton Blvd., Greer, SC 29650.

We
believe that all of our properties are adequately covered by insurance.

# Item 3.   Legal
Proceedings.

In
the ordinary course of operations, we may be a party to various legal proceedings from
time to time. We do not believe that there is any pending or threatened proceeding against
us, which, if determined adversely, would have a material effect on our business, results
of operations, or financial condition.

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

No
matter was submitted to a vote of security holders during the fourth quarter of the fiscal
year covered by this report.

19

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# Part II

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

On
January 16, 2006, the Company effected a 5-for-4 stock split in the form of a stock
dividend for shareholders of record as of December 15, 2005. On January 16, 2007, the
Company effected a 5-for-4 stock split in the form of a stock dividend for shareholders of
record as of December 15, 2006. All per share data has been adjusted for all periods prior
to the splits.

Since
March 15, 2006, our common stock has been quoted on the OTC Bulletin Board under the
symbol CBSO. Quotations on the OTC Bulletin Board reflect inter-dealer prices,
without retail mark-up, mark-down, or commissions, and may not represent actual
transactions. Because we were not approved for quotation until March 2006, meaningful
stock price data is unavailable for the year 2005. During 2005, management is aware of a
few transactions in which our common stock traded in the split adjusted price range of
$11.20 to $15.20 per share. However, management has not ascertained that these
transactions are the result of arms length negotiations between the parties, and
because of the limited number of shares involved, these prices may not be indicative of
the market value of our common stock.

The
following is a summary of the high and low bid prices for our common stock reported by the
OTC Bulletin Board for the periods indicated (the bids prices have been adjusted for all
stock splits):

| | 2006 | High | Low           
| | ---- | ---- | --------------
| |      |      | First Quarter 
| |      |      | Second Quarter
| |      |      | Third Quarter 
| |      |      | Fourth Quarter

Our
articles of incorporation authorize us to issue up to 10,000,000 shares of common stock,
of which 4,698,697 shares were outstanding as of March 23, 2007. We have approximately
1,013 shareholders of record.

We
have not declared or paid any cash dividends on our common stock since our inception. For
the foreseeable future we do not intend to declare cash dividends. We intend to retain
earnings to grow our business and strengthen our capital base. Our ability to pay
dividends depends on the ability of our subsidiary, CommunitySouth Bank & Trust, to
pay dividends to us. As a South Carolina state bank, CommunitySouth may only pay dividends
out of its net profits, after deducting expenses, including losses and bad debts. In
addition, the bank is prohibited from declaring a dividend on its shares of common stock
unless its surplus equals or exceeds its stated capital. At December 31, 2006, the banks
surplus exceeded its stated capital by $105,369.

# Item 6.   
Managements Discussion and Analysis or Plan of Operation.

The
information required by Item 6 is hereby incorporated by reference from our annual report
to shareholders for the year ended December 31, 2006.

# Item 7.   Financial
Statements.

The
information required by Item 7 is hereby incorporated by reference from our annual report
to shareholders for the year ended December 31, 2006.

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

None

# Item 8A.   Controls and
Procedures.

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer,

20

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of the effectiveness of our
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded
that our current disclosure controls and procedures are effective as of December 31, 2006.
There have been no significant changes in our internal controls over financial reporting
during the fourth fiscal quarter ended December 31, 2006 that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

# Part III

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

The
information required by Item 9 is hereby incorporated by reference from our proxy
statement for our 2007 annual meeting of shareholders to be held on May 15, 2007.

# Item 10.   Executive
Compensation.

The
information required by Item 10 is hereby incorporated by reference from our proxy
statement for our 2007 annual meeting of shareholders to be held on May 15, 2007.

# Item 11.   Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The
information required by Item 11 is hereby incorporated by reference from our proxy
statement for our 2007 annual meeting of shareholders to be held on May 15, 2007.

# Item 12.   Certain
Relationships and Related Transactions.

The
information required by Item 12 is hereby incorporated by reference from our proxy
statement for our 2007 annual meeting of shareholders to be held on May 15, 2007.

# Item 13.   Exhibits.

|     | 
|---- | 
|3.1  | 
|     | 
|     | 
|3.2  | 
|     | 
|4.1  | 
|     | 
|     | 
|     | 
|4.2  | 
|     | 
|     | 
|10.1 | 
|     | 

21

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|      | 
|----- | 
|10.2  | 
|      | 
|      | 
|10.3  | 
|      | 
|      | 
|10.4  | 
|      | 
|      | 
|10.5  | 
|      | 
|      | 
|10.6  | 
|      | 
|      | 
|10.7  | 
|      | 
|      | 
|10.8  | 
|      | 
|      | 
|10.9  | 
|      | 
|      | 
|10.10 | 
|      | 
|      | 
|      | 
|13    | 
|      | 
|21.1  | 
|      | 
|23.1  | 
|      | 
|24.1. | 
|      | 
|31.1  | 
|      | 
|31.2  | 
|      | 
|32    | 

_________________

|* | Management contract of compensatory plan or arrangement required to be filed as an Exhibit
to this Annual Report on Form 10-KSB.
|- | --------------------------------------------------------------------------------------------------------------------------------

If you wish to receive a paper copy
of any exhibit to our reports filed with or furnished to the SEC, the exhibit may be
obtained, upon payment of reasonable expenses, by writing to: CommunitySouth Bancshares,
Inc., Attn: John W. Hobbs, Chief Financial Officer, 6602 Calhoun Memorial Highway, Easley,
South Carolina 29640.

22

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# Item 14.   Principal
Accountant Fees and Services.

The
information required by Item 14 is hereby incorporated by reference from our proxy
statement for our 2007 annual meeting of shareholders to be held on May 15, 2007.

23

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# SIGNATURES

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

|                      |  | COMMUNITYSOUTH BANCSHARES, INC.      
|--------------------- |  | -------------------------------------
|                      |  |                                      
|Date:  March 25, 2007 |  | By:   /s/  C. Allan Ducker, III      
|                      |  | C. Allan Ducker, III                 
|                      |  | President and Chief Executive Officer

KNOW
ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints C. Allan Ducker, III, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Annual Report on Form 10-KSB,
and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto attorney-in-fact and
agent full power and authority to do and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.

In
accordance with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.

|Signature | Title | Date
|--------- | ----- | ----

|/s/  David Larry BrothertonDavid Larry Brotherton | Director | March 25, 2007
|------------------------------------------------- | -------- | --------------

|/s/  G. Dial DuboseG. Dial Dubose | Director | March 25, 2007
|--------------------------------- | -------- | --------------

|/s/  C. Allan Ducker, IIIC. Allan Ducker, III | Chief Executive Officer, Director | March 25, 2007
|--------------------------------------------- | --------------------------------- | --------------

|/s/  David W. EdwardsDavid W. Edwards | Director | March 25, 2007
|------------------------------------- | -------- | --------------

|/s/  R. Wesley HammondR. Wesley Hammond | Director | March 25, 2007
|--------------------------------------- | -------- | --------------

|/s/  David A. MillerDavid A. Miller | President, Director | March 25, 2007
|----------------------------------- | ------------------- | --------------

|/s/  John W. HobbsJohn W. Hobbs | Chief Financial Officer andPrincipal Accounting Officer | March 25, 2007
|------------------------------- | ------------------------------------------------------- | --------------

|/s/  Arnold J. Ramsey*Arnold J. Ramsey* | Director | March 25, 2007
|--------------------------------------- | -------- | --------------

|/s/  W. Michael RiddleW. Michael Riddle | Director | March 25, 2007
|--------------------------------------- | -------- | --------------

24

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|/s/  Joanne M. RogersJoanne M. Rogers | Director | March 25, 2007
|------------------------------------- | -------- | --------------

|/s/  B. Lynn SpencerB. Lynn Spencer | Director | March 25, 2007
|----------------------------------- | -------- | --------------

|/s/  J. Neal Workman, Jr.J. Neal Workman, Jr. | Director | March 25, 2007
|--------------------------------------------- | -------- | --------------

|/s/  Daniel E. YoungbloodDaniel E. Youngblood | Director | March 25, 2007
|--------------------------------------------- | -------- | --------------

25

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# Exhibit Index

|      | 
|----- | 
|3.1   | 
|      | 
|      | 
|3.2   | 
|      | 
|4.1   | 
|      | 
|      | 
|      | 
|4.2   | 
|      | 
|      | 
|10.1  | 
|      | 
|      | 
|10.2  | 
|      | 
|      | 
|10.3  | 
|      | 
|      | 
|10.4  | 
|      | 
|      | 
|10.5  | 
|      | 
|      | 
|10.6  | 
|      | 
|      | 
|10.7  | 
|      | 
|      | 
|10.8  | 
|      | 
|      | 
|10.9  | 
|      | 
|      | 
|10.10 | 
|      | 
|      | 
|      | 
|13    | 
|      | 
|21.1  | 
|      | 

26

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|      | 
|----- | 
|23.1  | 
|      | 
|24.1. | 
|      | 
|31.1  | 
|      | 
|31.2  | 
|      | 
|32    | 

27