** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 
| **x**      | ** ** | **Annual Report Under Section 13 or  15(d) of The Securities Exchange Act of 1934**                                                                                                                                                                                                                      |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For The Fiscal Year December 31, 2007**                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                         |
| **o**      | ** ** | **Transition Report Under Section 13 or 15  (d) of The Securities Exchange Act Of 1934**                                                                                                                                                                                                                 |
| ** ** | ** ** | **For the Transition Period from                          to                        ** |

 

**Commission file number:****333-117053**

 

**CommunitySouthFinancial Corporation**

(Name of small business issuer in its charter)

 

| **South Carolina**

(State or other jurisdiction of

incorporation or organization) |   | **20-0934786**

(I.R.S. Employer Identification  No.) |
|-------------------------------------------------------------------------------------|--------|-------------------------------------------------------|
|                                                                                |   |                                                  |
| **6602 Calhoun Memorial Highway**                                                   |   |                                                  |
| **Easley, South Carolina**                                                          |   | **29640**                                             |
| (Address of principal executive offices)                                            |   | (Zip Code)                                            |

 

Issuer’s telephone number: **(864) 306-2540**

 

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

 

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

** **

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yesx  No o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B in this form, and no disclosure will be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB.x

 

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

 

Theissuer’s revenues for the year ended December 31, 2007 were $24,790,260.

 

Theaggregate market value of the common equity stock held by non-affiliates(shareholders holding less than 5% of an outstanding class of stock, excludingdirectors and executive officers), as of March 18, 2008, was approximately$32,100,000.  This calculation was basedon the closing price of our common stock on March 18, 2008 of $8.00.

 

Thenumber of shares outstanding of the issuer’s common stock was 4,698,697 at March 18,2007.

 

**DOCUMENTS INCORPORATED BYREFERENCE**
| Annual  Report to Shareholders for the                  |   | Part II  (Items 6 and 7)                  |
|---------------------------------------------------------|--------|------------------------------------------------|
| Year  Ended December 31, 2007                      |   |                                           |
|                                                    |   |                                           |
| Proxy  Statement for the Annual Meeting of Shareholders |   | Part III  (Portions of Items 9-12 and 14) |
| to  be held on May 20, 2008                        |   |                                           |
|                                                    |   |                                           |

TransitionalSmall Business Disclosure Format.  (Checkone):  Yeso  No x

 

 

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**Part I**

 

**Item 1.  Description of Business.**

 

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

 

·                  significant increases in competitive pressurein the banking and financial services industries;

·                  changes in the interest rate environmentwhich could reduce anticipated or actual margins;

·                  changes in political conditions or thelegislative or regulatory environment;

·                  general economic conditions, eithernationally or regionally and especially in our primary service area, becomingless favorable than expected resulting in, among other things, a deteriorationin credit quality;

·                  changes occurring in business conditions andinflation;

·                  changes in technology;

·                  changes in monetary and tax policies;

·                  the level of allowance for loan loss;

·                  the rate of delinquencies and amounts ofcharge-offs;

·                  the rates of loan growth;

·                  adverse changes in asset quality andresulting credit risk-related losses and expenses;

·                  loss of consumer confidence and economicdisruptions resulting from terrorist activities;

·                  changes in the securities markets; and

·                  other risks and uncertainties detailed fromtime to time in our filings with the Securities and Exchange Commission (“SEC”).

 

**General**

 

CommunitySouthBancshares, Inc. was incorporated in South Carolina in March 2004 forpurposes of operating as a bank holding company.  Our wholly-owned subsidiary, CommunitySouthBank and Trust, commenced business on January 18, 2005, and is primarilyengaged in the business of accepting savings, demand, and time deposits andproviding mortgage, consumer and commercial loans to the general public.

 

**Marketing Focus**

 

Most of the banks in Anderson, Greenville, Pickens andSpartanburg Counties are now local branches of large regional banks.  Although size gives the larger banks certainadvantages in competing for business from large corporations, including higherlending limits and the ability to offer services in all of South Carolina, webelieve we have a niche in the community banking market in our marketarea.  As a result, we generally do notattempt to compete for the banking relationships of large corporations, butconcentrate our efforts on small- to medium-sized businesses and professionalconcerns.  The bank advertises toemphasize the company’s local ownership, community bank nature, and ability toprovide more personalized service than its competition.

 

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**Locationand Service Area**

 

Ourmain office is located at 6602 Calhoun Memorial Highway, Easley, South Carolina29640.  Our telephone number is (864)306-2540. Our site is approximately 1.2 acres in size, and the building isapproximately 10,000 square feet. We have five full service branch sites inaddition to the main office. The branch sites are in the towns of Anderson,Greenville, Greer, Mauldin and Spartanburg, South Carolina. Our full servicebranches service the entire upstate of South Carolina, which we refer to as the“Upstate,” but primarily the counties of Anderson, Greenville, Pickens andSpartanburg.

 

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

 

AndersonCounty is located in the northwest portion of South Carolina along the I-85corridor west of Pickens County. With over 230 manufacturers, including 22international companies, in the county, Anderson has a thriving businessclimate.  Significant industries inAnderson include manufacturers of automotive products, plastics, metalproducts, industrial machinery, publishing and textiles.  There are more than 27 BMW suppliers in theUpstate, which is recognized internationally as an automotive supplierhub.  The plastics industry has a strong presencein the Upstate with 244 plastics companies located within the 10 counties ofthe northwest corner of South Carolina. Anderson County, in particular, has 11 automotive suppliers and is amajor player in the plastics industry with 27 plastics companies located withinits borders

 

GreenvilleCounty is located in the northwest portion of South Carolina, also along theI-85 corridor between Atlanta and Charlotte, east of Pickens County. It isSouth Carolina’s most populous county with over 407,000 residents. Greenvilleis also one of the state’s wealthiest counties, with average household incomeof $61,023 in 2004. In the time period from 2001 to 2005 Greenville County hasattracted more than $2.4 billion in new business investments and 8,125 new jobsand is now considered the centerpiece of the region considered to be the “economicengine of South Carolina.” In 2002, the Greenville metropolitan area was rankedfifth out of America’s top 50 cities for European business expansion.Greenville County is the home to more corporate headquarters than any otherregion in South Carolina.

 

SpartanburgCounty is also located in the northwest portion of South Carolina along theI-85 “boom belt” of the Upstate. Spartanburg’s economic history is rooted in agriculture andtextiles.  Today, the county is aninternationally recognized business and cultural center.  More than 90 international firms representing15 nations have joined the business community. BMW Manufacturing Corporation, Milliken & Company, ExtendedStay America, and Denny’s are just a few of the companies that call Spartanburghome.  The most well known of thesecompanies is BMW, which began its assembly operation in Spartanburg in 1994 andtoday is the sole producer of the Z4 and X5 vehicles for worldwidedistribution.  Currently, BMW employsapproximately 2,000 workers.  The amenitiesand opportunities Spartanburg County offers are wide-ranging from housing,education, healthcare, shopping, recreation, and culture.  We believe these factors make the quality oflife in the area attractive. Additionally, Spartanburg’s mild climate and location and access to themountains, the coast, and larger cities such as Atlanta and Charlotte add tothe attractiveness of the area.  Thegrowth in the manufacturing base is complemented by the county’s populationgrowth, which is expected to increase from its current level of 254,000 to282,000 in 2010.

 

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**Lending Activities**

 

***General*****.**  Weemphasize a range of lending services, including real estate, commercial, andequity-line and consumer loans to individuals, small- to medium-sizedbusinesses, and professional concerns that are located in or conduct asubstantial portion of their business in our bank’s market area.

 

***Real Estate Loans*****.**  Realestate loans generally fall into one of two categories: construction realestate loans or mortgage loans. Each of these categories is discussed in moredetail below, including their specific risks. Interest rates for all categories may be fixed or adjustable.  We generally charge an origination fee foreach loan.

 

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

 

Wehave the ability to originate some real estate loans for sale into thesecondary market.  We can limit ourinterest rate and credit risk on these loans by locking the interest rate foreach loan with the secondary investor and receiving the investor’s underwritingapproval prior to originating the loan.

 

·                  ***Real Estate Loans - Mortgage*****.** Mortgage real estate loans generally have terms of five years or less,although payments may be structured on a longer amortization basis.  Inherent in mortgage real estate loans’credit risk is the risk that the primary source of repayment, the operatingcommercial real estate company or residential borrower, will be insufficient toservice the debt.  If a real estate loanis in default, we also run the risk that the value of the real estate securingthe loan will decrease, and thereby be insufficient to satisfy the loan.  To mitigate these risks, we evaluate eachborrower on an individual basis and attempt to determine its business risks andcredit profile.  We attempt to reducecredit risk in the real estate portfolio by emphasizing loans on owner-occupiedoffice/residential and retail buildings where the loan-to-value ratio isestablished by independent appraisals. We typically review the personal financial statements of the principalowners/borrower and require their personal guarantees.  These reviews often reveal secondary sourcesof payment and liquidity to support a loan request.

 

·                  ***Real Estate Loans - Construction.**** *We offer adjustableand fixed rate residential and commercial construction loans to builders anddevelopers and to consumers who wish to build their own home.  The term of construction and developmentloans generally is limited to 18 months, although payments may be structured ona longer amortization basis.  Most loansmature and require payment in full upon the sale of the property.  Construction loans generally carry a higherdegree of risk than long term financing of existing properties.  Repayment usually depends on the ultimatecompletion of the project within cost estimates and on the sale of the property.  Specific risks include:

 

·                  costoverruns;

·                  mismanagedconstruction;

·                  inferioror improper construction techniques;

·                  economicchanges or downturns during construction;

·                  adownturn in the real estate market;

·                  risinginterest rates which may prevent sale of the property; and

·                  failureto sell completed projects in a timely manner.

 

Weattempt to reduce risk by obtaining personal guarantees where possible, and bykeeping the loan-to-value ratio of the completed project below specifiedpercentages.  We also reduce risk byselling participations in larger loans to other institutions when possible.

 

***Commercial Loans*****.**  Wemake loans for commercial purposes in various lines of businesses.  Equipment loans typically are made for a termof five years or less at fixed or variable rates, with the loan fully amortizedover the term and secured by the financed equipment.  Working capital loans typically have termsnot exceeding one year 

 

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andare usually secured by accounts receivable, inventory, or personal guaranteesof the principals of the business.  Forloans secured by accounts receivable or inventory, principal is typicallyrepaid as the assets securing the loan are converted into cash, and in othercases principal is due at maturity. Trade letters of credit, standby letters of credit, and foreign exchangeare handled through a correspondent bank as agent for the bank.  Commercial loans primarily have risk that theprimary source of repayment, the borrowing business, will be insufficient toservice the debt.  Often this occurs asthe result of changes in local economic conditions or in the industry in whichthe borrower operates which impact cash flow or collateral value.

 

***Consumer Loans*****.**  Wemake a variety of loans to individuals for personal and household purposes,including secured and unsecured installment loans and revolving lines of creditsuch as credit cards.  Installment loanstypically carry balances of less than $50,000 and are amortized over periods upto 60 or more months.  Consumer loans areoffered on a single maturity basis where a specific source of repayment isavailable.  Revolving loan productstypically require monthly payments of interest and a portion of the principal.

 

Consumer loans are generally considered to havegreater risk than first or second mortgages on real estate because the value ofthe secured property may depreciate rapidly, they are often dependent on theborrower’s employment status as the sole source of repayment, and some of themare unsecured.  To mitigate these risks,we analyze selective underwriting criteria for each prospective borrower, whichmay include the borrower’s employment history, income history, credit bureaureports, or debt to income ratios.  Ifthe consumer loan is secured by property, such as an automobile loan, we alsoattempt to offset the risk of rapid depreciation of the collateral with ashorter loan amortization period. Despite these efforts to mitigate our risks, consumer loans have ahigher rate of default than real estate loans. For this reason, we attempt to reduce our loss exposure to these typesof loans by limiting their sizes relative to other types of loans.

 

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

 

We also have the ability to offer small businessloans utilizing government enhancements such as the Small BusinessAdministration’s 7(a) program and SBA’s 504 and “LowDoc” programs.  These loans will typically be partiallyguaranteed by the government which may help to reduce the bank’s risk.  Government guarantees of SBA loans will notexceed 80% of the loan value, and will generally be less.

 

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

 

***Loan Approval and Review*****.**  Our loan approval policies provide for various levels of officer lendingauthority.  When the amount of aggregateloans to a single borrower exceeds that individual officer’s lending authority,the loan request is considered and approved by an officer with a higher lendinglimit, the management loan committee or the board of directors’ loancommittee.  We do not make any loans toany director of the bank unless the loan is approved by the board of directorsof the bank and is made on terms not more favorable to the person than would beavailable to a person not affiliated with the bank.  We adhere to Federal National MortgageAssociation and Federal Home Loan Mortgage Corporation guidelines in itsmortgage loan review process, but we may choose to alter this policy in thefuture.

 

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

 

**Banking Services**

 

Weoffer a full range of deposit services that are typically available in mostbanks and savings and loan associations, including checking accounts, NOWaccounts, commercial accounts, savings accounts, and other time deposits ofvarious types, ranging from daily money market accounts to longer-termcertificates of deposit.  The transactionaccounts and time certificates are tailored to our principal market area atrates competitive to those offered in the upstate South Carolina region.  In addition, we offer certain retirementaccount services, including IRAs.  Wesolicit these accounts from individuals, businesses, and other organizations.

 

**Other Banking Services**

 

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

 

**Competition**

 

The banking business ishighly competitive.  We compete as afinancial intermediary with other commercial banks, savings banks, creditunions, finance companies, and money market mutual funds operating in Anderson,Greenville, Pickens and Spartanburg Counties. The competition among the various financial institutions is based upon avariety of factors, including interest rates offered on deposit accounts,interest rates charged on loans, credit and service charges, the quality ofservices rendered, the convenience of banking facilities and, in the case ofloans to large commercial borrowers, relative lending limits.  In addition to banks and savingsassociations, we compete with other financial institutions including securitiesfirms, insurance companies, credit unions, leasing companies and financecompanies.  Size gives larger bankscertain advantages in competing for business from large corporations.  These advantages include higher lendinglimits and the ability to offers services in other areas of SouthCarolina.  As a result, we do notgenerally attempt to compete for the banking relationships of largecorporations, but concentrate our efforts on small- to medium-sized businessesand individuals.  We believe we havecompeted effectively in this market by offering quality and personal service.

 

**Employees**

 

Asof December 31, 2007, we had 78 full-time employees and 5 part-timeemployees.

 

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**SUPERVISION AND REGULATION**

 

Both CommunitySouthBancshares, Inc., and CommunitySouth Bank and Trust are subject to extensivestate and federal banking regulations that impose restrictions on and providefor general regulatory oversight of their operations.  These laws generally are intended to protectdepositors and not shareholders.  The followingsummary is qualified by reference to the statutory and regulatory provisionsdiscussed.  Changes in applicable laws orregulations may have a material effect on our business and prospects.  Our operations may be affected by legislativechanges and the policies of various regulatory authorities.  We cannot predict the effect that fiscal ormonetary policies, economic control, or new federal or state legislation mayhave on our business and earnings in the future.

 

Thefollowing discussion is not intended to be a complete list of all theactivities regulated by the banking laws or of the impact of such laws andregulations on our operations.  It isintended only to briefly summarize some material provisions.

 

**CommunitySouth Financial Corporation**

 

We own 100% of theoutstanding capital stock of the bank, and therefore we are considered to be abank holding company under the federal Bank Holding Company Act of 1956 (the“Bank Holding Company Act”).  As aresult, we are primarily subject to the supervision, examination and reportingrequirements of the Board of Governors of the Federal Reserve (the “FederalReserve”) under the Bank Holding Company Act and its regulations promulgatedthereunder.  As a bank holding companylocated in South Carolina, the South Carolina Board of Financial Institutionsalso regulates and monitors all significant aspects of our operations.

 

***Permitted Activities.*** Under the Bank Holding Company Act, a bank holding company isgenerally permitted to engage in, or acquire direct or indirect control of morethan 5% of the voting shares of any company engaged in, the followingactivities:

 

·                  bankingor managing or controlling banks;

·                  furnishingservices to or performing services for our subsidiaries; and

·                  anyactivity that the Federal Reserve determines to be so closely related tobanking as to be a proper incident to the business of banking.

 

Activities that the Federal Reserve has found to be soclosely related to banking as to be a proper incident to the business ofbanking include:

 

·                  factoringaccounts receivable;

·                  making,acquiring, brokering or servicing loans and usual related activities;

·                  leasingpersonal or real property;

·                  operatinga non-bank depository institution, such as a savings association;

·                  trustcompany functions;

·                  financialand investment advisory activities;

·                  conductingdiscount securities brokerage activities;

·                  underwritingand dealing in government obligations and money market instruments;

·                  providingspecified management consulting and counseling activities;

·                  performingselected data processing services and support services;

·                  actingas agent or broker in selling credit life insurance and other types ofinsurance in connection with credit transactions; and

·                  performingselected insurance underwriting activities.

 

As a bank holding company we also can electto be treated as a “financial holding company,” which would allow us engage ina broader array of activities.  In sum, afinancial holding company can engage in activities that are financial in natureor incidental or complementary to financial activities, including insuranceunderwriting, sales and brokerage activities, providing financial andinvestment advisory services, underwriting services and limited merchantbanking activities.  We have not soughtfinancial holding company status, but may elect such status in the future asour business matures.  If we were toelect in writing for financial holding company status, each insured depositoryinstitution we control would have to be well capitalized, well managed and haveat least a satisfactory rating under the CRA (discussed below).

 

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The Federal Reserve has theauthority to order a bank holding company or its subsidiaries to terminate anyof these activities or to terminate its ownership or control of any subsidiarywhen it has reasonable cause to believe that the bank holding company’scontinued ownership, activity or control constitutes a serious risk to thefinancial safety, soundness or stability of it or any of its bank subsidiaries.

 

***Change inControl****. *In addition, andsubject to certain exceptions, the Bank Holding Company Act and the Change inBank Control Act, together with regulations promulgated there under, requireFederal Reserve approval prior to any person or company acquiring “control” ofa bank holding company.  Moreover, theSouth Carolina Board of Financial Institutions also must approve an acquisitionof a South Carolina bank holding company. Control is conclusively presumed to exist if an individual or companyacquires 25% or more of any class of voting securities of a bank holdingcompany.  Control is rebuttably presumedto exist if a person acquires 10% or more, but less than 25%, of any class ofvoting securities and either:

 

·                  thecompany has registered securities under Section 12 of the SecuritiesExchange Act of 1934; or

·                  noother person owns a greater percentage of that class of voting securitiesimmediately after the transaction.

 

Ourcommon stock is registered under Section 12 of the Securities Exchange Actof 1934.  Any shareholder of 10% or more,but less than 25% of any class of our voting securities would be required toeither file as a controlling shareholder of the company or rebut thepresumption of control in accordance with Federal Reserve regulations**.**  The regulationsprovide a procedure for rebutting control when ownership of any class of votingsecurities is below 25%.

 

***Source of Strength****.*  Inaccordance with Federal Reserve Board policy, we are expected to act as asource of financial strength to the bank and to commit resources to support thebank in circumstances in which we might not otherwise do so.  If the bank were to become “undercapitalized”(see below “CommunitySouth Bank and Trust – Prompt Corrective Action”), wewould be required to provide a guarantee of the bank’s plan to return tocapital adequacy.  Additionally, underthe Bank Holding Company Act, the Federal Reserve Board may require a bankholding company to terminate any activity or relinquish control of a nonbanksubsidiary, other than a nonbank subsidiary of a bank, upon the Federal ReserveBoard’s determination that such activity or control constitutes a serious riskto the financial soundness or stability of any depository institution subsidiaryof the bank holding company.  Further,federal bank regulatory authorities have additional discretion to require abank holding company to divest itself of any bank or nonbank subsidiaries ifthe agency determines that divestiture may aid the depository institution’sfinancial condition.  Further, any loansby a bank holding company to a subsidiary bank are subordinate in right ofpayment to deposits and certain other indebtedness of the subsidiary bank.  In the event of a bank holding company’sbankruptcy, any commitment by the bank holding company to a federal bankregulatory agency to maintain the capital of a subsidiary bank at a certainlevel would be assumed by the bankruptcy trustee and entitled to prioritypayment.

 

***Capital Requirements.***  TheFederal Reserve Board imposes certain capital requirements on the bank holdingcompany under the Bank Holding Company Act, including a minimum leverage ratioand a minimum ratio of “qualifying” capital to risk-weighted assets.  These requirements are essentially the sameas those that apply to the bank and are described below under “CommunitySouthBank and Trust - Capital Regulations.” Subject to our capital requirements and certain other restrictions, weare able to borrow money to make a capital contribution to the bank, and theseloans may be repaid from dividends paid from the bank to the company.  Our ability to pay dividends depends on thebank’s ability to pay dividends to us, which is subject to regulatoryrestrictions as described below in “CommunitySouth Bank and Trust - Dividends.”  We are also able to raise capital forcontribution to the bank by issuing securities without having to receiveregulatory approval, subject to compliance with federal and state securitieslaws.

 

***South Carolina State Regulation.***  As aSouth Carolina bank holding company under the South Carolina Banking andBranching Efficiency Act, we are subject to limitations on sale or merger andto regulation by the South Carolina Board of Financial Institutions.  We are not required to obtain the approval ofthe South Carolina Board prior to acquiring the capital stock of a nationalbank, but we must notify them at least 15 days prior to doing so.  We must receive the Board’s approval prior toengaging in the acquisition of a South Carolina state chartered bank or anotherSouth Carolina bank holding company.

 

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**CommunitySouthBank and Trust**

 

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

 

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

 

·                  securitydevices and procedures;

·                  adequacyof capitalization and loss reserves;

·                  loans;

·                  investments;

·                  borrowings;

·                  deposits;

·                  mergers;

·                  issuancesof securities;

·                  paymentof dividends;

·                  interestrates payable on deposits;

·                  interestrates or fees chargeable on loans;

·                  establishmentof branches;

·                  corporatereorganizations;

·                  maintenanceof books and records; and

·                  adequacyof staff training to carry on safe lending and deposit gathering practices.

 

The South Carolina Board of Financial Institutionsrequires the bank to maintain specified capital ratios and imposes limitationson the bank’s aggregate investment in real estate, bank premises, and furnitureand fixtures.  The South Carolina Boardof Financial Institutions also requires the bank to prepare quarterly reportson the bank’s financial condition in compliance with its minimum standards andprocedures.

 

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

 

·                  internalcontrols;

·                  informationsystems and audit systems;

·                  loandocumentation;

·                  creditunderwriting;

·                  interestrate risk exposure; and

·                  assetquality.

 

***PromptCorrective Action. ***As an insured depository institution, thebank is required to comply with the capital requirements promulgated under theFederal Deposit Insurance Act and the regulations thereunder, which set forth****five capital categories, each with specific regulatoryconsequences.  Under these regulations,the categories are:

 

·                  WellCapitalized – The institution exceeds the required minimum level for eachrelevant capital measure.  A wellcapitalized institution is one (i) having a total capital ratio of 10% orgreater, (ii) having a tier 1 capital ratio of 6% or greater, (iii) havinga leverage capital ratio of 5% or greater and (iv) that is not subject toany order or written directive to meet and maintain a specific capital levelfor any capital measure.

 

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·                  AdequatelyCapitalized – The institution meets the required minimum level for eachrelevant capital measure.  No capitaldistribution may be made that would result in the institution becomingundercapitalized.  An adequatelycapitalized institution is one (i) having a total capital ratio of 8% orgreater, (ii) having a tier 1 capital ratio of 4% or greater and (iii) havinga leverage capital ratio of 4% or greater or a leverage capital ratio of 3% orgreater if the institution is rated composite 1 under the CAMELS (Capital,Assets, Management, Earnings, Liquidity and Sensitivity to market risk) ratingsystem.

 

·                  Undercapitalized– The institution fails to meet the required minimum level for any relevantcapital measure.  An undercapitalizedinstitution is one (i) having a total capital ratio of less than 8% or (ii) havinga tier 1 capital ratio of less than 4% or (iii) having a leverage capitalratio of less than 4%, or if the institution is rated a composite 1 under theCAMELS rating system, a leverage capital ratio of less than 3%.

 

·                  SignificantlyUndercapitalized – The institution is significantly below the required minimumlevel for any relevant capital measure. A significantly undercapitalized institution is one (i) having atotal capital ratio of less than 6% or (ii) having a tier 1 capital ratioof less than 3% or (iii) having a leverage capital ratio of less than 3%.

 

·                  CriticallyUndercapitalized – The institution fails to meet a critical capital level setby the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio oftangible equity to total assets that is equal to or less than 2%.

 

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

 

If the bank is not well capitalized, it cannot accept brokered depositswithout prior FDIC approval and, if approval is granted, cannot offer aneffective yield in excess of 75 basis points on interests paid on deposits ofcomparable size and maturity in such institution’s normal market area fordeposits accepted from within its normal market area, or national rate paid ondeposits of comparable size and maturity for deposits accepted outside the bank’snormal market area.  Moreover, if thebank becomes less than adequately capitalized, it must adopt a capitalrestoration plan acceptable to the FDIC. The bank also would become subject to increased regulatory oversight, andis increasingly restricted in the scope of its permissible activities.  Each company having control over anundercapitalized institution also must provide a limited guarantee that theinstitution will comply with its capital restoration plan.  Except under limited circumstances consistentwith an accepted capital restoration plan, an undercapitalized institution maynot grow.  An undercapitalizedinstitution may not acquire another institution, establish additional branchoffices or engage in any new line of business unless determined by theappropriate Federal banking agency to be consistent with an accepted capitalrestoration plan, or unless the FDIC determines that the proposed action willfurther the purpose of prompt corrective action.  The appropriate federal banking agency maytake any action authorized for a significantly undercapitalized institution ifan undercapitalized institution fails to submit an acceptable capitalrestoration plan or fails in any material respect to implement a plan acceptedby the agency.  A criticallyundercapitalized institution is subject to having a receiver or conservatorappointed to manage its affairs and for loss of its charter to conduct bankingactivities.

 

An insured depository institution may not pay a management fee to abank holding company controlling that institution or any other person havingcontrol of the institution if, after making the payment, the institution, wouldbe undercapitalized.  In addition, aninstitution cannot make a capital distribution, such as a dividend or otherdistribution that is in substance a distribution of capital to the owners ofthe institution if following such a distribution the institution would beundercapitalized.  Thus, if payment of sucha management fee or the making of such would cause the bank to becomeundercapitalized, it could not pay a management fee or dividend to us.

 

As of December 31, 2007, the bank was deemed to be “wellcapitalized.”

 

***Deposit Insurance and Assessments.***  Deposits at the bank are insured by the DepositInsurance Fund (the “DIF”) as administered by the FDIC, up to the applicablelimits established by law –generally $100,000 per accountholder and $250,000 for certain retirementaccountholders.  In November 2006,the FDIC adopted final 

 

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regulations that set the deposit insurance assessment rates that tookeffect in 2007.  The FDIC uses arisk-based assessment system that assigns insured depository institutions toone of four risk categories based on three primary sources of information –supervisory risk ratings for all institutions, financial ratios for mostinstitutions, including the company, and long-term debt issuer ratings forlarge institutions that have such ratings. The new premium rate structure imposes a minimum assessment of from fiveto seven cents for every $100 of domestic deposits in institutions that areassigned to the lowest risk category. This category is expected to encompass substantially all insuredinstitutions, including the bank.  A onetime assessment credit is available to offset up to 100% of the 2007assessment.  Any remaining credit can beused to offset up to 90% of subsequent annual assessments through 2010.  For institutions assigned to higher riskcategories, the premium that took effect in 2007 ranges from 10 cents to 43cents per $100 of deposits.

 

The FDIC also collects a deposit-based assessment from insuredfinancial institutions on behalf of The Financing Corporation (“FICO”).  The funds from these assessments are used toservice debt issued by FICO in its capacity as a financial vehicle for theFederal Savings and Loan Insurance Corporation. The FICO assessment rate is set quarterly and in 2006 ranged from 1.32cents to 1.24 cents per $100 of assessable deposits.  For the first quarter of 2007, the FICOassessment rate was 1.22 cents per $100 of assessable deposits.

 

***Transactions with Affiliates and Insiders.***  Thecompany is a legal entity separate and distinct from the bank and its othersubsidiaries.  Various legal limitationsrestrict the bank from lending or otherwise supplying funds to the company orits non-bank subsidiaries.  The companyand the bank are subject to Section 23A and 23B of the Federal Reserve Actand Federal Reserve Regulation W.  Section 23Aof the Federal Reserve Act places limits on the amount of loans or extensionsof credit to, or investments in, or certain other transactions with, affiliatesand on the amount of advances to third parties collateralized by the securitiesor obligations of affiliates.  Theaggregate of all covered transactions is limited in amount, as to any oneaffiliate, to 10% of the bank’s capital and surplus and, as to all affiliatescombined, to 20% of the bank’s capital and surplus.  Furthermore, within the foregoing limitationsas to amount, each covered transaction must meet specified collateralrequirements.  The bank is forbidden topurchase low quality assets from an affiliate.

 

Section 23Bof the Federal Reserve Act, among other things, prohibits an institution fromengaging in certain transactions with certain affiliates unless thetransactions are on terms substantially the same, or at least as favorable tosuch institution or its subsidiaries, as those prevailing at the time forcomparable transactions with nonaffiliated companies.

 

RegulationW generally excludes all non-bank and non-savings association subsidiaries ofbanks from treatment as affiliates, except to the extent that the FederalReserve Board decides to treat these subsidiaries as affiliates.  The regulation also limits the amount of loansthat can be purchased by a bank from an affiliate to not more than 100% of thebank’s capital and surplus.

 

Thebank is also subject to certain restrictions on extensions of credit toexecutive officers, directors, certain principal shareholders, and theirrelated interests.  Such extensions ofcredit (i) must be made on substantially the same terms, includinginterest rates and collateral, as those prevailing at the time for comparabletransactions with third parties and (ii) must not involve more than thenormal risk of repayment or present other unfavorable features.

 

***Branching****.*  Under current South Carolina law, we may openbranch offices throughout South Carolina with the prior approval of the SouthCarolina Board of Financial Institutions.  In addition, with prior regulatory approval, the bank will be able toacquire existing banking operations in South Carolina.  Furthermore, federal legislation has beenpassed that permits interstate branching by banks if allowed by state law, andinterstate merging by banks.  However,South Carolina law, with limited exceptions, currently permits branching acrossstate lines only through interstate mergers.

 

***Anti-Tying Restrictions***.   Under amendments to the Bank Holding CompanyAct and Federal Reserve regulations, a bank is prohibited from engaging incertain tying or reciprocity arrangements with its customers.  In general, a bank may not extend credit,lease, sell property, or furnish any services or fix or vary the considerationfor these on the condition that (i) the customer obtain or provide someadditional credit, property, or services from or to the bank, the bank holdingcompany or subsidiaries thereof or (ii) the customer may not obtain someother credit, 

 

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property, or services from a competitor, except to the extentreasonable conditions are imposed to assure the soundness of the creditextended.  Certain arrangements arepermissible: a bank may offer combined-balance products and may otherwise offermore favorable terms if a customer obtains two or more traditional bankproducts; and certain foreign transactions are exempt from the generalrule.  A bank holding company or any bankaffiliate also is subject to anti-tying requirements in connection withelectronic benefit transfer services.

 

***Community Reinvestment Act****.*  TheCommunity Reinvestment Act (“CRA”) requires that, in connection withexaminations of financial institutions within their respective jurisdictions, afinancial institution’s primary regulator, which is the FDIC for the bank,shall evaluate the record of each financial institution in meeting the creditneeds of its local community, including low and moderate incomeneighborhoods.  These factors are alsoconsidered in evaluating mergers, acquisitions, and applications to open abranch or facility.  Failure toadequately meet these criteria could impose additional requirements andlimitations on our bank.  Additionally,we must publicly disclose the terms of various Community ReinvestmentAct-related agreements.

 

***Finance Subsidiaries.***  Underthe Gramm-Leach-Bliley Act (the “GLBA”), subject to certain conditions imposedby their respective banking regulators, national and state-chartered banks arepermitted to form “financial subsidiaries” that may conduct financial orincidental activities, thereby permitting bank subsidiaries to engage incertain activities that previously were impermissible.  The GLBA imposes several safeguards andrestrictions on financial subsidiaries, including that the parent bank’s equityinvestment in the financial subsidiary be deducted from the bank’s assets andtangible equity for purposes of calculating the bank’s capital adequacy.  In addition, the GLBA imposes new restrictionson transactions between a bank and its financial subsidiaries similar torestrictions applicable to transactions between banks and non-bank affiliates.

 

***Consumer ProtectionRegulations.*** Activities of the bank are subject to avariety of statutes and regulations designed to protect consumers.  Interest and other charges collected orcontracted for by the bank are subject to state usury laws and federal lawsconcerning interest rates.  The bank’sloan operations are also subject to federal laws applicable to credittransactions, such as the:

 

·                  Thefederal Truth-In-Lending Act, governing disclosures of credit terms to consumerborrowers;

·                  TheHome Mortgage Disclosure Act of 1975, requiring financial institutions toprovide information to enable the public and public officials to determine whethera financial institution is fulfilling its obligation to help meet the housingneeds of the community it serves;

·                  TheEqual Credit Opportunity Act, prohibiting discrimination on the basis of race,creed or other prohibited factors in extending credit;

·                  TheFair Credit Reporting Act of 1978, as amended by the Fair and Accurate CreditTransactions Act, governing the use and provision of information to creditreporting agencies, certain identity theft protections and certain credit andother disclosures;

·                  TheFair Debt Collection Act, governing the manner in which consumer debts may becollected by collection agencies; and

·                  TheRules and regulations of the various federal agencies charged with theresponsibility of implementing these federal laws.

 

The deposit operations of the bank also are subjectto:

 

·                  theRight to Financial Privacy Act, which imposes a duty to maintainconfidentiality of consumer financial records and prescribes procedures forcomplying with administrative subpoenas of financial records; and

·                  theElectronic Funds Transfer Act and Regulation E issued by the Federal ReserveBoard to implement that Act, which governs automatic deposits to andwithdrawals from deposit accounts and customers’ rights and liabilities arisingfrom the use of automated teller machines and other electronic bankingservices.

 

***Enforcement Powers.***  Thebank and its “institution-affiliated parties,” including its management,employees, agents, independent contractors, and consultants such as attorneysand accountants and others who participate in the conduct of the financialinstitution’s affairs, are subject to potential civil and criminal penaltiesfor violations of law, regulations or written orders of a government agency.These practices can include the failure of an institution to timely filerequired reports or the filing of false or misleading information or thesubmission of 

 

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inaccuratereports.  Civil penalties may be as highas $1,000,000 a day for such violations. Criminal penalties for some financial institution crimes have beenincreased to twenty years.  In addition,regulators are provided with greater flexibility to commence enforcementactions against institutions and institution-affiliated parties.  Possible enforcement actions include thetermination of deposit insurance. Furthermore, banking agencies’ power to issue cease-and-desist orderswere expanded.  Such orders may, amongother things, require affirmative action to correct any harm resulting from aviolation or practice, including restitution, reimbursement, indemnificationsor guarantees against loss.  A financialinstitution may also be ordered to restrict its growth, dispose of certainassets, rescind agreements or contracts, or take other actions as determined bythe ordering agency to be appropriate.

 

***Anti-Money Laundering.***  Financial institutions must maintainanti-money laundering programs that include established internal policies,procedures, and controls; a designated compliance officer; an ongoing employeetraining program; and testing of the program by an independent audit function.The company and the bank are also prohibited from entering into specifiedfinancial transactions and account relationships and must meet enhanced standardsfor due diligence and “knowing your customer” in their dealings with foreignfinancial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhancedscrutiny of account relationships to guard against money laundering and toreport any suspicious transactions, and recent laws provide law enforcementauthorities with increased access to financial information maintained bybanks.  Anti-money laundering obligationshave been substantially strengthened as a result of the USA Patriot Act,enacted in 2001 and renewed in 2006. Bank regulators routinely examine institutions for compliance with theseobligations and are required to consider compliance in connection with the regulatoryreview of applications.  The regulatoryauthorities have been active in imposing “cease and desist” orders and moneypenalty sanctions against institutions found to be violating these obligations.

 

## ***USA PATRIOT Act.*** The USA PATRIOT Act becameeffective on October 26, 2001, amended, in part, the Bank Secrecy Act, andprovides, in part, for the facilitation of information sharing amonggovernmental entities and financial institutions for the purpose of combatingterrorism and money laundering by enhancing anti-money laundering and financialtransparency laws, as well as enhanced information collection tools andenforcement mechanics for the U.S. government, including: (i) requiringstandards for verifying customer identification at account opening; (ii) rules topromote cooperation among financial institutions, regulators, and lawenforcement entities in identifying parties that may be involved in terrorismor money laundering; (iii) reports by nonfinancial trades and businessesfiled with the Treasury Department’s Financial Crimes Enforcement Network fortransactions exceeding $10,000; and (iv) filing suspicious activitiesreports by brokers and dealers if they believe a customer may be violating U.S.laws and regulations and requires enhanced due diligence requirements forfinancial institutions that administer, maintain, or manage private bankaccounts or correspondent accounts for non-U.S. persons.  Bank regulators routinely examineinstitutions for compliance with these obligations and are required to considercompliance in connection with the regulatory review of applications.

## ** **

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

 

The Office of Foreign Assets Control (“OFAC”), which is a division ofthe U.S. Department of the Treasury, is responsible for helping to insure thatUnited States entities do not engage in transactions with “enemies” of theUnited States, as defined by various Executive Orders and Acts of Congress.  OFAC has sent, and will send, our bankingregulatory agencies lists of names of persons and organizations suspected ofaiding, harboring or engaging in terrorist acts.  If the bank finds a name on any transaction,account or wire transfer that is on an OFAC list, it must freeze such account,file a suspicious activity report and notify the FBI.  The bank has appointed an OFAC complianceofficer to oversee the inspection of its accounts and the filing of anynotifications.  The bank actively checkshigh-risk OFAC areas such as new accounts, wire transfers and customerfiles.  The bank performs these checksutilizing software, which is updated each time a modification is made to thelists provided by OFAC and other agencies of Specially Designated Nationals andBlocked Persons.

 

***Privacy and Credit Reporting.***  Financial institutions are required todisclose their policies for collecting and protecting confidentialinformation.  Customers generally mayprevent financial institutions from sharing nonpublic personal financialinformation with nonaffiliated third parties except under narrow circumstances,such as the processing of transactions requested by the consumer or when thefinancial institution is jointly sponsoring a

 

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product or service with anonaffiliated third party.  Additionally,financial institutions generally may not disclose consumer account numbers toany nonaffiliated third party for use in telemarketing, direct mail marketingor other marketing to consumers.  It isthe bank’s policy not to disclose any personal information unless required bylaw.

 

Likeother lending institutions, the bank utilizes credit bureau data in itsunderwriting activities.  Use of suchdata is regulated under the Federal Credit Reporting Act on a uniform,nationwide basis, including credit reporting, prescreening, sharing ofinformation between affiliates, and the use of credit data.  The Fair and Accurate Credit Transactions Actof 2003 (the “FACT Act”) authorizes states to enact identity theft laws thatare not inconsistent with the conduct required by the provisions of the FACTAct.

 

***Payment of Dividends.***A South Carolina state bank may not pay dividends from its capital.  All dividends must be paid out of undividedprofits then on hand, after deducting expenses, including reserves for lossesand bad debts.  The bank is authorized topay cash dividends up to 100% of net income in any calendar year withoutobtaining the prior approval of the South Carolina Board of FinancialInstitutions, provided that the bank received a composite rating of one or twoat the last federal or state regulatory examination.  The bank must obtain approval from the SouthCarolina Board of Financial Institutions prior to the payment of any other cashdividends.  In addition, under the FDICImprovement Act, the bank may not pay a dividend if, after paying the dividend,the bank would be undercapitalized.

 

***Check 21.***  TheCheck Clearing for the 21st Century Act gives “substitute checks,” such as a digitalimage of a check and copies made from that image, the same legal standing asthe original paper check.  Some of themajor provisions include:

 

·                  allowingcheck truncation without making it mandatory;

·                  demandingthat every financial institution communicate to accountholders in writing adescription of its substitute check processing program and their rights underthe law;

·                  legalizingsubstitutions for and replacements of paper checks without agreement fromconsumers;

·                  retainingin place the previously mandated electronic collection and return of checksbetween financial institutions only when individual agreements are in place;

·                  requiringthat when accountholders request verification, financial institutions producethe original check (or a copy that accurately represents the original) anddemonstrate that the account debit was accurate and valid; and

·                  requiringthe re-crediting of funds to an individual’s account on the next business dayafter a consumer proves that the financial institution has erred.

 

***Effect of Governmental Monetary Policies*****.**  Ourearnings are affected by domestic economic conditions and the monetary andfiscal policies of the United States government and its agencies.  The Federal Reserve Board’s monetary policieshave had, and are likely to continue to have, an important impact on theoperating results of commercial banks through its power to implement nationalmonetary policy in order, among other things, to curb inflation or combat arecession.  The monetary policies of theFederal Reserve Board have major effects upon the levels of bank loans,investments and deposits through its open market operations in United Statesgovernment securities and through its regulation of the discount rate onborrowings of member banks and the reserve requirements against member bankdeposits.  It is not possible to predictthe nature or impact of future changes in monetary and fiscal policies.

 

***Proposed Legislation and Regulatory Action*****.**  Newregulations and statutes are regularly proposed that contain wide-rangingproposals for altering the structures, regulations, and competitiverelationships of the nation’s financial institutions.  We cannot predict whether or in what form anyproposed regulation or statute will be adopted or the extent to which ourbusiness may be affected by any new regulation or statute.

 

**RiskFactors**

 

***We are dependent on key individuals and the loss ofone or more of these key individuals could curtail our growth and adverselyaffect our prospects.***

 

AllanDucker, our chief executive officer, and David Miller, our president, haveextensive and long-standing ties within our market area and substantialexperience with our operations which has contributed significantly to ourgrowth.  If we lose the services of Mr. Duckerand/or Mr. Miller, they would be difficult to 

 

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replaceand our business and development could be materially and adverselyaffected.  We maintain key man lifeinsurance policies in the amount of $5.7 million and $6.6 million on Mr. Duckerand Mr. Miller, respectively.

 

Oursuccess also depends, in part, on our continued ability to attract and retainexperienced loan originators, as well as other management personnel.  Competition for personnel is intense, and wemay not be successful in attracting or retaining qualified personnel.  Our failure to compete for these personnel,or the loss of the services of several of such key personnel, could adverselyaffect our growth strategy and seriously harm our business, results ofoperations, and financial condition.

 

***The success of our growth strategy depends on our ability to identifyand retain individuals with experience and relationships in the markets inwhich we intend to expand.***

 

Toexpand our upstate franchise successfully, we must identify and retainexperienced key management members with local expertise and relationships inthese markets.  We expect thatcompetition for qualified management in the markets in which we may expand willbe intense and that there will be a limited number of qualified persons withknowledge of and experience in the community banking industry in thesemarkets.  Even if we identify individualsthat we believe could assist us in establishing a presence in a new market, wemay be unable to recruit these individuals away from more established financialinstitutions.  In addition, the processof identifying and recruiting individuals with the combination of skills andattributes required to carry out our strategy requires both management andfinancial resources and is often lengthy. Our inability to identify, recruit, and retain talented personnel tomanage new offices effectively would limit our growth and could materiallyadversely affect our business, financial condition, and results of operations.

 

***Our decisions regardingcredit risk and allowances for loan losses may materially and adversely affectour business.***

 

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

 

·                  theduration of the credit;

·                  creditrisks of a particular customer;

·                  changesin economic and industry conditions; and

·                  inthe case of a collateralized loan, risks resulting from uncertainties about thefuture value of the collateral.

 

Weattempt to maintain an appropriate allowance for loan losses to provide forpotential losses in our loan portfolio. We periodically determine the amount of the allowance based onconsideration of several factors, including:

 

·                  anongoing review of the quality, mix, and size of our overall loan portfolio;

·                  ourhistorical loan loss experience;

·                  evaluationof economic conditions;

·                  regularreviews of loan delinquencies and loan portfolio quality; and

·                  theamount and quality of collateral, including guarantees, securing the loans.

 

Thereis no precise method of predicting credit losses.  Therefore, we face the risk that charge-offsin future periods will exceed our allowance for loan losses and that additionalincreases in the allowance for loan losses will be required.  Additions to the allowance for loan losseswould result in a decrease of our net income, and possibly our capital.

 

Whilewe generally underwrite the loans in our portfolio in accordance with our owninternal underwriting guidelines and regulatory supervisory guidelines, incertain circumstances we have made loans which exceed either our internalunderwriting guidelines, supervisory guidelines, or both.  As of December 31, 2007, approximately $24.1million of our loans, or 76.7% of our company’s capital, had loan-to-valueratios that exceeded regulatory supervisory guidelines, of which 11 loanstotaling approximately $4.4 million had loan-to-value ratios of 100% ormore.  At December 31, 2007, $12.9million of our commercial loans, or 41.1% of our company’s capital, exceededthe supervisory loan to value ratio.  Thenumber of loans in our portfolio with loan-to-value ratios in excess of

 

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supervisoryguidelines, our internal guidelines, or both could increase the risk ofdelinquencies and defaults in our portfolio.

 

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

 

Asignificant portion of our loan portfolio is secured by real estate.  As of December 31, 2007, approximately90% of our loans had real estate as a primary or secondary component ofcollateral.  The real estate collateralin each case provides an alternate source of repayment in the event of defaultby the borrower and may deteriorate in value during the time the credit isextended.  A weakening of the real estatemarket in our primary market area could result in an increase in the number ofborrowers who default on their loans and a reduction in the value of thecollateral securing their loans, which in turn could have an adverse effect onour profitability and asset quality.  Ifwe are required to liquidate the collateral securing a loan to satisfy the debtduring a period of reduced real estate values, our earnings and capital could beadversely affected.  Acts of nature,including hurricanes, tornados, earthquakes, fires and floods, which may causeuninsured damage and other loss of value to real estate that secures theseloans, may also negatively impact our financial condition.

 

***We may have higher loan losses than we have allowed for in ourallowance for loan losses.***

 

Ourloan losses could exceed our allowance for loan losses.  Approximately 85% of our loan portfolio iscomposed of construction, commercial mortgage and commercial loans.  Repayment of such loans is generallyconsidered more subject to market risk than residential mortgage loans.  Industry experience shows that a portion ofloans will become delinquent and a portion of loans will require partial orentire charge-off.  Regardless of theunderwriting criteria utilized, losses may be experienced as a result ofvarious factors beyond our control, including among other things, changes inmarket conditions affecting the value of loan collateral and problems affectingthe credit of our borrowers.

 

***Lack of seasoning of our loan portfolio may increase the risk of creditdefaults in the future.***

 

Dueto our short operating history, all of the loans in our loan portfolio and ourlending relationships are of relatively recent origin.  In general, loans do not begin to show signsof credit deterioration or default until they have been outstanding for someperiod of time, a process we refer to as “seasoning.”  As a result, a portfolio of older loans willusually behave more predictably than a newer portfolio.  Because our loan portfolio is relatively new,the current level of delinquencies and defaults may not be representative ofthe level that will prevail when the portfolio becomes more seasoned, which maybe higher than current levels.  Ifdelinquencies and defaults increase, we may be required to increase ourprovision for loan losses, which would adversely affect our results ofoperations and financial condition.

 

***An economic downturn, especiallyone affecting Pickens, Greenville and Spartanburg Counties, could reduce ourcustomer base, our level of deposits, and demand for financial products such asloans.***

 

Weare in uncertain economic times, including uncertainty with respect tofinancial markets that have been volatile as a result of sub-prime mortgagerelated and other matters.  Our successwill significantly depend upon the growth in population, income levels,deposits, and housing starts in our market of Anderson, Pickens, Greenville andSpartanburg Counties.  If the community inwhich we operate does not grow or if prevailing economic conditions locally ornationally are unfavorable, our business may not succeed.  An economic downturn would likely contributeto the deterioration of the quality of our loan portfolio and reduce our levelof deposits, which in turn would hurt our business.  If an economic downturn occurs in the economyas a whole, or in Anderson, Pickens, Greenville and Spartanburg Counties,borrowers may be less likely to repay their loans as scheduled.  Moreover, the value of real estate or othercollateral that may secure our loans could be adversely affected.  Unlike many larger institutions, we are not ableto spread the risks of unfavorable local economic conditions across a largenumber of diversified economies.  An economic downturn could, therefore, resultin losses that materially and adversely affect our business.

 

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***Changes in prevailing interest rates may reduce our profitability.***

 

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

 

***We are subject to extensive regulation that could limit or restrict ouractivities.***

 

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

 

Thelaws and regulations applicable to the banking industry could change at anytime, and we cannot predict the effects of these changes on our business andprofitability.  Because governmentregulation greatly affects the business and financial results of all commercialbanks and bank holding companies, our cost of compliance could adversely affectour ability to operate profitably.

 

TheSarbanes-Oxley Act of 2002, and the related rules and regulations promulgatedby the Securities and Exchange Commission that are now applicable to us, haveincreased the scope, complexity, and cost of corporate governance, reporting,and disclosure practices.

 

***We face strong competition for customers, whichcould prevent us from obtaining customers and may cause us to pay higherinterest rates to attract customers****.*

 

Thebanking business is highly competitive, and we experience competition in ourmarket from many other financial institutions. We compete with commercial banks, credit unions, savings and loanassociations, mortgage banking firms, consumer finance companies, securitiesbrokerage firms, insurance companies, money market funds, and other mutualfunds, as well as other super-regional, national, and international financialinstitutions that operate offices in our primary market areas andelsewhere.  We compete with theseinstitutions both in attracting deposits and in making loans.  In addition, we have to attract our clientbase from other existing financial institutions and from new residents.  Many of our competitors are well-established,larger financial institutions.  Theseinstitutions offer some services, such as extensive and established branchnetworks, that we do not currently provide. There is a risk that we will not be able to compete successfully withother financial institutions in our market, and that we may have to pay higherinterest rates to attract deposits, resulting in reduced profitability.  In addition, competitors that are notdepository institutions are generally not subject to the extensive regulationsthat apply to us.

 

***We will face risks with respect to future expansion and acquisitions ormergers.***

 

Although we do not have anycurrent plans to do so, we may seek to acquire other financial institutions orparts of those institutions.  We may alsoexpand into new markets or lines of business or offer new products orservices.  These activities would involvea number of risks, including:

 

·                  takingadditional time and creating expense associated with identifying and evaluatingpotential acquisitions and merger partners;

·                  usinginaccurate estimates and judgments to evaluate credit, operations, management,and market risks with respect to the target institution or assets;

·                  dilutingour existing shareholders in an acquisition;

·                  takingadditional time and creating expense associated with evaluating new markets forexpansion, hiring experienced local management, and opening new offices, asthere may be a substantial time lag between these activities before we generatesufficient assets and deposits to support the costs of the expansion;

·                  takinga significant amount of time negotiating a transaction or working on expansionplans, resulting in management’s attention being diverted from the operation ofour existing business;

 

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·                  takingtime and creating expense integrating the operations and personnel of thecombined businesses;

·                  creatingan adverse short-term effect on our results of operations; and

·                  losingkey employees and customers as a result of an acquisition that is poorlyreceived.

 

We have never acquiredanother institution before, so we lack experience in handling any of theserisks.  There is also a risk that anyexpansion effort will not be successful.

 

***The costs of being an SECregistered company are proportionately higher for smaller companies such asCommunitySouth Financial Corporation because of the requirements imposed by theSarbanes-Oxley Act.***

 

The Sarbanes-Oxley Act of2002 and the related rules and regulations promulgated by the SEC haveincreased the scope, complexity, and cost of corporate governance, reporting,and disclosure practices.  Theseregulations are applicable to our company. We have experienced, and expect to continue to experience, increasingcompliance costs, including costs related to internal controls, as a result ofthe Sarbanes-Oxley Act.  These necessarycosts are proportionately higher for a company of our size and will affect ourprofitability more than that of some of our larger competitors.

 

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**Item 2.  Description of Property.**

 

Ourmain office is located at 6602 Calhoun Memorial Highway, Easley, South Carolina29640. Our site is approximately 1.2 acres in size, and the building isapproximately 10,000 square feet. We own our main office and lease all others.We have five full service branch sites in addition to the main office. Thebranch sites are in the towns of Anderson, Greenville, Greer, Mauldin andSpartanburg, South Carolina. Our full service branches service the entireupstate of South Carolina, but primarily the counties of Anderson, Greenville,Pickens and Spartanburg.

 

Wehave a ten year lease that began in November 2005 for our Spartanburgoffice. The office is located at 531 East Main Street, Spartanburg, S.C. 29302.

 

Wehave a ten year lease that began in November 2005 for our Mauldin office.The office is located at 787 East Butler Road, Mauldin, S.C. 29662.

 

Wehave a ten year lease that began in June 2006 for our Anderson office. Theoffice is located at 1510 North Main Street, Anderson, S.C. 29621.

 

Wehave a ten year lease that began in November 2006 for our Greer office.The office is located at 530 West Wade Hampton Blvd., Greer, S.C. 29650.

 

Wehave a three year lease that began in May 2007 for our Loan Operationscenter. The operations center is located at 6606 Calhoun Memorial Highway,Easley, S.C. 29640.

 

Wehave a ten year lease that began in October 2007 for our Greenvilleoffice. The office is located at 2415 Laurens Road, Greenville, S.C. 29607.

 

Webelieve that all of our properties are adequately covered by insurance.

 

**Item 3.  Legal Proceedings.**

 

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

 

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

 

Nomatter was submitted to a vote of security holders during the fourth quarter ofthe fiscal year covered by this report.

 

19

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**Part II**

 

**Item 5.  Market for Common Equityand Related Stockholder Matters****.**

 

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

 

Since March15, 2006, our common stock has been quoted on the OTC Bulletin Board under thesymbol “CBSO.” Quotations on the OTC Bulletin Board reflect inter-dealerprices, without retail mark-up, mark-down, or commissions, and may notrepresent actual transactions.  Transactionsof our common stock did not begin to occur on the OTC Bulletin Board untilMarch 16, 2006.

 

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

 
| **2007**       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| Fourth Quarter |       | $        | 11.40      |    | $          | 8.55 |   |
| Third Quarter  |       | 13.50    |       | 11.00   |       |
| Second Quarter |       | 15.90    |       | 12.75   |       |
| First Quarter  |       | 18.00    |       | 13.68   |       |
| **2006**       | ** ** | **High** | ** ** | **Low** | ** ** |
| Fourth Quarter |       | $        | 15.36      |    | $          | 10.80 |   |
| Third Quarter  |       | 14.40    |       | 12.00   |       |
| Second Quarter |       | 17.60    |       | 13.60   |       |
| First Quarter  |       | 15.60    |       | 15.20   |       |

 

Ourarticles of incorporation authorize us to issue up to 10,000,000 shares ofcommon stock, of which 4,698,697 shares were outstanding as of December 31,2007. We have approximately 945 shareholders of record.

 

Wehave not declared or paid any cash dividends on our common stock since ourinception.  For the foreseeable future wedo not intend to declare cash dividends. We intend to retain earnings to grow our business and strengthen ourcapital base.  Our ability to paydividends depends on the ability of our subsidiary, CommunitySouth Bank andTrust, to pay dividends to us.  As aSouth Carolina state bank, CommunitySouth Bank and Trust may only pay dividendsout of its net profits, after deducting expenses, including losses and baddebts. In addition, the bank is prohibited from declaring a dividend on itsshares of common stock unless its surplus equals or exceeds its stated capital.At December 31, 2007, the bank’s surplus exceeded its stated capital by$1,970,050.

 

**Item 6.  Management’s Discussionand Analysis or Plan of Operation.**

 

**The information required by Item 6 is hereby incorporatedby reference from our annual report to shareholders for the year ended December 31,2007.**

** **

**Item 7.  Financial Statements.**

 

**The information required by Item 7 is hereby incorporatedby reference from our annual report to shareholders for the year ended December 31,2007.**

** **

**Item8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None

 

20

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**Item8A.  Controls and Procedures.**

 

As of the end of the period covered by this report, wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures asdefined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our current disclosure controls andprocedures are effective as of December 31, 2007.   There have been no significant changes inour internal controls over financial reporting during the fourth fiscal quarterended December 31, 2007 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

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

 

**Management’s Report on InternalControls Over Financial Reporting**

 

Management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in the Exchange Act Rules13a-15(f).  A system of internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.

 

Under thesupervision and with the participation of management, including the principalexecutive officer and the principal financial officer, the Company’s managementhas evaluated the effectiveness of its internal control over financialreporting as of December 31, 2007 based on the criteria established in a reportentitled “Internal Control - Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission” and the interpretiveguidance issued by the Commission in Release No. 34-55929.  Based on this evaluation, the Company’smanagement has evaluated and concluded that the Company’s internal control overfinancial reporting was effective as of December 31, 2007.

 

The Company iscontinuously seeking to improve the efficiency and effectiveness of itsoperations and of its internal controls. This results in modifications to itsprocesses throughout the Company. However, there has been no change in itsinternal control over financial reporting that occurred during the Company’smost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

This annualreport does not include an attestation report of the Company’s independentregistered public accounting firm regarding internal control over financialreporting. The Company’s registered public accounting firm was not required toissue an attestation on its internal controls over financial reporting pursuantto temporary rules of the Securities and Exchange Commission.

 

**Part III**

 

**Item9.  Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of theExchange Act.**

 

Theinformation required by Item 9 is hereby incorporated by reference from ourproxy statement for our 2008 annual meeting of shareholders to be held on May20, 2008.

 

**Item10.  Executive Compensation.**

 

Theinformation required by Item 10 is hereby incorporated by reference from ourproxy statement for our 2008 annual meeting of shareholders to be held on May20, 2008.

 

21

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**Item 11.  Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

 

The information required byItem 11 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 20, 2008.

 

**Item 12.  Certain Relationshipsand Related Transactions.**

 

The information required byItem 12 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 20, 2008.

 

**Item 13.  Exhibits.**

 
| 3.1.   |   | Articles of  Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form  SB-2, File No. 333-117053).                                                                                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                           |
| 3.2.   |   | Bylaws  (incorporated by reference to Exhibit 3.2 of the Company’s Form SB-2, File  No. 333-117053).                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                           |
| 4.1.   |   | See Exhibits  3.1 and 3.2 for provisions in CommunitySouth Bancshares, Inc.’s Articles of  Incorporation and Bylaws defining the rights of holders of the common stock  (incorporated by reference to Exhibit 4.1 of the Company’s Form SB-2, File  No. 333-117053). |
|   |   |                                                                                                                                                                                                                                                                           |
| 4.2.   |   | Form of  certificate of common stock (incorporated by reference to Exhibit 4.2 of the  Company’s Form SB-2, File No. 333-117053).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.1   |   | Employment  Agreement between CommunitySouth Bancshares, Inc. and C. Allan Ducker, III  dated March 29, 2004 (incorporated by reference to Exhibit 10.1 of the  Company’s Form SB-2, File No. 333-117053).*                                                               |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.2   |   | Employment  Agreement between CommunitySouth Bancshares, Inc. and David A. Miller dated  March 29, 2004 (incorporated by reference to Exhibit 10.2 of the Company’s  Form SB-2, File No. 333-117053).*                                                                    |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.3   |   | Form of  Stock Warrant Agreement (incorporated by reference to Exhibit 10.1 of the  Company’s Form 10-QSB filed on August 15, 2005).*                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.4   |   | Master Loan  Purchase Agreement between Bank of Tennessee and CommunitySouth Bank and  Trust(incorporated by reference to Exhibit 10.6 of the Company’s Form SB-2,  File No. 333-117053).                                                                                 |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.5   |   | Employment  Agreement between CommunitySouth Bancshares, Inc. and John W. Hobbs dated  August 17, 2004 (incorporated by reference to Exhibit 10.7 of the Company’s  Form SB-2, File No. 333-117053).*                                                                     |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.6   |   | Commercial  Loan Agreement between Nexity Bank and Community Bancshares, Inc. dated July  26, 2004 (incorporated by reference to Exhibit 10.9 of the Company’s Form  SB-2, File No. 333-117053).                                                                          |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.7   |   | Option and  Agreement of Sale dated August 18, 2004 by and between CommunitySouth  Bancshares, Inc. and Daniel E. Youngblood (incorporated by reference to  Exhibit 10.10 of the Company’s Form SB-2 as, File No. 333-117053).                                            |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.8   |   | Ground Lease  Agreement dated August 18, 2004 by and between CommunitySouth Bancshares,  Inc. and Daniel E. Youngblood (incorporated by reference to Exhibit 10.11 of  the Company’s Form SB-2, File No. 333-117053).                                                     |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.9   |   | CommunitySouth  Bancshares, Inc. 2005 Stock Incentive Plan and Form of Option Agreement  (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-KSB for  the year ended December 31, 2004).*                                                                 |
|   |   |                                                                                                                                                                                                                                                                           |
| 10.10  |   | Standard  Form of Design-Build Agreement and General Conditions between CommunitySouth  Bancshares, Inc. and Trehel Corporation dated August 3, 2005 (incorporated by  reference to Exhibit 10.1 of the Company’s Form 10-QSB filed on November 14,  2005).               |
|   |   |                                                                                                                                                                                                                                                                           |
| 13     |   | Annual  Report of the Company for the year ended 2007.                                                                                                                                                                                                                         |

 

22

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| 21.1   | Subsidiaries  of the Company.                                      |
|--------|--------------------------------------------------------------------|
|   |                                                               |
| 23.1   | Consent of  Elliott Davis, LLC                                     |
|   |                                                               |
| 24.1.  | Power of  Attorney (filed as part of the signature page herewith). |
|   |                                                               |
| 31.1   | Rule  13a-14(a) Certification of the Chief Executive Officer.      |
|   |                                                               |
| 31.2   | Rule  13a-14(a) Certification of the Chief Financial Officer.      |
|   |                                                               |
| 32     | Section 1350  Certifications.                                      |

 

----

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

 

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

 

**Item 14.  Principal Accountant Fees and Services.**

 

The information required byItem 14 is hereby incorporated by reference from our proxy statement for our2008 annual meeting of shareholders to be held on May 20, 2008.

 

23

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**SIGNATURES**

 

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

 
| ** ** |                |   |   | **COMMUNITYSOUTH FINANCIAL CORPORATION** |
|------------|---------------------|--------|--------|------------------------------------------|
|       |                |   |   |                                     |   |
| Date:      | March 27, 2008 |   | By:    | /s/ C. Allan Ducker, III            |
|       |                |   |   | C.  Allan Ducker, III               |
|       |                |   |   | Chief  Executive Officer                 |
|            |                     |        |        |                                          |  |  |  |

 

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

 

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

 
| **Signature**                 | ** ** | **Title**                          | ** ** | **Date**             |
|-------------------------------|------------|------------------------------------|------------|----------------------|
| ** **                    | ** ** | ** **                         | ** ** | ** **           |
| /s/ David Larry Brotherton    | ** ** | Director                           | ** ** | March 27, 2008  |
| David Larry Brotherton        | ** ** | ** **                         | ** ** | ** **           |
|                          |       |                               |       |                 |
| /s/  G. Dial Dubose           |       | Director                           |       | March 27,  2008 |
| G.  Dial DuBose               |       |                               |       |                 |
|                          |       |                               |       |                 |
| /s/ C. Allan Ducker, III |       | Chief  Executive Officer, Director |       | March 27,  2008 |
| C. Allan Ducker, III     |       |                               |       |                 |
|                          |       |                               |       |                 |
| /s/  David W. Edwards         |       | Director                           |       | March 27,  2008 |
| David  W. Edwards             |       |                               |       |                 |
|                          |       |                               |       |                 |
| /s/  R. Wesley Hammond        |       | Director                           |       | March 27,  2008 |
| R.  Wesley Hammond            |       |                               |       |                 |
|                          |       |                               |       |                 |
| /s/ David A. Miller           |       | President,  Director               |       | March 27,  2008 |
| David A. Miller               |       |                               |       |                 |
|                          |       |                               |       |                 |
| /s/  John W. Hobbs            |       | Chief  Financial Officer and       |       | March 27,  2008 |
| John  W. Hobbs                |       | Principal  Accounting Officer,     |       |                 |
|                          |       | Director                           |       |                 |
|                          |       |                               |       |                 |
| /s/  Arnold J. Ramsey         |       | Director                           |       | March 27,  2008 |
| Arnold  J. Ramsey             |       |                               |       |                 |
|                          |       |                               |       |                 |
| /s/  W. Michael Riddle        |       | Director                           |       | March 27,  2008 |
| W.  Michael Riddle            |       |                               |       |                 |

 

24

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| /s/ Joanne M. Rogers           |   | Director |   | March 27, 2008  |
|--------------------------------|--------|----------|--------|----------------------|
| Joanne M. Rogers               |   |     |   |                 |
|                           |   |     |   |                 |
| /s/  B. Lynn Spencer           |   | Director |   | March 27,  2008 |
| B.  Lynn Spencer               |   |     |   |                 |
|                           |   |     |   |                 |
| /s/  J. Neal Workman, Jr. |   | Director |   | March 27,  2008 |
| J.  Neal Workman, Jr.     |   |     |   |                 |
|                           |   |     |   |                 |
| /s/  Daniel E. Youngblood      |   | Director |   | March 27,  2008 |
| Daniel  E. Youngblood          |   |     |   |                 |

 

25

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**Exhibit Index**

 
| 3.1.   | Articles of  Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Form  SB-2, File No. 333-117053).                                                                                                                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                           |
| 3.2.   | Bylaws  (incorporated by reference to Exhibit 3.2 of the Company’s Form SB-2, File  No. 333-117053).                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                           |
| 4.1.   | See Exhibits  3.1 and 3.2 for provisions in CommunitySouth Bancshares, Inc.’s Articles of  Incorporation and Bylaws defining the rights of holders of the common stock  (incorporated by reference to Exhibit 4.1 of the Company’s Form SB-2, File  No. 333-117053). |
|   |                                                                                                                                                                                                                                                                           |
| 4.2.   | Form of  certificate of common stock (incorporated by reference to Exhibit 4.2 of the  Company’s Form SB-2, File No. 333-117053).                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                           |
| 10.1   | Employment  Agreement between CommunitySouth Bancshares, Inc. and C. Allan Ducker, III  dated March 29, 2004 (incorporated by reference to Exhibit 10.1 of the  Company’s Form SB-2, File No. 333-117053).*                                                               |
|   |                                                                                                                                                                                                                                                                           |
| 10.2   | Employment  Agreement between CommunitySouth Bancshares, Inc. and David A. Miller dated  March 29, 2004 (incorporated by reference to Exhibit 10.2 of the Company’s  Form SB-2, File No. 333-117053).*                                                                    |
|   |                                                                                                                                                                                                                                                                           |
| 10.3   | Form of  Stock Warrant Agreement (incorporated by reference to Exhibit 10.1 of the  Company’s Form 10-QSB filed on August 15, 2005).*                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                           |
| 10.4   | Master Loan  Purchase Agreement between Bank of Tennessee and CommunitySouth Bank and  Trust (incorporated by reference to Exhibit 10.6 of the Company’s Form SB-2,  File No. 333-117053).                                                                                |
|   |                                                                                                                                                                                                                                                                           |
| 10.5   | Employment  Agreement between CommunitySouth Bancshares, Inc. and John W. Hobbs dated  August 17, 2004 (incorporated by reference to Exhibit 10.7 of the Company’s  Form SB-2, File No. 333-117053).*                                                                     |
|   |                                                                                                                                                                                                                                                                           |
| 10.6   | Commercial  Loan Agreement between Nexity Bank and Community Bancshares, Inc. dated July  26, 2004 (incorporated by reference to Exhibit 10.9 of the Company’s Form  SB-2, File No. 333-117053).                                                                          |
|   |                                                                                                                                                                                                                                                                           |
| 10.7   | Option and  Agreement of Sale dated August 18, 2004 by and between CommunitySouth  Bancshares, Inc. and Daniel E. Youngblood (incorporated by reference to  Exhibit 10.10 of the Company’s Form SB-2 as, File No. 333-117053).                                            |
|   |                                                                                                                                                                                                                                                                           |
| 10.8   | Ground Lease  Agreement dated August 18, 2004 by and between CommunitySouth Bancshares,  Inc. and Daniel E. Youngblood (incorporated by reference to Exhibit 10.11 of  the Company’s Form SB-2, File No. 333-117053).                                                     |
|   |                                                                                                                                                                                                                                                                           |
| 10.9   | CommunitySouth  Bancshares, Inc. 2005 Stock Incentive Plan and Form of Option Agreement  (incorporated by reference to Exhibit 10.9 of the Company’s Form 10-KSB for  the year ended December 31, 2004).*                                                                 |
|   |                                                                                                                                                                                                                                                                           |
| 10.10  | Standard  Form of Design-Build Agreement and General Conditions between CommunitySouth  Bancshares, Inc. and Trehel Corporation dated August 3, 2005 (incorporated by  reference to Exhibit 10.1 of the Company’s Form 10-QSB filed on November 14,  2005).               |
|   |                                                                                                                                                                                                                                                                           |
| 13     | Annual  Report of the Company for the year ended 2007                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                           |
| 21.1   | Subsidiaries  of the Company.                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                           |
| 23.1   | Consent of  Elliott Davis, LLC                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                           |
| 24.1.  | Power of  Attorney (filed as part of the signature page herewith).                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                           |
| 31.1   | Rule  13a-14(a) Certification of the Chief Executive Officer.                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                           |
| 31.2   | Rule  13a-14(a) Certification of the Chief Financial Officer.                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                           |
| 32     | Section 1350  Certifications.                                                                                                                                                                                                                                                  |

 

26

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