# Exhibit 13

# 2006 Annual Report

# CommunitySouth
Bancshares, Inc.

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| | [Image of corporate headquarters, image of executive management team,
image of family in front of house, image of car]
| | ----------------------------------------------------------------------------------------------------------------------

# There is value in the
unusual.

[CommunitySouth logo]Banking
Unusual!

# 2006 Annual Report

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# Mission Statement

The mission of CommunitySouth Bank
& Trust is to be the most customer centered, premier financial services provider in
the Upstate banking market in order to enhance shareholder value and promote the welfare
of our employees and the communities we serve.

|                                               | 
|---------------------------------------------- | 
|Contents                                       | 
|Letter to Shareholders                         | 
|A Growth Company                               | 
|Unusual Fan Mail                               | 
|CommunitySouth in the News                     | 
|Selected Financial Data                        | 
|Management's Discussion and Analysis of        | 
|Financial Condition and Results of Operations, | 
|Consolidated Financial Statements and Notes    | 
|Leadership                                     | 
|Corporate Information                          | 

2

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Unusually Convenient
Office Locations>Growing in the right directions

# [Branch map]

[Office Photo]Easley Headquarters 
6602 Calhoun Memorial HwyEasley, SC 29640

[Branch Photo]Mauldin 
787 East Butler RoadMauldin, SC 29662

[Branch Photo]Spartanburg 531 East Main Street
Spartanburg, SC 29302

[Branch Photo]Anderson 
1510 North Main StreetAnderson, SC 29621

[Branch Photo]Greer 
530 W. Wade Hampton BoulevardGreer, SC 29650

3

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[Photo of Executive
Management Team with Board Chairman]

# To Our Shareholders,
Customers, and Friends:

As we complete our second year of
operation, the Management and Board of Directors of CommunitySouth Bancshares, Inc. and
its wholly owned subsidiary, CommunitySouth Bank & Trust, take extraordinary pride in
presenting our results for 2006.

It is hard to believe that in only
two short years we have amassed $248 million in assets, achieved net income of $1.2
million and became cumulatively profitable, opened five full-service branches across the
Upstate of South Carolina and a full-service mortgage division, listed our stock on the
Over the Counter Bulletin Board under the symbol CBSO, and most importantly, increased
shareholder value 131% since we began operations, based upon the closing price of our
stock as of December 31, 2006.

The theme of our 2006 annual report
is There is Value in the Unusual. This theme is in concert with our new tagline
Banking Unusual!, which is a key component of our overall branding strategy. We
believe that Banking Unusual! describes exactly who we are, how we do business, and
the quality results we have delivered to our shareholders.

# Unusually Strong
Financial Results

Our strategy is based on franchise
and earnings growth. Our accomplishments in 2006 and since we began operations are
evidence that we have been extremely successful in striking the right balance between
these two goals. Financially we continued to make great strides in 2006.

Highlights included:

| | Net income of $1.2 million, or $0.22 per diluted share, compared to a net loss of
$615,600, or $0.13 per diluted share, for the previous year, our first year of operation.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Bank was cumulatively profitable at December 31, 2006.
|- | ----------------------------------------------------------

| | Total assets exceeded $248 million, an 81% increase.
|- | ----------------------------------------------------

| | Total loans grew 88% to $217.7 million.
|- | ---------------------------------------

| | Total deposits grew 103% to $217.0 million.
|- | -------------------------------------------

| | Return on average assets of 0.59%, compared to a loss of 0.77% for the previous year, our
first year of operation.
|- | ------------------------------------------------------------------------------------------------------------------

| | Return on average shareholder equity of 4.08%, compared to a loss of 2.24% for the
previous year, our first year of operation.
|- | ------------------------------------------------------------------------------------------------------------------------------

| | Strong asset quality with only
0.13% adversely classified assets and no 90 day delinquencies at year-end.
|- | ---------------------------------------------------------------------------------------------------------

| | CommunitySouth Bancshares, Inc. Board of Directors declared a five-for-four stock split.
|- | ----------------------------------------------------------------------------------------

| | Split adjusted stock price grew from $12.16 per share at December 31, 2005 to $14.80 per
share at December 31, 2006, an increase of 21.7%.
|- | ------------------------------------------------------------------------------------------------------------------------------------------

4

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[Photo of Spartanburg branch ribbon
cutting ceremony; Spartanburg Customer Service Representatives Tammy Byars and Melissa
Nolen; CommunitySouth Easley employees; CommunitySouths redesigned website]

CommunitySouths financial
performance has been unusually strong compared to peer banks. According to fourth quarter
2006 data supplied by SNL Financial, the leading financial information provider for the
financial services industry, CommunitySouth ranked third in asset size and third in 2006
net income among the 31 banks nationwide that also opened in the first quarter of 2005.

We think you will agree that to
achieve asset growth of 81%, net income of $1.2 million, and become cumulatively
profitable in only our second year of operation is without a doubt highly unusual
performance for a de novo bank.

# Unusual Growth in Market
Presence

At our annual strategic planning
session, your Board of Directors confirmed our strategy of growth in the Upstate region.
Our plan is to grow through the acquisition of new customers, deepening existing customer
relationships, and capitalizing on the growth, economic development, and favorable
demographics of our market area.

To this end, we opened three
additional branches during 2006; Spartanburg in January, Anderson in July, and Greer in
November. This investment in facilities, along with our future expansion plans, emphasizes
our commitment to Upstate market penetration and franchise growth. This aggressive
expansion has resulted in branch offices in the four largest counties in the market
(Greenville (2), Spartanburg, Anderson, and Pickens), leading to an increased share of the
$16.5 billion Upstate deposit market. In just one year, our deposit market share increased
from 0.42% at June 30, 2005 to 1.07% at June 30, 2006. This growth is certainly unusually
strong for a two-year-old de novo institution.

# Our Unusually Strong Team

The heart and soul of any community
bank is its people. In this regard, much of our success can be directly attributed to our
officers and employees.

As we mentioned in last years
report, to be a part of one of the fastest growing community banks in the country takes an
unusual combination of teamwork, dedication, professionalism, and a level of flexibility
not normally seen in todays working environment. Our associates continue to
exemplify these qualities in spite of the challenges that inevitably accompany rapid
growth, such as technological changes, workload, and regulatory demands. We would like to
take this opportunity to acknowledge the outstanding performance of our associates. Their
productivity, energy and enthusiasm are our competitive advantage.

5

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[Clockwise from left: President David
Miller with customers Ed and Paul Patterson of Cherokee Masonry; CEO Allan Ducker with
customer Tim Kerns of Tremont Church of God; City Executive Dwayne Stickler with customer
Dr. Anne Tuggle of Families First Family Medicine; Allan Ducker and City Executive Jeff
Kirby with customer Randy Stone of Carolina Gas Piping.]

Delivering an Unusual
Customer Experience What makes the CommunitySouth customer experience unusual? It is being greeted by your second step in the lobby. It is
being treated to our free signature refreshment center, featuring freshly baked cookies,
soft drinks, coffee, and more. It is always reaching a courteous, knowledgeable, local
person at the end of the phone line. It is knowing that if you get your deposit in at 6
pm, you will still receive same day credit. It is the peace of mind in knowing that when
youre traveling, you can visit any ATM in the country and access your account free
of charge. It is knowing that your loan request or service issue will be handled in a
prompt manner by an empowered local banker. And for our business customers, its
knowing that we can bring the bank to you with our free business courier service.

Our number one corporate goal has
always been and always will be excellence in customer service. Execution of our customer
service strategies is a key factor to our continued success. Through the continuous
development of different employee recognition and incentive programs, and ongoing
training, education and motivation initiatives, we continue to enhance our customer
service culture. We are proud to report that based on our recent customer satisfaction
surveys, 98% of our customers rated our service superior or very good, while 99% of
customers surveyed said they would recommend CommunitySouth to family and friends. This is
a key statistic, as we consider our customers an integral component of our sales force.
Our commitment to providing unusually great customer service is what sets us apart from
the competition.

Unusually Progressive
with Innovative Products and ServicesA key component of delivering
excellent customer service is providing the banking services our customers need to achieve
their financial goals. We are constantly developing products and services to more
effectively meet the changing needs of our customers. During 2006, we launched several new
products and services, including remote deposit, money market sweep accounts,
CommunitySouth at Work, health savings accounts, and a revised shareholder banking
package.

Thus far, we have emphasized a
strategy targeting small to medium-sized businesses because these customers are often
underserviced by larger institutions and are a perfect fit for CommunitySouth. In 2006 we
created a Commercial Deposit Specialist position designed to cater to this segment of our
customer base. This position is responsible for obtaining new customers and expanding
existing relationships with a focus on our commercial deposit, cash management and payment
products.

6

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[Chart of total assets]

There is Value in the
UnusualIt is clear that your Company continued to achieve highly unusual results in 2006, translating into increased
shareholder value. While this was a tremendous year for CommunitySouth, 2007 brings many
challenges such as an inverted yield curve and resulting margin pressure, regulatory
scrutiny, and a very competitive landscape.

However, times of challenge also
bring times of opportunity. We believe our Company is well positioned to meet the
challenges and seize the opportunities that lie ahead by a continued focus on our
strategic vision. Our strategy combines an intense customer-focused business model with
continued loan growth, a quality credit culture, increased core deposit funding and
providing innovative products and services that one would typically expect to find at a
much larger institution.

In closing, all of us at
CommunitySouth are deeply grateful for the results we achieved in 2006, and are firmly
committed to meeting the challenges ahead. We would like to thank you, our shareholders,
customers, and friends for your support and for sharing the CommunitySouth vision. Without
a doubt, there is value in the unusual at CommunitySouth.

As always, your questions and
comments are welcome.

Sincerely,

Daniel E. YoungbloodChairman
of the Board

C. Allan Ducker, III
Chief Executive Officer

David A. MillerPresident

John W. Hobbs
Chief Financial Officer

7

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# A Growth Company 
OTCBB: CBSO

Chart 
Total Loans/Deposits ($ Millions) (unaudited)

ChartNet Income ($
Thousands) (unaudited)

Chart 
Earnings Per Share (Diluted)(unaudited)

Chart
Stock Price (Split Adjusted)(unaudited)

8

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# Unusual Fan Mail!
Listen to what our customers are saying

CommunitySouth is a different kind of
bank. And one of the main differences is our unsurpassed customer service. We greet you by
your second step in the lobby. Live people in local branches answer your telephone calls.
Customers are called by name and thanked for their business, and much more!

We also distribute customer
satisfaction surveys to ensure we are exceeding our customers expectations. 98% of
customers rate our service as excellent or very good. 99% said they would refer a friend
or family member to CommunitySouth.

I think you are the best bank
out there! I love your bank.

For someone to say I want to
earn your business, then actually do it is another thing! Great job!"

Ive only been in the bank
two or three times and they already know my name! Very cool!"

My mother recommended
CommunitySouth to me, and we both agree it is the friendliest and most efficient bank
weve come across!"

I have never seen a bank with
so many friendly people. Great people to work with.

CommunitySouth has done a great
job of making banking enjoyable!"

I LOVE the fact that I get a
live person and not an automated system when calling CommunitySouth.

Wonderful! Best
banking experience ever!"

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# CommunitySouth in the
News Unusually good news travels fast

CommunitySouths focus on
creating an exceptional customer experience has fueled our growth and helped set a new
standard for community banks in the Upstate region. In addition to prompting unusual fan
mail from our customers, our unusually good service initiatives and unusually strong
financial performance has the local media talking.

[Photos of newspaper and magazine
articles]

10

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# Selected Financial Data

The following selected financial data
for the years ended December 31, 2005 and 2006 and for the period March 20, 2004
(inception) to December 31, 2004 was derived from the consolidated financial statements
and other data of CommunitySouth Bancshares, Inc. and subsidiary (the
Company). The selected financial data should be read in conjunction with the
consolidated financial statements of the Company, including the accompanying notes,
included elsewhere herein.

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
share and per share data has been adjusted for all periods prior to the splits.

|                                                    | 2006 | 2005 | 2004
|--------------------------------------------------- | ---- | ---- | ----
|(Dollars in thousands except per share data)        |      |      |     
|Income Statement Data:                              |      |      |     
|Interest income                                     |      |      | $   
|Interest expense                                    |      |      |     
|                                                    |      |      |     
|Net interest income                                 |      |      |     
|Provision for loan losses                           |      |      |     
|                                                    |      |      |     
|Net interest income after provision for loan losses |      |      |     
|                                                    |      |      |     
|Noninterest income                                  |      |      |     
|Noninterest expense                                 |      |      |     
|                                                    |      |      |     
|Income (loss) before income taxes                   |      |      |     
|                                                    |      |      |     
|Income tax expense (benefit)                        |      |      |     
|                                                    |      |      |     
|Net income (loss)                                   |      |      | $   
|                                                    |      |      |     
|Balance Sheet Data (period end):                    |      |      |     
|Assets                                              |      |      | $   
|Earning assets                                      |      |      |     
|Securities (1)                                      |      |      |     
|Loans (2)                                           |      |      |     
|Allowance for loan losses                           |      |      |     
|Deposits                                            |      |      |     
|Shareholders equity                                |      |      |     
|                                                    |      |      |     
|Per-Share Data:                                     |      |      |     
|Basic net income (loss)                             |      |      | $   
|Diluted net income (loss)                           |      |      |     
|Book value (period end)                             |      |      |     
|                                                    |      |      |     
|Return on Equity and Assets:                        |      |      |     
|Return on average assets                            |      |      |     
|Return on average equity                            |      |      |     
|Average equity to average assets ratio              |      |      |     

_________________

(1)    
          Nonmarketable securities are stated at cost.(2)    
          Loans are stated at gross amounts before allowance for loan losses.

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# Forward Looking
Statements

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

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

| |  | our rapid growth to date and short operating history;
| | - | -----------------------------------------------------

| |  | 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 lack of seasoning of our loan portfolio, especially given our rapid loan growth;
| | - | ------------------------------------------------------------------------------------

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

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

| |  | 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.
| | - | --------------------------------------------------------------------------------------------------------------------

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

A copy of the our Annual Report on
Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and
Exchange Commission, which contains a discussion of certain risks and uncertainties that
could affect our forward-looking statements, will be sent to any stockholder without
charge upon written request to: CommunitySouth Bancshares, Inc., Attn: John W. Hobbs,
Chief Financial Officer, 6602 Calhoun Memorial Highway, Easley, South Carolina 29640.

# Market for Common Stock
and Dividends

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.

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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

As
of March 23, 2007, there were 4,698,697 shares of common stock outstanding held by
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 Bank and Trust 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.

# COMMUNITYSOUTH
BANCSHARES, INC.MANAGEMENTS DISCUSSION AND ANALYSIS

# Basis of Presentation

The following discussion should be
read in conjunction with the Companys Financial Statements and the Notes thereto and
the other financial data included elsewhere in this Annual Report. The financial
information provided below has been rounded in order to simplify its presentation.
However, the ratios and percentages provided below are calculated using the detailed
financial information contained in the Financial Statements, the Notes thereto and the
other financial data included elsewhere in this Annual Report.

# General

CommunitySouth Bancshares, Inc. is a
bank holding company headquartered in Easley, South Carolina. Its subsidiary,
CommunitySouth Bank and Trust (the Bank), opened for business on January 18,
2005. The principal business activity of the Bank is to provide banking services to
domestic markets, principally in the upstate of South Carolina. The deposits of the Bank
are insured by the Federal Deposit Insurance Corporation. The Company completed an initial
public offering of its common stock in which it sold a total of 4,681,069 shares at $6.40
per share as adjusted for all previous stock splits. Proceeds of the offering were used to
pay organizational costs and provide the initial capital for the Bank.

# Overview

The following discussion describes
our results of operations for the years ended December 31, 2005 and 2006 and also analyzes
our financial condition as of December 31, 2005 and 2006. Because our bank opened for
business on January 18, 2005, a comparison of the year ended December 31, 2005 to the year
ended December 31, 2004 is not meaningful. Until January 2005, our principal activities
related to our organization, the conducting of our initial public offering, the pursuit of
approvals from the State Board of Financial Institutions for our application to charter
the bank, the pursuit of approvals from the Federal Reserve to become a bank holding
company, and the pursuit of approvals from the FDIC for our application for insurance of
the deposits of the bank. We received approval from the FDIC, Federal Reserve Board
(Federal Reserve), and the State Board of Financial Institutions in January
2005, and commenced business on January 18, 2005.

Like most community banks, we derive
most of our income from interest we receive on our loans and investments. Our primary
source of funds for making these loans and investments is our deposits, on which we pay
interest. Consequently, one of the key measures of our success is our amount of net
interest income, or the difference between the income on our interest-earning assets, such
as loans and investments, and the expense on our interest-bearing liabilities, such as
deposits. Another

13

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key measure is the spread between the
yield we earn on these interest-earning assets and the rate we pay on our interest-bearing
liabilities.

Of course, there are risks inherent
in all loans, so we maintain an allowance for loan losses to absorb probable losses on
existing loans that may become uncollectible. We establish and maintain this allowance by
charging a provision for loan losses against our operating earnings. In the following
section we have included a detailed discussion of this process.

In addition to earning interest on
our loans and investments, we earn income through fees and other expenses we charge to our
customers. We describe the various components of this noninterest income, as well as our
noninterest expense, in the following discussion.

# Results of Operations

# Results of operations are
only presented for the years ended December 31, 2006 and 2005 since the Bank opened for
business on January 18, 2005.

Net interest income increased $4.3
million, or 137.2%, to $7.4 million in 2006, up from net interest income of $3.1 million
in 2005. The primary component of interest income in 2006 was interest on loans, including
fees, of $13.6 million, as compared to $4.5 million in 2005. The increase in net interest
income was due primarily to an increase in average earning assets, which increased by
$114.1 million, or 153.0%, in 2006 due to continued growth in the loan portfolio during
this second year of operation.

The Companys net interest
spread and net interest margin were 3.05% and 3.93% in 2006, compared to 2.76% and 4.18%
in 2005, respectively. Yields on average earning assets increased from 6.68% in 2005 to
7.79% in 2006. Rates on average interest bearing liabilities increased from 3.92% in 2005
to 4.74% in 2006. These increases of rates on the asset and liability side of the balance
sheet resulted in a net increase in net interest spread of 0.29%. The net interest margin,
however, declined by 0.25% due to the increased leveraging of our capital. Average
shareholder equity was 58% of average interest bearing liabilities in 2005 and 18% of
average interest bearing liabilities in 2006.

The provision for loan losses was
$1.5 million in 2006, compared to $1.6 million in 2005. The charges to the provision were
to maintain the allowance for loan losses at a level sufficient to cover estimated losses
inherent in the loan portfolio.

Noninterest income increased
$521,608, or 162.5% in 2006, up from noninterest income of $320,902 in 2005. The increase
is primarily attributable to an increase in mortgage loan origination fees, which
increased $367,639, or 134.0% to $642,066 for the year ended December 31, 2006 due to our
increased volume in mortgage loan originations. Service charges on deposit accounts
increased $62,000, or 227.5%, to $89,000 in 2006, as compared to service charges on
deposit accounts of $27,000 in 2005, due to the increased volume in deposit accounts.

Noninterest expense increased $2.5
million, or 93.9%, to $5.2 million in 2006, compared to noninterest expense of $2.7
million in 2005. Noninterest expense increased in all categories as a result of our
continued growth. Salaries and employee benefits increased $1.5 million to $2.8 million
for the year ended December 31, 2006. This increase is attributable to normal pay
increases, hiring of additional staff to meet the needs associated with our growth,
including the opening of three full service branches in 2006, and incentive compensation
for commercial lenders and branch managers. The companys efficiency ratio was 63% in
2006 compared to 78% in 2005. The efficiency ratio is defined as noninterest expense
divided by the sum of net interest income and noninterest income, net of gains and losses
on sales of assets

The Companys net income was
$1,157,000 in 2006, compared to a net loss of $615,627 in 2005. The net income for the
year reflects our continued growth, as average earning assets increased from $74.6 million
in 2005 to $188.8 million in 2006. Return on average assets during 2006 was 0.59% compared
to a negative return of 0.77% in 2005. Net income was after an income tax expense of
$360,420 in 2006 and an income tax benefit of $179,035 in 2005, respectively. The income
tax expense, or benefit, was based on an effective tax rate of 34%. See Notes 1 and 6 to
the consolidated financial statements for additional information about income taxes.

# Net Interest Income

General.
          The largest component of the Companys net income is its net interest
          income, which is the difference between the income earned on assets and interest
          paid on deposits and borrowings used to support such assets. Net interest income
          is

14

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determined by the yields  earned on the  Companys  interest-earning  assets and the rates
paid on its interest-bearing liabilities, as well as the relative amounts of interest-earning assets and
interest-bearing liabilities. Net interest income divided by average interest-earning
assets represents the Companys net interest margin. The net interest spread is the
difference between the yield we earn on our interest-earning assets and the rate we pay on
our interest-bearing liabilities.

Average Balances, Income and
Expenses and Rates. The following tables set forth, for the years ended
December 31, 2006 and 2005, information related to the Companys average balance
sheet and its average yields on earning assets and average costs of interest-bearing
liabilities. Such yields are derived by dividing income or expense by the average balance
of the corresponding earning assets or interest-bearing liabilities. Average balances have
been derived from the daily balances throughout the periods indicated.

|                                       | 2006 | 2005
|-------------------------------------- | ---- | ----
|
|
|Assets                                 |      |     
|Earning assets:                        |      |     
|Loans (1)                              |      |     
|Securities, taxable                    |      |     
|Federal funds sold and other           |      |     
|                                       |      |     
|Total earning assets                   |      |     
|                                       |      |     
|Cash and due from banks                |      |     
|Premises and equipment                 |      |     
|Other assets                           |      |     
|Allowance for loan losses              |      |     
|                                       |      |     
|Total assets                           |      |     
|                                       |      |     
|Liabilities                            |      |     
|Interest-bearing liabilities:          |      |     
|Federal funds purchased                |      |     
|Interest-bearing                       |      |     
|transaction accounts                   |      |     
|Savings deposits                       |      |     
|Time deposits                          |      |     
|                                       |      |     
|Total interest-bearing liabilities     |      |     
|                                       |      |     
|Demand deposits                        |      |     
|Accrued interest and other liabilities |      |     
|                                       |      |     
|Total liabilities                      |      |     
|Shareholders' equity                   |      |     
|                                       |      |     
|Total liabilities and                  |      |     
|shareholders' equity                   |      |     
|                                       |      |     
|                                       |      |     
|Net interest spread                    |      |     
|Net interest income                    |      |     
|                                       |      |     
|Net interest margin                    |      |     

|_________________ | 
|----------------- | 

|(1) | There were $283,934 of loans in non accrual status as of December 31, 2006 and
no loans in nonaccrual status in 2005.  The effect of fees collected on loans
in 2005 and 2006 totaled $207,645 and $527,248,
respectively, and increased the annualized yield on loans by 0.32% from 6.78% for 2005 and
0.32% from 7.80% for 2006. The effect of such fees on the annualized yield on earning
assets was an increase of 0.28% from 6.40% in 2005 and 0.28% from 7.51% in 2006. The
effect of such fees on net interest spread and net interest margin was an increase of
0.28% and 0.27% from 2.48% and 3.91%, respectively in 2005. The effect on net interest
spread and net interest margin was an increase of 0.28% and 0.28% from 2.77% and 3.65%,
respectively in 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest  Sensitivity.  The Company  monitors and manages the pricing and maturity of its assets and liabilities in
order to diminish  the  potential  adverse  impact that  changes in interest  rates could have on its net  interest
income.  The principal

15

---

monitoring  technique  employed by the Company
is the measurement of the Company's interest sensitivity gap, which is
the positive or negative dollar difference between assets and liabilities that are subject
to interest rate repricing within a given period of time. Interest rate sensitivity can be
managed by repricing assets or liabilities, selling securities available for sale,
replacing an asset or liability at maturity, or adjusting the interest rate during the
life of an asset or liability. Managing the amount of assets and liabilities repricing in
this same time interval helps to hedge the risk and minimize the impact on net interest
income of rising or falling interest rates.

The following table sets forth the
Companys interest rate sensitivity at December 31, 2006.

|                                    |  | After Three |   | Greater |  
|----------------------------------- |  | ----------- | - | ------- | -
|
|
|
|Assets                              |  |             |   |         |  
|Earning assets:                     |  |             |   |         |  
|Loans                               |  |             | $ | 115,256 |  
|Investment securities and Fed Funds |  |             |   | 17,925  |  
|                                    |  |             |   |         |  
|Total earning assets                |  |             |   | 133,181 |  
|                                    |  |             |   |         |  
|Liabilities                         |  |             |   |         |  
|Interest-bearing liabilities:       |  |             |   |         |  
|Interest-bearing deposits:          |  |             |   |         |  
|Demand deposits                     |  |             |   | 5,508   |  
|Savings deposits                    |  |             |   | 13,868  |  
|Time deposits                       |  |             |   | 29,275  |  
|                                    |  |             |   |         |  
|Total interest-bearing liabilities  |  |             |   | 48,651  |  
|                                    |  |             |   |         |  
|Period gap                          |  |             | $ | 84,530  |  
|                                    |  |             |   |         |  
|Cumulative gap                      |  |             | $ | 84,530  |  
|                                    |  |             |   |         |  
|Ratio of cumulative gap             |  |             |   |         |  
|to total earning assets             |  |             |   | 35.82   | %

The above table reflects the balances
of interest-earning assets and interest-bearing liabilities at the earlier of their
repricing or maturity dates. Overnight federal funds are reflected at the earliest pricing
interval due to the immediately available nature of the instruments. Scheduled payment
amounts of fixed rate amortizing loans are reflected at each scheduled payment date.
Scheduled payment amounts of variable rate amortizing loans are reflected at each
scheduled payment date until the loan may be repriced contractually; the unamortized
balance is reflected at that point. Interest-bearing liabilities with no contractual
maturity, such as savings deposits and interest-bearing transaction accounts, are
reflected in the earliest repricing period due to contractual arrangements which give the
Company the opportunity to vary the rates paid on those deposits within a thirty-day or
shorter period. Fixed rate time deposits, principally certificates of deposit, are
reflected at their contractual maturity date.

The Company generally would benefit
from increasing market rates of interest when it has an asset-sensitive gap position and
generally would benefit from decreasing market rates of interest when it is
liability-sensitive. The Company is cumulatively asset sensitive over all periods.
However, the Companys gap analysis is not a precise indicator of its interest
sensitivity position. The analysis presents only a static view of the timing of maturities
and repricing opportunities, without taking into consideration that changes in interest
rates do not affect all assets and liabilities equally. Net interest income may be
impacted by other significant factors in a given interest rate environment, including
changes in the volume and mix of earning assets and interest-bearing liabilities.

# Provision and Allowance
for Loan Losses

General.    
          The Company has developed policies and procedures for evaluating the overall
          quality of its credit portfolio and the timely identification of potential
          problem loans. On a quarterly basis, the Companys Board of Directors
          reviews and approves the appropriate level for the Companys allowance for
          loan losses based upon managements recommendations, the results of the
          internal monitoring and reporting system, and an analysis of economic conditions
          in its market.

16

---

Additions to the allowance for loan
losses, which are expensed as the provision for loan losses on the Companys income
statement, are made periodically to maintain the allowance at an appropriate level based
on managements analysis of the estimated losses inherent in the loan portfolio. Loan
losses and recoveries are charged or credited directly to the allowance. The amount of the
provision is a function of the level of loans outstanding, the level of nonperforming
loans, historical loan loss experience, the amount of loan losses actually charged against
the reserve during a given period, and current and anticipated economic conditions.

The Companys allowance for loan
losses is based upon judgments and assumptions about risk elements in the portfolio,
future economic conditions, and other factors affecting borrowers. The process includes
identification and analysis of loss potential in various portfolio segments utilizing a
credit risk grading process and specific reviews and evaluations of significant problem
credits. In addition, management monitors the overall portfolio quality through observable
trends in delinquencies, charge-offs, and general and economic conditions in the service
area. The adequacy of the allowance for loan losses and the effectiveness of the
Companys monitoring and analysis system are also reviewed periodically by the
banking regulators and the Companys independent auditors.

Based on present information and an
ongoing evaluation, management considers the allowance for loan losses to be adequate to
meet presently known and inherent losses in the loan portfolio. Managements judgment
about the adequacy of the allowance is based upon a number of assumptions about future
events which it believes to be reasonable but which may or may not be accurate. Thus,
there can be no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the allowance for loan losses will not be
required. The Company does not allocate the allowance for loan losses to specific
categories of loans but evaluates the adequacy on an overall portfolio basis utilizing a
risk grading system.

The following table sets forth
certain information with respect to the Companys allowance for loan losses and the
composition of charge-offs and recoveries for the year ended December 31, 2005 and 2006.

# Allowance for Loan Losses

|(Dollars in thousands)                                    | 2006 | 2005
|--------------------------------------------------------- | ---- | ----
|
|Total loans outstanding at end of period                  |      |     
|                                                          |      |     
|Average loans outstanding                                 |      |     
|                                                          |      |     
|Balance of allowance for loan losses at beginning of year |      |     
|                                                          |      |     
|Provision for loan losses                                 |      |     
|                                                          |      |     
|Balance of allowance for loan losses at end of year       |      |     
|                                                          |      |     
|Allowance for loan losses to period end loans             |      |     
|                                                          |      |     

# Nonperforming Assets

Nonperforming
Assets. There were $283,934 of nonaccrual loans at December 31, 2006 and no
nonaccrual loans at December 31, 2005. There were no loans past due 90 days or more and
still accruing interest, or restructured loans at December 31, 2005 or December 31, 2006.

The Companys policy with
respect to nonperforming assets is as follows. Accrual of interest will be discontinued on
a loan when management believes, after considering economic and business conditions and
collection efforts that the borrowers financial condition is such that the
collection of interest is doubtful. A delinquent loan will generally be placed in
nonaccrual status when it becomes 90 days or more past due unless the estimated net
realizable value of collateral exceeds the principal balance and accrued interest. When a
loan is placed in nonaccrual status, all interest which has been accrued on the loan but
remains unpaid will be reversed and deducted from current earnings as a reduction of
reported interest income. No additional interest will be accrued on the loan balance until
the collection of both principal and interest becomes reasonably certain. When a problem
loan is finally resolved, there may ultimately be an actual writedown or charge-off of the
principal balance of the loan to the allowance for loan losses.

17

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Potential Problem
Loans. Potential problem loans are loans that are not included in impaired
loans (nonaccrual loans or loans past due 90 days or more and still accruing), but about
which management has become aware of information about possible credit problems of the
borrowers that causes doubt about their ability to comply with current repayment terms. At
December 31, 2006 and December 31, 2005, the Company had not identified any criticized or
classified loans through its internal review mechanisms. The results of this internal
review process are considered in determining managements assessment of the adequacy
of the allowance for loan losses.

# Noninterest Income and
Expense

Noninterest
Income. The largest component of noninterest income was mortgage
origination fees which totaled $642,066 and $274,000 for the years ended December 31, 2006
and 2005, respectively.

The following table sets forth the
principal components of noninterest income for the years ended December 31, 2005 and 2006.

|(Dollars in thousands)              |  | 
|----------------------------------- |  | 
|
|Mortgage origination fees           |  | 
|Service charges on deposit accounts |  | 
|Other income                        |  | 
|                                    |  | 
|                                    |  | 
|Total noninterest income            |  | 
|                                    |  | 

Noninterest Expense.Salaries and employee benefits comprised the largest component of noninterest expense
which totaled $2.8 million and $1.4 million for the years ended December 31, 2006 and
2005, respectively. All of the other categories of noninterest expense totaled $2.4
million and $1.3 million for the years ended December 31, 2006 and 2005, respectively.

The following table sets forth the
primary components of noninterest expense for the years ended December 31, 2006 and 2005.

|(Dollars in thousands)           | 2006 | 2005
|-------------------------------- | ---- | ----
|
|Salaries and benefits            |      |     
|Professional fees                |      |     
|Advertising                      |      |     
|Office supplies                  |      |     
|Data processing                  |      |     
|Net occupancy                    |      |     
|Depreciation                     |      |     
|Equipment maintenance and rental |      |     
|Loan expenses                    |      |     
|Telephone                        |      |     
|Other                            |      |     
|                                 |      |     
|Total noninterest expense        |      |     
|                                 |      |     

# Earning Assets

Loans.Loans are the largest category of earning assets and typically provide
          higher yields than the other types of earning assets. Loans also entail greater
          credit and liquidity risks than most of the Companys other investments and
          short-term interest-earning cash and cash equivalents, which management attempts
          to control and counterbalance. Loans averaged $64.0 million and $168.1 million
          in 2005 and 2006, respectively. Total loans were $115.7 million and $217.7
          million at December 31, 2005 and 2006, respectively.

18

---

The following table sets forth the
composition of the loan portfolio by category at December 31, 2006 and 2005 and highlights
the Companys general emphasis on mortgage lending.

|                           | 2006 | 2005
|-------------------------- | ---- | ----
|
|
|
|Real estate - construction |      |     
|Real estate - mortgage     |      |     
|Commercial and industrial  |      |     
|Consumer                   |      |     
|                           |      |     
|Total loans, gross         |      |     
|                           |      |     
|Allowance for loan losses  |      |     
|                           |      |     
|Net loans                  |      |     
|                           |      |     

The largest component of loans in the
Companys loan portfolio is real estate mortgage loans. At December 31, 2005 and
2006, real estate mortgage loans, which consist of first and second mortgages on single or
multi-family residential dwellings, loans secured by commercial and industrial real estate
and other loans secured by multi-family properties and farmland, totaled $69.0 million and
$128.7 million, respectively and represented 59.60% and 59.13%, respectively of the total
loan portfolio. In the context of this discussion, a real estate mortgage loan
is defined as any loan, other than a loan for construction purposes, secured by real
estate, regardless of the purpose of the loan. It is common practice for financial
institutions in the Companys market area to obtain a security interest in real
estate whenever possible, in addition to any other available collateral. This collateral
is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to
increase the magnitude of the real estate loan portfolio component.

The demand for residential and
commercial real estate loans in the upstate South Carolina market is strong due to the
historically low interest rate environment. We would anticipate this demand to slow if
interest rates were to rise.

Real estate construction loans
totaled $35.7 million and $69.0 million at December 31, 2005 and 2006, respectively. In
the context of this discussion, a real estate construction loan is defined as
any loan for construction purposes, secured by real estate, regardless of the purpose of
the loan. It is common practice for financial institutions in the Companys market
area to obtain a security interest in real estate whenever possible, in addition to any
other available collateral. This collateral is taken to reinforce the likelihood of the
ultimate repayment of the loan and tends to increase the magnitude of the real estate loan
portfolio component.

Commercial and industrial loans
totaled $9.1 million and $17.2 million at December 31, 2005 and 2006, respectively and
comprised 7.85% and 7.92%, respectively of the total portfolio. In the context of this
discussion, a commercial and industrial loan is defined as any loan for a
non-consumer purpose, not secured by real estate.

The Companys loan portfolio
also includes consumer loans. At December 31, 2005 and 2006, consumer loans totaled $1.9
million and $2.7 million, respectively and represented 1.66% and 1.24%, respectively of
the total loan portfolio.

The Companys loan portfolio
reflects the diversity of its upstate South Carolina market. The Companys offices
are located in Easley, Spartanburg, Mauldin, Greer and Anderson, South Carolina.
Management expects the area to remain stable with continued growth in the near future. The
diversity of the economy creates opportunities for all types of lending. The Company does
not engage in foreign lending.

19

---

The repayment of loans in the loan
portfolio as they mature is also a source of liquidity for the Company. The following
table sets forth the Companys loans maturing within specified intervals at December
31, 2006 and 2005.

|                                    |  | Over One |   |       
|----------------------------------- |  | -------- | - | ------
|
|
|
|
|Real estate - construction          |  |          | $ | 38,797
|Real estate - mortgage              |  |          |   | 28,676
|Commercial and industrial           |  |          |   | 7,215 
|Consumer                            |  |          |   | 740   
|                                    |  |          |   |       
|                                    |  |          | $ | 75,428
|                                    |  |          |   |       
|                                    |  |          |   |       
|Loans maturing after one year with: |  |          |   |       
|Fixed interest rates                |  |          |   |       
|Floating interest rates             |  |          |   |       
|                                    |  |          |   |       
|                                    |  |          |   |       
|                                    |  |          |   |       

|                                    |  | Over One |   |       
|----------------------------------- |  | -------- | - | ------
|
|
|
|
|Real estate - construction          |  |          | $ | 17,359
|Real estate - mortgage              |  |          |   | 16,105
|Commercial and industrial           |  |          |   | 4,349 
|Consumer                            |  |          |   | 786   
|                                    |  |          |   |       
|                                    |  |          | $ | 38,599
|                                    |  |          |   |       
|                                    |  |          |   |       
|Loans maturing after one year with: |  |          |   |       
|Fixed interest rates                |  |          |   |       
|Floating interest rates             |  |          |   |       
|                                    |  |          |   |       
|                                    |  |          |   |       
|                                    |  |          |   |       

The information presented in the
above table is based on the contractual maturities of the individual loans, including
loans which may be subject to renewal at their contractual maturity. Renewal of such loans
is subject to review and credit approval as well as modification of terms upon their
maturity. Consequently, management believes this treatment presents fairly the maturity
and repricing structure of the loan portfolio shown in the above table.

Investment
Securities. The investment securities portfolio is also a component of the
Companys total earning assets. Total securities averaged $329,885 and $23,000 in
2006 and 2005, respectively. At December 31, 2006 and 2005, the total securities portfolio
was $370,800 and $82,700, respectively. Securities were primarily non-marketable equity
investments recorded at their cost.

The following table sets forth the
fair value of the securities held by the Company at December 31, 2006 and 2005.

|(Dollars in thousands)          | 2006 | 2005
|------------------------------- | ---- | ----
|Nonmarketable equity securities |      |     
|Marketable equity securities    |      |     
|                                |      |     
|Total investment securities     |      |     
|                                |      |     

Short-Term
Investments.Short-term investments, which consist primarily of federal
funds sold, averaged $20.3 million and $10.6 million in 2006 and 2005, respectively with a
weighted average yield of 5.12% and 4.15% in 2006 and 2005, respectively. These funds are
an important source of the Companys liquidity. Federal funds are generally invested
in an

20

---

earning capacity on an overnight
basis. At December 31, 2006 and 2005, federal funds were $17.9 million and $17.5 million
at an overnight rate of 5.12% and 3.95%, respectively. The maximum outstanding balance of
federal funds sold at any month end during the years 2006 and 2005 was $30.3 million and
$29.3 million, respectively.

# Deposits

General.Average interest-bearing liabilities totaled $153.8 million and
          $47.5 million in 2006 and 2005, respectively. Average total deposits totaled
          $165.2 million and $51.5 million during 2006 and 2005, respectively. At December
          31, 2006 and 2005 total deposits were $217.0 million and $107.0 million,
          respectively.

The following table sets forth the
average deposits of the Company by category for the year ended December 31, 2006 and 2005.

|                           | 2006 | 2005
|-------------------------- | ---- | ----
|
|
|Noninterest bearing demand |      |     
|Interest bearing demand    |      |     
|Savings                    |      |     
|Time                       |      |     
|                           |      |     
|Total                      |      |     
|                           |      |     

The following table sets forth the deposits
of the Company by category as of December 31, 2006 and 2005.

|                              | 2006 | 2005
|----------------------------- | ---- | ----
|
|
|
|Noninterest bearing demand    |      |     
|Interest bearing demand       |      |     
|Savings                       |      |     
|Time deposits less than $100  |      |     
|Time deposits of $100 or over |      |     
|Brokered deposits             |      |     
|                              |      |     
|Total deposits                |      |     
|                              |      |     

Core deposits, which exclude
certificates of deposit of $100,000 or more and brokered deposits, provide a relatively
stable funding source for the Companys loan portfolio and other earning assets. The
Companys core deposits were $98.6 million and $28.7 million at December 31, 2006 and
2005, respectively, or 45.44% and 26.84%, respectively of total deposits. Certificates of
deposit of $100,000 or more and brokered deposits are not considered core deposits because
their retention can be expected to be heavily influenced by rates offered at renewal. Due
to the developed national market for certificates of deposit, we anticipate being able to
either renew or replace these deposits when they renew; however, no assurance can be given
that we will be able to replace them with deposits with the same terms.

Deposits have been a primary source
of funding. Management anticipates that deposits will continue to be the Companys
primary source of funding in the future. The Companys loan-to-deposit ratio was 100%
and 108% at December 31, 2006 and 2005, respectively. The maturity distribution of the
Companys time deposits of $100,000 or over at December 31, 2006 and 2005, is set
forth in the following table.

21

---

# Maturities of
Certificates of Deposit of $100,000 or More (Including Brokered Deposits)

|December 31, 2006                           |  |  | After Six |        | 
|------------------------------------------- |  |  | --------- | ------ | 
|
|
|
|
|Certificates of deposit of $100,000 or more |  |  | $         | 22,282 | 

Approximately and 19% of the
Companys time deposits of $100,000 or over had scheduled maturities within three
months, and 96% had maturities within twelve months as of December 31, 2006.

|December 31, 2006                           |  |  | After Six |       | 
|------------------------------------------- |  |  | --------- | ----- | 
|
|
|
|
|Certificates of deposit of $100,000 or more |  |  | $         | 6,600 | 

Approximately and 8% of the
Companys time deposits of $100,000 or over had scheduled maturities within three
months, and 97% had maturities within twelve months as of December 31, 2005. Large
certificate of deposit customers tend to be extremely sensitive to interest rate levels,
making these deposits less reliable sources of funding for liquidity planning purposes
than core deposits.

# Capital

The Federal Reserve and bank
regulatory agencies require bank holding companies and financial institutions to maintain
capital at adequate levels based on a percentage of assets and off-balance sheet
exposures, adjusted for risk weights ranging from 0% to 100%. The Federal Reserve
guidelines contain an exemption from the capital requirements for small bank holding
companies. On February 27, 2006, the Federal Reserve approved a new rule expanding
the definition of a small bank holding company. The new definition will
include bank holding companies with less than $500 million in total assets. Bank holding
companies will not qualify under the new definition if they (i) are engaged in significant
non-banking activities either directly or indirectly through a subsidiary, (ii) conduct
significant off-balance sheet activities, including securitizations or managing or
administering assets for third parties, or (iii) have a material amount of debt or equity
securities (including trust preferred securities) outstanding that are registered with the
SEC. The new rule was effective on March 30, 2006. Although the Company has less than $500
million in assets, it is unclear at this point whether it will otherwise meet the
requirements for qualifying as a small bank holding company. According to the
Federal Reserve, the revision of the criterion to exclude any bank holding company that
has outstanding a material amount of SEC-registered debt or equity securities reflects the
fact that SEC registrants typically exhibit a degree of complexity of operations and
access to multiple funding sources that warrants excluding them from the new policy
statement and subjecting them to the capital guidelines.   In the adopting
release for the new rule, the Federal Reserve stated that what constitutes a
material amount of SEC-registered debt or equity for a particular bank holding
company depends on the size, activities and condition of the relevant bank holding
company.  In lieu of using fixed measurable parameters of materiality across all
institutions, the rule provides the Federal Reserve with supervisory flexibility in
determining, on a case-by-case basis, the significance or materiality of activities
or securities outstanding such that a bank holding company should be excluded from the
policy statement and subject to the capital guidelines. Prior to adoption of this new
rule, our holding company was not subject to these capital guidelines, as it had less than
$150 million in assets at the time. Until the Federal Reserve provides further guidance on
the new rules, it will be unclear whether our holding company will be subject to the
exemption from the capital requirements for small bank holding companies. Regardless, our
Bank is well capitalized under these minimum capital requirements as set per
bank regulatory agencies.

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

22

---

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier
1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Tier 1 capital of the Bank consists of common
shareholders equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Banks Tier 2 capital
consists of the allowance for loan losses subject to certain limitations. Total capital
for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2
capital. The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total
risk-based capital.

The Bank is also required to maintain
capital at a minimum level based on quarterly average assets, which is known as the
leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the
minimum.

The Bank exceeded the regulatory
capital requirements at December 31, 2006 and 2005 as set forth in the following table.

# Analysis of Capital and
Capital Ratios

|(Dollars in thousands)                                             | 2006 | 2005
|------------------------------------------------------------------ | ---- | ----
|Tier 1 capital                                                     |      |     
|Tier 2 capital                                                     |      |     
|                                                                   |      |     
|Total qualifying capital                                           |      |     
|                                                                   |      |     
|Risk-adjusted total assets (including off-balance-sheet exposures) |      |     
|                                                                   |      |     
|Tier 1 risk-based capital ratio                                    |      |     
|Total risk-based capital ratio                                     |      |     
|Tier 1 leverage ratio                                              |      |     

# Off-Balance Sheet Risk

Through its operations, the Bank has
made contractual commitments to extend credit in the ordinary course of its business
activities. These commitments are legally binding agreements to lend money to the
Banks customers at predetermined interest rates for a specified period of time. At
December 31, 2006 and 2005, the Bank had issued commitments, including standby letters of
credit, to extend credit of $40.7 million and $25.0 million, respectively through various
types of commercial lending arrangements.

The following table sets forth the
length of time until maturity for unused commitments to extend credit at December 31, 2006
and 2005.

|                                    |  | After One | After Three |       |  |  
|----------------------------------- |  | --------- | ----------- | ----- |  | -
|
|
|
|
|Unused commitments to extend credit |  |           | $           | 1,224 |  | $
|Standby letters of credit           |  |           |             | 321   |  |  
|                                    |  |           |             |       |  |  
|                                    |  |           | $           | 1,545 |  | $
|                                    |  |           |             |       |  |  

Approximately $23.5 million of these
commitments to extend credit had variable rates.

|                                    |  | After One | After Three |     |  |  
|----------------------------------- |  | --------- | ----------- | --- |  | -
|
|
|
|
|Unused commitments to extend credit |  |           | $           | 86  |  | $
|Standby letters of credit           |  |           |             | 239 |  |  
|                                    |  |           |             |     |  |  
|                                    |  |           | $           | 325 |  | $
|                                    |  |           |             |     |  |  

23

---

Approximately $18.1 million of these commitments
to extend credit had variable rates.

The Bank evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on its credit
evaluation of the borrower. Collateral varies but may include accounts receivable,
inventory, property, plant and equipment, commercial and residential real estate.

# Critical Accounting
Policies

The Company has adopted various
accounting policies which govern the application of accounting principles generally
accepted in the United States in the preparation of our financial statements. Its
significant accounting policies are described in the footnotes to the consolidated
financial statements at December 31, 2006, included in this Annual Report to Shareholders,
and as filed with the Companys Annual Report on Form 10-KSB. Certain accounting
policies involve significant judgments and assumptions which have a material impact on the
carrying value of certain assets and liabilities. These accounting policies are considered
to be critical accounting policies. The judgments and assumptions used are based on
historical experience and other factors, which are believed to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions, actual results
could differ from these judgments and estimates which could have a material impact on the
carrying values of assets and liabilities and results of operations.

Management believes the allowance for
loan losses is a critical accounting policy that requires the most significant judgments
and estimates used in preparation of the consolidated financial statements. Refer to the
portion of this discussion that addresses the allowance for loan losses for a description
of our processes and methodology for determining our allowance for loan losses.

# Liquidity Management

Liquidity management involves
monitoring the Companys sources and uses of funds in order to meet its day-to-day
cash flow requirements while maximizing profits. Liquidity represents the ability of a
Company to convert assets into cash or cash equivalents without significant loss and to
raise additional funds by increasing liabilities. Without proper liquidity management, the
Company would not be able to perform the primary function of a financial intermediary and
would, therefore, not be able to meet the needs of the communities it serves.

Liquidity management is made more
complex because different balance sheet components are subject to varying degrees of
management control. For example, the timing of maturities of the investment portfolio is
very predictable and subject to a high degree of control at the time investment decisions
are made. However, net deposit inflows and outflows are far less predictable and are not
subject to nearly the same degree of control. The Company also has the ability to obtain
funds from various financial institutions should the need arise.

# Impact of Inflation

Unlike most industrial companies, the
assets and liabilities of financial institutions such as the Bank are primarily monetary
in nature. Therefore, interest rates have a more significant effect on the Banks
performance than do the effects of changes in the general rate of inflation and change in
prices. In addition, interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services. As discussed previously,
management seeks to manage the relationships between interest sensitive assets and
liabilities in order to protect against wide interest rate fluctuations, including those
resulting from inflation.

# Recently Issued
Accounting Standards

Accounting standards and
pronouncements of a recent nature are discussed in Notes to Consolidated Financial
Statements, Note 1  Summary of Significant Accounting Policies. Other accounting
standards that have been issued or proposed by authoritative standards-setting bodies that
do not require adoption until a future date are not expected to have a material impact on
the consolidated financial statements upon adoption.

24

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# Elliott Davis

To the Stockholders and
Board of Directors CommunitySouth Bancshares, Inc. and Subsidiary Easley, South Carolina

We
have audited the accompanying consolidated balance sheets of CommunitySouth
Bancshares, Inc. and Subsidiary(the Company) as of December
31, 2006 and 2005, and the related consolidated statements of operations, changes in
shareholders equity, and cash flows for the years ended December 31, 2006 and 2005.
These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of CommunitySouth Bancshares, Inc. and
Subsidiaryas of December 31, 2006 and 2005 and the results of their
operations and their cash flows for the years ended December 31, 2006 and 2005 in
conformity with accounting principles generally accepted in the United States of America.

/s/ Elliott Davis LLC

Greenville, South CarolinaMarch 27, 2007

25

---

# COMMUNITYSOUTH
BANCSHARES, INC.CONSOLIDATED BALANCE SHEETS

|                                                             | December 31,
|------------------------------------------------------------ | ------------
|
|Assets                                                       |             
|Cash and cash equivalents                                    |             
|Cash and due from bank                                       |             
|Federal funds sold                                           |             
|                                                             |             
|Total cash and cash equivalents                              |             
|Other investments, at cost                                   |             
|Loans, net                                                   |             
|Accrued interest receivable                                  |             
|Property and equipment, net                                  |             
|Bank owned life insurance                                    |             
|Other assets                                                 |             
|                                                             |             
|Total assets                                                 |             
|                                                             |             
|Liabilities and Shareholders Equity                         |             
|                                                             |             
|Liabilities                                                  |             
|Deposits                                                     |             
|Noninterest bearing                                          |             
|Interest bearing                                             |             
|                                                             |             
|Total deposits                                               |             
|                                                             |             
|Accrued expense                                              |             
|Accrued interest payable                                     |             
|Other liabilities                                            |             
|                                                             |             
|Total liabilities                                            |             
|                                                             |             
|Commitments and Contingencies                                |             
|                                                             |             
|Shareholders Equity                                         |             
|Preferred stock, par value $.01 per share                    |             
|10,000,000 shares authorized, no shares issued               |             
|Common stock, par value $.01 per share                       |             
|10,000,000 shares authorized; 4,697,697 and 4,681,069 issued |             
|and outstanding at December 31, 2006 and December 31, 2005   |             
|Additional paid-in capital                                   |             
|Retained earnings (deficit)                                  |             
|                                                             |             
|Total shareholders' equity                                   |             
|                                                             |             
|Total liabilities and shareholders' equity                   |             
|                                                             |             

26

---

# COMMUNITYSOUTH
BANCSHARES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                    | Year ended December 31,
|--------------------------------------------------- | -----------------------
|
|
|Interest income                                     |                        
|Interest and fees on loans                          |                        
|Interest and dividends on investments               |                        
|                                                    |                        
|Total interest income                               |                        
|                                                    |                        
|Interest expense - deposits                         |                        
|                                                    |                        
|Net interest income                                 |                        
|                                                    |                        
|Provision for loan losses                           |                        
|                                                    |                        
|Net interest income after provision for loan losses |                        
|                                                    |                        
|Noninterest income                                  |                        
|Mortgage origination fees                           |                        
|Other                                               |                        
|                                                    |                        
|Total noninterest income                            |                        
|                                                    |                        
|Noninterest expense                                 |                        
|Salaries and benefits                               |                        
|Professional fees                                   |                        
|Advertising                                         |                        
|Supplies                                            |                        
|Data processing                                     |                        
|Occupancy                                           |                        
|Depreciation                                        |                        
|Equipment maintenance and rental                    |                        
|Loan expenses                                       |                        
|Telephone                                           |                        
|Other                                               |                        
|                                                    |                        
|Total noninterest expense                           |                        
|                                                    |                        
|Income (loss) before income taxes                   |                        
|                                                    |                        
|Income tax expense (benefit)                        |                        
|                                                    |                        
|Net income (loss)                                   |                        
|                                                    |                        
|Earnings (loss) per share (1)                       |                        
|Basic                                               |                        
|                                                    |                        
|Diluted                                             |                        
|                                                    |                        
|Weighted average basic shares outstanding (1)       |                        
|                                                    |                        
|Weighted average diluted shares outstanding (1)     |                        
|                                                    |                        

(1)   
          Adjusted for 5-for-4 stock splits effective January 16, 2006 and January 16,
          2007.

26

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

---

# COMMUNITYSOUTH
BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY 
For the years ended December 31, 2006 and December 31, 2005

|                                |  |  |  | Retained  | Total
|------------------------------- |  |  |  | --------- | -----
|
|
|
|Balance at December 31, 2004    |  |  |  | 4,681,069 |      
|                                |  |  |  |           |      
|Net loss                        |  |  |  | -         |      
|                                |  |  |  |           |      
|Additional offering costs       |  |  |  | -         |      
|                                |  |  |  |           |      
|Balance at December 31, 2005    |  |  |  | 4,681,069 |      
|                                |  |  |  |           |      
|Net income                      |  |  |  | -         |      
|                                |  |  |  |           |      
|Stock based compensation        |  |  |  | -         |      
|                                |  |  |  |           |      
|Cash paid for fractional shares |  |  |  | (417      | )    
|                                |  |  |  |           |      
|Stock options exercised         |  |  |  | 17,045    |      
|                                |  |  |  |           |      
|Balance at December 31, 2006    |  |  |  | 4,697,697 |      
|                                |  |  |  |           |      

(1)    
          Adjusted for 5-for-4 stock splits effective January 16, 2006 and January 16,
          2007.

27

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

---

# COMMUNITYSOUTH
BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                   | Year ended December 31,
|------------------------------------------------------------------ | -----------------------
|
|Operating activities                                               |                        
|Net income (loss)                                                  |                        
|Adjustments to reconcile net income (loss) to net cash provided by |                        
|operating activities:                                              |                        
|Provision for loan losses                                          |                        
|Stock based compensation                                           |                        
|Depreciation and amortization                                      |                        
|Deferred income tax benefit                                        |                        
|Increase in accrued interest receivable                            |                        
|Increase in accrued interest payable                               |                        
|Increase (decrease) in accrued expenses                            |                        
|Decrease (increase) in other assets                                |                        
|Increase (decrease) in other liabilities                           |                        
|                                                                   |                        
|Net cash provided by operating activities                          |                        
|                                                                   |                        
|Investing activities                                               |                        
|Decrease in restricted cash                                        |                        
|Purchase of bank owned life insurance                              |                        
|Net increase in loans outstanding                                  |                        
|Purchase of investments and FHLB stock                             |                        
|Purchase of property and equipment                                 |                        
|                                                                   |                        
|Net cash used in investing activities                              |                        
|                                                                   |                        
|Financing activities                                               |                        
|Net increase in deposit accounts                                   |                        
|Cash paid for fractional shares                                    |                        
|Stock options exercised                                            |                        
|Refund of subscriptions                                            |                        
|Additional stock offering costs                                    |                        
|                                                                   |                        
|Net cash provided by financing activities                          |                        
|                                                                   |                        
|Net increase (decrease) in cash and cash equivalents               |                        
|                                                                   |                        
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                       |                        
|                                                                   |                        
|CASH AND CASH EQUIVALENTS, END OF YEAR                             |                        
|                                                                   |                        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                   |                        
|Cash paid for:                                                     |                        
|Interest                                                           |                        
|                                                                   |                        
|Income taxes                                                       |                        
|                                                                   |                        

28

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

---

# COMMUNITYSOUTH
BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Business activity and organization
CommunitySouth Bancshares, Inc. (the Company) is a South Carolina
corporation organized for the purpose of owning and controlling all of the capital stock
of CommunitySouth Bank and Trust (the Bank). The Bank is a state chartered
bank organized under the laws of South Carolina. From inception on March 20, 2004 through
January 18, 2005, the Company engaged in organizational and pre-opening activities
necessary to obtain regulatory approvals and to prepare its subsidiary, the Bank, to
commence business as a financial institution. The Company received approval from the
Federal Deposit Insurance Corporation (FDIC), Federal Reserve
(FRB) and the State Board of Financial Institutions in January 2005.

The Bank began operations on January
18, 2005. The Bank primarily is engaged in the business of accepting deposits insured by
the FDIC, and providing commercial, consumer and mortgage loans to the general public.

The Company sold 4,681,069 shares of
common stock at $6.40 per share in an initial public offering that was completed on
February 15, 2005 (as adjusted for all stock splits). The offering raised $29,430,810, net
of offering costs. The directors and officers of the Company purchased 659,531 shares at
$6.40 per share for a total of $4,221,000.

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

Principles of Consolidation The consolidated financial statements include the accounts of CommunitySouth
Bancshares, Inc., the parent company, and CommunitySouth Bank and Trust, its wholly owned
subsidiary. All significant intercompany items have been eliminated in the consolidated
financial statements.

Managements Estimates
 The preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.

Disclosure Regarding Segments
 The Company reports as one operating segment, as management reviews the results of
operations of the Company as a single enterprise.

Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, short-term interest bearing deposits and federal funds sold.
Cash and cash equivalents have an original maturity of three months or less.

Concentrations of Credit Risk
 Financial instruments, which potentially subject the Company to concentrations of
credit risk, consist principally of loans receivable, investment securities, federal funds
sold and amounts due from banks.

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

29

---

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

The Companys investment
portfolio consists of both marketable and nonmarketable equity securities. Management
believes credit risk associated with the equity securities is not significant. The Company
places its deposits and correspondent accounts with and sells its federal funds to high
quality institutions. Management believes credit risk associated with correspondent
accounts is not significant.

Other Investments  Other
investments consist primarily of the Companys investment in the stock of the Federal
Home Loan Bank of Atlanta (FHLB). The stock has no quoted market value and no
ready market exists. Investment in the FHLB is a condition of borrowing from the FHLB, and
the stock is pledged to collateralize such borrowings. At December 31, 2006 and 2005, the
Companys investment in FHLB stock was $270,800 and $82,700, respectively. The
dividend received on this stock is included in interest and dividends on investments.

Loans Receivable  Loans
are stated at their unpaid principal balance less an allowance for loan losses and net
deferred loan origination fees. Interest income is computed using the simple interest
method and is recorded in the period earned. Loan origination fees collected and certain
loan origination costs are deferred and the net amount is accreted as income using a
method that approximates the level yield method over the life of the related loans.

When serious doubt exists as to the
collectibility of a loan or when a loan becomes ninety days past due as to principal or
interest, interest income generally is discontinued unless the estimated net realizable
value of collateral exceeds the principal balance and accrued interest. When interest
accruals are discontinued, income earned but not collected is reversed.

The Company identifies impaired loans
through its normal internal loan review process. Loans on the Companys problem loan
watch list are considered potentially impaired loans. These loans are evaluated in
determining whether all outstanding principal and interest are expected to be collected.
Loans are not considered impaired if a minimal payment delay occurs and all amounts due,
including accrued interest at the contractual interest rate for the period of delay, are
expected to be collected. At December 31, 2006, management has determined that the Company
had $283,934 in non-accrual loans. There were no loans in non-accrual status at December
31, 2005.

Allowance for Loan Losses
 The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is
evaluated on a regular basis by management and is based upon managements periodic
review of the collectibility of the loans in light of historical experiences, the nature
and volume of the loan portfolio, adverse situations that may affect the borrowers
ability to repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.

The allowance consists of specific,
general and unallocated components. The specific component relates to loans that are
classified as either doubtful, substandard or special mention. For such loans that are
also classified as impaired, an allowance is established when the discounted cash flows
(or collateral value or observable market price) of the impaired loan is lower than the
carrying value of the loan. The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors. An unallocated component
is maintained to cover uncertainties that could affect managements estimate of
probable losses. The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio.

A loan is considered impaired when,
based on current information and events, it is probable that the company will be unable to
collect the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement.

30

---

Factors  considered  by
management  in  determining  impairment  include  payment  status, collateral value, and the probability
of collecting scheduled principal and interest payments due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding
the loan and the borrower, including the length of the delay, the reasons for the delay,
the borrowers prior payment record and the amount of the shortfall in relation to
the principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future cash
flows discounted at the loans effective interest rate, the loans obtainable
market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment. Accordingly, the company does
not separately identify individual consumer and residential loans for impairment
disclosures, unless such loans are the subject of a restructuring agreement.

Property and Equipment 
Premises, furniture and equipment are stated at cost, less accumulated depreciation.
Depreciation expense is computed using the straight-line method, based on the estimated
useful lives for furniture and equipment of 5 to 10 years. Leasehold improvements are
amortized over the life of the lease. Maintenance and repairs are charged to current
expense. The costs of major renewals and improvements are capitalized.

Residential Loan Origination
Fees  The Company offers residential loan origination services to its customers
in its immediate market area. The loans are offered on terms and prices offered by the
Companys correspondents and are closed in the name of the correspondents. The
Company receives fees for services it provides in conjunction with the origination
services it provides. The fees are recognized at the time the loans are closed by the
Companys correspondent.

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

Income Taxes  Income
taxes are the sum of amounts currently payable to taxing authorities and the net changes
in income taxes payable or refundable in future years. Income taxes deferred to future
years are determined utilizing an asset and liability approach. This method gives
consideration to the future tax consequences associated with differences between financial
accounting and tax bases of certain assets and liabilities which are principally the
allowance for loan losses, depreciable premises and equipment, and net operating loss
carryforwards.

Income (Loss) Per Share 
Basic income (loss) per share represents the net income (loss) allocated to shareholders
divided by the weighted-average number of common shares outstanding during the period.
Dilutive income (loss) per share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued. Potential common shares
that may be issued by the Company relate to both outstanding warrants and stock options,
and are determined using the treasury stock method.

Stockbased Compensation
 On January 1, 2006, the Company adopted the fair value recognition provisions of
the Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payments, which is
a revision of SFAS No. 123, Accounting of Stock-Based Compensation, to account for
compensation costs under its stock option plans. The Company previously utilized the
intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (as amended) (APB 25). Under the intrinsic value
method prescribed by APB 25, no compensation costs were recognized for the Companys
stock options because the option exercise price in its plans equals the market price on
the date of grant. Prior to January 1, 2006, the Company only disclosed the pro forma
effects on net income and earnings per share as if the fair value recognition provisions
of SFAS No. 123(R) had been utilized.

In adopting SFAS No. 123, the Company
elected to use the modified prospective method to account for the transition from the
intrinsic value method to the fair value recognition method. Under the modified
prospective method, compensation cost is recognized from the adoption date forward for all
new stock options granted and for any outstanding unvested awards as if the fair value
method had been applied to those awards as of the date of grant. The following table
illustrates the effect on net income and earnings per share as if the fair value based
method had been applied to all outstanding and unvested awards in each period.

31

---

|(in thousands, except per share amounts)                     | Year ended December 31,
|------------------------------------------------------------ | -----------------------
|
|Net income (loss) as reported                                |                        
|Add: Stock-based employee compensation expense included in   |                        
|reported net income, net of related tax effects              |                        
|Deduct: Total stock-based employee compensation expense      |                        
|determined under fair value based method for all awards, net |                        
|of related tax effects                                       |                        
|                                                             |                        
|Pro forma net income including stock-based compensation cost |                        
|based on fair-value method                                   |                        
|                                                             |                        
|Earnings (loss) per share:                                   |                        
|Basic--as reported                                           |                        
|                                                             |                        
|Basic--pro forma                                             |                        
|                                                             |                        
|Diluted--as reported                                         |                        
|                                                             |                        
|Diluted--pro forma                                           |                        
|                                                             |                        

Off-Balance-Sheet Financial
Instruments  In the ordinary course of business, the Company enters into
off-balance-sheet financial instruments consisting of commitments to extend credit and
letters of credit. These financial instruments are recorded in the financial statements
when they become payable by the customer.

Recently Issued Accounting
Standards The following is a summary of recent authoritative pronouncements
that could impact the accounting, reporting, and / or disclosure of financial information
by the Company.

In February 2006, the FASB issued
SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment
of FASB Statements No. 133 and 140. This Statement amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This Statement resolves issues addressed in SFAS No. 133
Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year
that begins after September 15, 2006. The Company does not believe that the adoption of
SFAS No. 155 will have a material impact on its financial position, results of operations
and cash flows.

In March 2006, the FASB issued SFAS
No. 156, Accounting for Servicing of Financial Assetsan amendment of FASB
Statement No. 140. This Statement amends FASB No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering
into a servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable; permits an
entity to choose its subsequent measurement methods for each class of separately
recognized servicing assets and servicing liabilities; at its initial adoption, permits a
one-time reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights, without calling into question the treatment of
other available-for-sale securities under Statement 115, provided that the
available-for-sale securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing assets or servicing
liabilities that a servicer elects to subsequently measure at fair value; and requires
separate presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the statement of financial position and additional disclosures for all
separately recognized servicing assets and servicing liabilities. An entity should adopt
SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15,
2006. The Company does not believe the adoption of SFAS No. 156 will have a material
impact on its financial position, results of operations and cash flows.

In July 2006, the FASB issued FASB
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in
an enterprises financial statements in accordance

32

---

with FASB  Statement  No.
109,  "Accounting  for Income  Taxes".  FIN 48  prescribes  a recognition threshold and measurement
attributable for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosures and transitions. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company is currently analyzing the effects of FIN 48.

In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS 157 is effective
for the Company on January 1, 2008 and is not expected to have a significant impact on the
Companys financial statements.

In September, 2006, The FASB ratified
the consensuses reached by the FASBs Emerging Issues Task Force (EITF) relating to
EITF 06-4 Accounting for the Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 addresses
employer accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize a
liability for future benefits in accordance with FASB Statement of Financial Accounting
Standards (SFAS) No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions,or Accounting Principles Board (APB) Opinion No. 12,
Omnibus Opinion1967".EITF 06-4 is effective for fiscal years
beginning after December 15, 2006. Entities should recognize the effects of applying this
Issue through either (a) a change in accounting principle through a cumulative-effect
adjustment to retained earnings or to other components of equity or net assets in the
statement of financial position as of the beginning of the year of adoption or (b) a
change in accounting principle through retrospective application to all prior periods. The
Company does not believe the adoption of EITF 06-4 will have a material impact on its
financial position, results of operations and cash flows.

On September 13, 2006, the SEC issued
Staff Accounting Bulleting No. 108 (SAB 108). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a potential current year misstatement. Prior to SAB
108, Companies might evaluate the materiality of financial statement misstatements using
either the income statement or balance sheet approach, with the income statement approach
focusing on new misstatements added in the current year, and the balance sheet approach
focusing on the cumulative amount of misstatement present in a companys balance
sheet. Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires that
companies view financial statement misstatements as material if they are material
according to either the income statement or balance sheet approach. The Company has
analyzed SAB 108 and determined that upon adoption it will have no impact on the reported
results of operations or financial conditions.

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

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

Risks and Uncertainties 
In the normal course of its business, the Company encounters two significant types of
risks: economic and regulatory. There are three main components of economic risk: interest
rate risk, credit risk and market risk. The Company is subject to interest rate risk to
the degree that its interest-bearing liabilities mature or reprice at different

33

---

speeds, or on different basis, than
its interest-earning assets. Credit risk is the risk of default on the Companys loan
portfolio that results from borrowers inability or unwillingness to make
contractually required payments. Market risk reflects changes in the value of collateral
underlying loans receivable and the valuation of real estate held by the Company.

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

Reclassifications 
Certain captions and amounts in the prior financial statements were reclassified to
conform with the 2006 presentation. Such reclassifications had no effect on previously
reported net loss or shareholders equity.

# NOTE 2  CASH AND
DUE FROM BANKS

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

# NOTE 3  LOANS
RECEIVABLE

Major classifications of loans
receivable are summarized as follows:

|                               | December 31,
|------------------------------ | ------------
|
|
|Real estate - construction     |             
|Real estate - mortgage         |             
|Commercial and industrial      |             
|Consumer and other             |             
|                               |             
|Total loans, gross             |             
|                               |             
|Less allowance for loan losses |             
|                               |             
|Total loans, net               |             
|                               |             

Loans are stated net of deferred fees
and costs.

Activity in the allowance for loan
losses during the years ended December 31, 2006 and 2005 is summarized below:

|                                | 2006 | 2005
|------------------------------- | ---- | ----
|
|Balance, beginning of year      |      |     
|Provision charged to operations |      |     
|Chargeoffs                      |      |     
|                                |      |     
|Balance, end of year            |      |     
|                                |      |     

At December 31, 2006 the Bank had
$283,934 of loans in nonaccrual status and no loans past due ninety days and no impaired
loans. At December 31, 2005 the Bank had no impaired loans, no loans in nonaccrual status,
no loans past due ninety days or more and still accruing interest, and no restructured
loans.

34

---

# NOTE 4  PROPERTY
AND EQUIPMENT

Property and equipment consisted of
the following:

|                                                | December 31,
|----------------------------------------------- | ------------
|
|
|Land                                            |             
|Buildings and Leasehold improvements            |             
|Property and equipment                          |             
|Construction in progress                        |             
|                                                |             
|Total                                           |             
|Less, accumulated depreciation and amortization |             
|                                                |             
|Property and equipment, net                     |             
|                                                |             

# NOTE 5  DEPOSITS

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

|Maturing In | Amount
|----------- | ------
|
|2007        |       
|2008        |       
|2009        |       
|2010        |       
|Thereafter  |       
|            |       
|Total       |       
|            |       

Deposits from outside the
Companys market area obtained through brokers amounted to $71,808,000, or
approximately 33.09% of deposits at December 31, 2006. Deposits from outside the
Companys market area obtained through brokers amounted to $60,362,000, or
approximately 56.43% of deposits at December 31, 2005.

# NOTE 6  INCOME
TAXES

Income tax expense for the year ended
December 31, 2006 and 2005 is summarized as follows:

|                             | 2006 | 2005
|---------------------------- | ---- | ----
|
|Current portion              |      |     
|Federal                      |      |     
|State                        |      |     
|                             |      |     
|Total current expense        |      |     
|                             |      |     
|Deferred benefit             |      |     
|                             |      |     
|Income tax (benefit) expense |      |     
|                             |      |     

35

---

The gross amounts of deferred tax
assets and deferred tax liabilities are as follows:

|                                      | December 31,
|------------------------------------- | ------------
|
|
|Deferred tax assets                   |             
|Allowance for loan losses             |             
|Organization and start-up costs       |             
|Accrued interest on non-accrual loans |             
|Depreciation                          |             
|                                      |             
|Total deferred tax assets             |             
|Less valuation allowance              |             
|                                      |             
|                                      |             
|                                      |             
|Deferred tax liabilities              |             
|Loan origination costs                |             
|Depreciation                          |             
|Prepaid expenses                      |             
|                                      |             
|Total deferred tax liabilities        |             
|                                      |             
|Net deferred tax asset                |             
|                                      |             

Deferred tax assets represent the future
tax benefit of deductible differences and, if it is more likely than not that a tax asset
will not be realized, a valuation allowance is required to reduce the recorded deferred
tax assets to net realizable value. As of December 31, 2005, in consideration of the lack
of an established earnings history, management has provided a valuation allowance of
approximately 45%, to reflect its estimate of net realizable value. The net tax asset is
included in the caption other assets on the balance sheet.

A reconciliation between the income
tax expense and the amount computed by applying the Federal statutory rate of 34% for 2006
and 2005 to income before income taxes follows:

|                                           | 2006 | 2005
|------------------------------------------ | ---- | ----
|
|Tax (benefit) expense at statutory rate    |      |     
|State income taxes, net of federal benefit |      |     
|Valuation allowance change                 |      |     
|Other                                      |      |     
|                                           |      |     
|Income tax (benefit) expense               |      |     
|                                           |      |     

# NOTE 7  LEASES

Spartanburg location 
The Company has a ten year lease beginning November 15, 2005 for its 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.

Mauldin location  The
Company has a ten year lease beginning November 15, 2005 for its 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.

Anderson location  The
Company has a ten year lease beginning June 1, 2006 for its 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.

Greer location  The
Company has a ten year lease beginning November 20, 2006 for its 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.

36

---

Minimum future rental payments under
non-cancelable operating leases having remaining terms in excess of one year, for each of
the next five years and in the aggregate are:

|                                     | 
|------------------------------------ | 
|2007                                 | 
|2008                                 | 
|2009                                 | 
|2010                                 | 
|2011                                 | 
|Thereafter                           | 
|                                     | 
|Total minimum future rental payments | 
|                                     | 

# NOTE 8  RELATED
PARTY TRANSACTIONS

Certain parties (principally certain
directors and executive officers of the Company, their immediate families and business
interests) (affiliates) are loan customers in the normal course of business
with the Bank. These loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than the normal risk of collectibility. As of
December 31, 2006 and 2005 the Bank had related party loans totaling $15,250,850 and
$10,702,284, respectively. During 2006, advances on related party loans totaled $9,435,115
and repayments were $4,886,549.

At December 31, 2006 and 2005
affiliates had deposits with the Bank in the amount of $3.7 million and $1.7 million,
respectively.

The Company also enters into other
transactions in the ordinary course of business with affiliates. Company policy requires
transactions with affiliates to be on terms no more favorable than could be obtained from
an unaffiliated third party and to be approved by a majority of disinterested directors.
The following are transactions entered into with affiliates during the year s ended
December 31, 2006 and 2005:

| |  | The Company leased the site for its temporary headquarters and banking facility in Easley
from a director at a cost $3,443 per month. Lease payments under this lease totaled
$20,658 and $41,316 for the years ended December 31, 2006 and 2005, respectively.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The site for the permanent headquarters and branch office in Easley was purchased on March
16, 2005 from the same director from which the temporary site was being leased at a
purchase price of $775,000.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The permanent headquarters and branch office in Easley was completed as of May 19, 2006 by
a company owned by one of our directors at a contract cost of $1,974,059.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The permanent Spartanburg branch location is leased for $6,500 per month from a
partnership in which two Company directors have a partnership interest. Lease payments on
that office totaled $78,000 and $13,000 for the years ended December 31, 2006 and 2005,
respectively.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Mauldin location leasehold improvements were constructed by a company owned by one of
our directors during the year ended December 31, 2005 at a cost of $255,199.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A company in which one of our directors is an owner was the leasing agent for our
temporary Spartanburg office at cost $2,529 per month. Lease payments on that office
totaled $25,285 during the year ended December 31, 2005.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 9 
COMMITMENTS AND CONTINGENCIES

The Company is subject to claims and
lawsuits which arise primarily in the ordinary course of business. Management is not aware
of any legal proceedings which would have a material adverse effect on the financial
position or operating results of the Company.

# NOTE 10  SHARES
OUTSTANDING AND EARNINGS (LOSS) PER SHARE

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

37

---

shareholders of record as of December
15, 2006. All share and per share data has been adjusted for all periods prior to the
splits.

Basic income (loss) per share is
computed by dividing net loss by the weighted-average number of common shares outstanding.
Diluted income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding and dilutive common share equivalents
using the treasury stock method. Dilutive common share equivalents include common shares
issuable upon exercise of outstanding stock warrants and stock options. Due to the net
losses for the year ended December 31, 2005, basic loss per share and diluted earnings per
share were the same.

The following is the basic and
diluted loss per share computation:

|                                            | 2006 | 2005
|------------------------------------------- | ---- | ----
|
|Net income (loss) to common shareholders    |      |     
|                                            |      |     
|Average common shares outstanding - basic   |      |     
|                                            |      |     
|Average common shares outstanding - diluted |      |     
|                                            |      |     
|Basic earnings (loss) per share             |      |     
|                                            |      |     
|Diluted earnings (loss) per share           |      |     
|                                            |      |     

# NOTE 11  STOCK
COMPENSATION PLANS

Upon completion of the offering, the
Company agreed to issue warrants to the organizing directors for the purchase of one share
of common stock at $6.40 per share for every two shares purchased in the stock offering,
up to a maximum of 15,625 warrants per director. The warrants were fully vested 120 days
after January 18, 2005 and will expire on January 18, 2015. Warrants held by directors of
the Company will expire 90 days after the director ceases to be a director or officer of
the Company (365 days if due to death or disability). The Company issued a total of
171,406 warrants. In addition, the Company has adopted a stock option plan. As of December
31, 2006 the Company has 738,013 outstanding options to employees and directors. Under the
plan, the Company may grant options for up to 21% of its issued shares of common stock.
The exercise price of each option is equal to the market price of the Companys stock
on the date of grant. The maximum term is ten years, and they vest in no greater than five
years. When necessary, the Company may purchase shares on the open market to satisfy share
option exercises. During the ensuing year, the Company is expected to acquire no shares.

The table set forth below summarizes
stock option activity for the Companys stock compensation plans for the years ended
December 31, 2006 and 2005 as adjusted for all stock splits.

|                                 | Stock Options | Warrants
|-------------------------------- | ------------- | --------
|
|
|
|Outstanding at December 31, 2004 |               |         
|Granted                          |               |         
|Forfeited                        |               |         
|Exercised                        |               |         
|                                 |               |         
|Outstanding at December 31, 2005 |               |         
|Granted                          |               |         
|Forfeited                        |               |         
|Exercised                        |               |         
|                                 |               |         
|Outstanding at December 31, 2006 |               |         
|                                 |               |         

38

---

The table set forth below summarizes
non-vested stock options as of December 31, 2006.

|                                  | Weighted-Average | 
|--------------------------------- | ---------------- | 
|
|Outstanding at December 31, 2005  |                  | 
|Granted                           |                  | 
|Vested during the year            |                  | 
|Forfeited during the year         |                  | 
|                                  |                  | 
|Outstanding at September 30, 2006 |                  | 
|                                  |                  | 

As of December 31, 2006, there was
$62,627 total unrecognized compensation cost related to nonvested share-based compensation
arrangements, which is expected to be recognized over a weighted average period of 56
months.

The fair value of each option granted
is estimated on the grant date using the Black-Scholes option-pricing model with the
following assumptions for 2006 and 2005: dividend yield of 0%, expected term of 10 years,
risk-free interest rate of 5.0%, expected life of 10 years, and expected volatility of
20%.

The following table summarizes
information about stock options outstanding under the Companys plans at December 31,
2005 and 2006 as adjusted for the 5-for-4 stock split effective January 16, 2006 and
January 16, 2007.

|                                | Outstanding | Exercisable
|------------------------------- | ----------- | -----------
|
|Number of options               |             |            
|Weighted average remaining life |             |            
|Weighted average exercise price |             |            
|High exercise price             |             |            
|Low exercise price              |             |            

|                                | Outstanding | Exercisable
|------------------------------- | ----------- | -----------
|
|Number of options               |             |            
|Weighted average remaining life |             |            
|Weighted average exercise price |             |            
|High exercise price             |             |            
|Low exercise price              |             |            

Cash received from the exercise of
options during the year was $112,328. The intrinsic value of options exercised during 2006
was $50,480.

At December 31, 2006, all of the
171,406 warrants were exercisable and had an average remaining life of 8.25 years.

# NOTE 12 
REGULATORY MATTERS

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

Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum ratios of Tier
1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Tier 1 capital consists of common
shareholders equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. Tier 2 capital consists of the
allowance for loan losses subject to certain

39

---

limitations.    
          Total capital for purposes of computing the capital ratios consists of the sum
          of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for
          Tier 1 and 8% for total risk-based capital.

The Bank is also required to maintain
capital at a minimum level based on total assets, which is known as the leverage ratio.
Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%.
All others are subject to maintaining ratios 1% to 2% above the minimum.

As of December 31, 2006, the most
recent notification from the Banks primary regulator categorized it as
well-capitalized under the regulatory framework for prompt corrective action. There are no
conditions or events that management believes have changed the Banks category.

The following table summarizes the
capital amounts and ratios of the Bank and the regulatory minimum requirements at December
31, 2006.

|                                         |  |  |   |            | To Be Well-
|---------------------------------------- |  |  | - | ---------- | -----------
|
|
|
|
|December 31, 2006                        |  |  |   |            |            
|Total capital (to risk-weighted assets)  |  |  | $ | 30,521,000 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 27,528,000 |            
|Tier 1 capital (to average assets)       |  |  |   | 27,528,000 |            
|December 31, 2005                        |  |  |   |            |            
|Total capital (to risk-weighted assets)  |  |  | $ | 20,602,000 |            
|Tier 1 capital (to risk-weighted assets) |  |  |   | 19,044,000 |            
|Tier 1 capital (to average assets)       |  |  |   | 19,044,000 |            

The FRB has similar requirements for
bank holding companies. The Company currently is not subject to these requirements because
the FRB applies its guidelines on a bank-only basis for bank holding companies with less
than $500,000,000 in consolidated assets.

# NOTE 13  UNUSED
LINES OF CREDIT

As of December 31, 2006 and 2005, the
Bank had unused lines of credit to purchase federal funds from unrelated banks totaling
$11,125,000 and $9,125,000, respectively. These lines of credit are available on a one to
fourteen day basis for general corporate purposes. As of December 31, 2006 and 2005, the
Bank has no funds drawn from these lines. The Company also has a line of credit to borrow
funds from the FHLB up to 10% of the Banks total assets subject to available
collateral; availability under this facility totaled $20,292,000 and $13,682,000 as of
December 31, 2006 and 2005, respectively. As of December 31, 2006 and 2005, the Bank had
not drawn any advances on this line.

# NOTE 14 
RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES

The ability of CommunitySouth
Bancshares, Inc. to pay cash dividends is dependent upon receiving cash in the form of
dividends from the Bank. However, there are restrictions on the ability of the Bank to
transfer funds to CommunitySouth Bancshares, Inc. in the form of cash dividends, loans, or
advances. As a South Carolina state bank, the Bank 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 until its surplus
equals its stated capital. At December 31, 2006 the bank was no longer prohibited from
declaring a dividend because it had a surplus of $105,369. At December 31, 2005, the Bank
was prohibited from declaring a dividend because it had an accumulated deficit of
$1,064,984.

# NOTE 15  FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments consist of commitments to
extend credit and standby letters of credit. Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses
and may require

40

---

payment of a fee. A commitment
involves, to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The Companys exposure to credit loss in the
event of nonperformance by the other party to the instrument is represented by the
contractual notional amount of the instrument. Since certain commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company uses the same credit policies in making commitments
to extend credit as it does for on-balance-sheet instruments.

Letters of credit are conditional
commitments issued to guarantee a customers performance to a third party and have
essentially the same credit risk as other lending facilities. The Company has not recorded
a liability for the current carrying amount of the obligation to perform as a guarantor
and no contingent liability was considered necessary, as such amounts were not considered
material.

Collateral held for commitments to
extend credit and letters of credit varies but may include accounts receivable, inventory,
property, plant, equipment and income-producing commercial properties.

The following table summarizes the
Companys off-balance-sheet financial instruments whose contract amounts represent
credit risk:

|                             | December 31,
|---------------------------- | ------------
|
|
|Commitments to extend credit |             
|                             |             
|Standby letters of credit    |             
|                             |             

# NOTE 16  FAIR
VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial
instrument is the amount at which the asset or obligation could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. Fair
value estimates are made at a specific point in time based on relevant market information
and information about the financial instruments. Because no market value exists for a
significant portion of the financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.

The following methods and assumptions
were used to estimate the fair value of significant financial instruments:

Cash and Due from
Banks  The carrying amount is a reasonable estimate of fair value.

Federal Funds
Sold  Federal funds sold are for a term of one day, and the carrying
amount approximates the fair value.

Other
Investments  The carrying value of nonmarketable equity securities
approximates the fair value since no ready market exists for the stocks.

Loans receivable
 For certain categories of loans, such as variable rate loans which are
repriced frequently and have no significant change in credit risk, fair values are based
on the carrying amounts. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits
The fair value of demand deposits, savings, and money market accounts is the amount
payable on demand at the reporting date. The fair values of certificates of deposit are
estimated using a discounted cash flow calculation that applies current interest rates to
a schedule of aggregated expected maturities.

Accrued Interest Receivable and
Payable  The carrying value of these instruments is a reasonable
estimate of fair value.

41

---

The carrying values and estimated
fair values of the Companys financial instruments at December 31, 2006 and 2005 are
shown in the following table.

|                                                                   | Carrying | Estimated
|------------------------------------------------------------------ | -------- | ---------
|
|
|Financial Assets                                                   |          |          
|Cash and due from banks                                            |          |          
|Federal funds sold                                                 |          |          
|Other investments, at cost                                         |          |          
|Loans, gross                                                       |          |          
|Accrued interest receivable                                        |          |          
|                                                                   |          |          
|Financial Liabilities                                              |          |          
|Demand deposit, interest-bearing transaction, and savings accounts |          |          
|Certificates of deposit and other time deposits                    |          |          
|Accrued interest payable                                           |          |          

|                                                                   | Carrying | Estimated
|------------------------------------------------------------------ | -------- | ---------
|
|
|Financial Assets                                                   |          |          
|Cash and due from banks                                            |          |          
|Federal funds sold                                                 |          |          
|Other investments, at cost                                         |          |          
|Loans, gross                                                       |          |          
|Accrued interest receivable                                        |          |          
|                                                                   |          |          
|Financial Liabilities                                              |          |          
|Demand deposit, interest-bearing transaction, and savings accounts |          |          
|Certificates of deposit and other time deposits                    |          |          
|Accrued interest payable                                           |          |          

# NOTE 17 
COMMUNITYSOUTH BANCSHARES, INC. (PARENT COMPANY ONLY)

Presented below are the condensed financial statements for CommunitySouth Bancshares, Inc. (Parent Company only).

# Condensed Balance Sheets

|                                           | December 31,
|------------------------------------------ | ------------
|
|Assets                                     |             
|Cash                                       |             
|Investments                                |             
|Investment in the Bank                     |             
|Fixed assets                               |             
|Other assets                               |             
|                                           |             
|Total assets                               |             
|                                           |             
|Liabilities and shareholders equity       |             
|Other liabilities                          |             
|Shareholders' equity                       |             
|                                           |             
|Total liabilities and shareholders' equity |             
|                                           |             

42

---

# Condensed Statements
of OperationsFor the years ended December 31, 2006 and December 31, 2005

|                                                    | 2006 | 2005
|--------------------------------------------------- | ---- | ----
|
|Income                                              |      |     
|                                                    |      |     
|Expenses                                            |      |     
|                                                    |      |     
|Income (loss) before income taxes and equity in     |      |     
|undistributed income (losses) of the Bank           |      |     
|                                                    |      |     
|Equity in undistributed income (losses) of the Bank |      |     
|                                                    |      |     
|Net income (loss) before taxes                      |      |     
|                                                    |      |     
|Income tax expense (benefit)                        |      |     
|                                                    |      |     
|Net income (loss)                                   |      |     
|                                                    |      |     

# Condensed Statements
of Cash FlowsFor the year ended December 31, 2006 and December 31, 2005

|                                                       | 2006 | 2005
|------------------------------------------------------ | ---- | ----
|Cash flows from operating activities                   |      |     
|Net income (loss)                                      |      |     
|Adjustments to reconcile net income (loss) to net cash |      |     
|provided by operating activities:                      |      |     
|Increase in other assets                               |      |     
|Stock based compensation                               |      |     
|Equity in undistributed income (losses) of the Bank    |      |     
|Increase (decrease) in other liabilities               |      |     
|Net cash provided by operating activities              |      |     
|                                                       |      |     
|Cash flows from investing activities                   |      |     
|Purchase of property and equipment                     |      |     
|Purchase of investment                                 |      |     
|Transfer of property and equipment                     |      |     
|Decrease in restricted cash                            |      |     
|Purchase of Bank stock                                 |      |     
|                                                       |      |     
|Net cash used in operating activities                  |      |     
|                                                       |      |     
|Cash flows from financing activities                   |      |     
|Refund of subscriptions                                |      |     
|Cash paid for fractional shares                        |      |     
|Stock options exercised                                |      |     
|Additional stock offering costs                        |      |     
|                                                       |      |     
|Net cash provided by (used in) financing activities    |      |     
|                                                       |      |     
|Net decrease in cash and cash equivalents              |      |     
|                                                       |      |     
|Cash and cash equivalents, beginning of year           |      |     
|                                                       |      |     
|Cash and cash equivalents, end of year                 |      |     
|                                                       |      |     

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# (This page
intentionally left blank)

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# Leadership

# Board of Directors 
CommunitySouth Bancshares, Inc. and CommunitySouth Bank & Trust

|                          | 
|------------------------- | 
|[Photo]                   | 
|C. Allan Ducker, III      | 
|Chief Executive Officer   | 
|CommunitySouth            | 
|                          | 
|[Photo]                   | 
|David A. Miller           | 
|President/COO             | 
|CommunitySouth            | 
|                          | 
|[Photo]                   | 
|John W. Hobbs             | 
|Chief Financial Officer   | 
|CommunitySouth            | 
|                          | 
|[Photo]                   | 
|Daniel E. Youngblood      | 
|Board Chairman            | 
|Owner                     | 
|Youngblood Development    | 
|                          | 
|[Photo]                   | 
|Dave W. Edwards           | 
|Board Vice Chairman       | 
|Owner                     | 
|Dave Edwards Toyota       | 
|                          | 
|[Photo]                   | 
|D. Larry Brotherton, Ph.D | 
|Owner                     | 
|Ortec, Inc.               | 
|                          | 
|                          | 

# Executive Management

# CommunitySouth Bancshares,
Inc. and CommunitySouth Bank & Trust

[Photo of David Miller, John Hobbs and C. Allan Ducker, III]From left: David A. Miller, President and Chief Operating Officer; John W. Hobbs, Chief Financial Officer; C. Allan Ducker, III,
Chief Executive Officer

45

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# Regional Advisory BoardsCommunitySouth
Bank & Trust

|                      |  | 
|--------------------- |  | 
|Easley                |  | 
|E. Drake Curry, CPA   |  | 
|Roddey E. Gettys, III |  | 
|Joel D. Ledbetter     |  | 
|Dr. Daniel McCollum   |  | 
|Daniel "Ty" Schmidt   |  | 
|Jennifer H. Willis    |  | 
|                      |  | 
|Spartanburg           |  | 
|Stephen R. Collins    |  | 
|David G. Ingalls      |  | 

# Bank OfficersCommunitySouth
Bank & Trust

|                         |  | 
|------------------------ |  | 
|C. Allan Ducker, III     |  | 
|Chief Executive Officer  |  | 
|                         |  | 
|David A. Miller          |  | 
|President                |  | 
|Chief Operating Officer  |  | 
|                         |  | 
|John W. Hobbs            |  | 
|Executive Vice President |  | 
|Chief Financial Officer  |  | 
|                         |  | 
|Barbra Anderson          |  | 
|Senior Vice President    |  | 
|Marketing Director       |  | 
|                         |  | 
|Jay Davis                |  | 
|Senior Vice President    |  | 
|Anderson City Executive  |  | 
|                         |  | 
|Tom Hale                 |  | 
|Senior Vice President    |  | 
|Chief Credit Officer     |  | 
|                         |  | 
|Lary Heichel             |  | 
|Senior Vice President    |  | 
|Chief Risk Officer       |  | 
|                         |  | 
|Kathy King               |  | 
|Senior Vice President    |  | 
|Branch Coordinator       |  | 

46

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# Corporate Information

Headquarters
CommunitySouth Bancshares, Inc.
6602 Calhoun Memorial Hwy
Easley, South Carolina 29640
866.421.CSBT
www.communitysouthbankandtrust.com

Annual Meeting
CommunitySouths annual
shareholder meeting will be held on May 15, 2007 at 11:00 a.m. at the Marriott Hotel, 1
Parkway East, Greenville, South Carolina.

Counsel
Nelson, Mullins, Riley & Scarborough, LLP104 South Main Street, Suite 900 
Greenville, SC 29601

Independent AuditorsElliott
Davis, LLC200 East Broad Street PO Box 6286Greenville, SC 29601

Stock Transfer AgentRegistrar
and Transfer Company 10 Commerce Drive Cranford, NJ 07016

CommunitySouth Online 
To learn more, visit our investors resource center at communitysouthbankandtrust.com. Click
on Investors for a comprehensive portfolio of information, including calculators, SEC filings, 
financial news and more.

Annual Report & Form
10-KSB Additional copies of CommunitySouth's Annual Report and Form 10-KSB are available by 
writing to: Shareholder RelationsCommunitySouth Bancshares, Inc.
PO Box 2849Easley, SC 29641

Stock InformationSymbol:
CBSO Over the Counter Bulletin Board Quotation System

47

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Market Makers
At March 7, 2007, the following firms were registered with the Over the Counter Bulletin Board 
as market makers in CommunitySouth stock:

FIG Partners, LLC 
1175 Peachtree Street, NE 100 Colony Square, Suite 2250 Atlanta, GA 30361 404-601-7200

Hill, Thompson, Magid
& Company, Inc.15 Exchange Place, Suite 800 Jersey City, NJ 07302 201-434-6900

Howe Barnes Hoefer &
Arnett, Inc.222 South Riverside Plaza, 7th Floor Chicago, IL 60606 312-655-3000

Knight Equity Markets, LP
545 Washington BoulevardJersey City, NJ 07310 201-557-6844

Monroe Securities, Inc.
343 West Erie Street, Suite 410 Chicago, IL 60610312-327-2532

Penson Financial
Services, Inc.1700 Pacific Avenue, Suite 1400 Dallas, TX 75201 
214-765-1100

UBS Securities, LLC
677 Washington Boulevard, 6th FloorStamford, CT 06901203-719-1000

48