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

# FORM 10-QSB

(Mark One)

|[X] | QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------

| | For the Quarterly Period Ended March 31, 2005
| | ---------------------------------------------

|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|----- | ----------------------------------------------------------------------------------------

| | For the Transition Period from ___________ to _____________
| | -----------------------------------------------------------

Commission file number
333-117053

COMMUNITYSOUTH BANCSHARES, INC.(Exact name of registrant as specified in its charter)

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

6650 Calhoun Memorial HighwayEasley, South Carolina 29640
(Address of principal executive offices, including zip code)

(864) 306-2540(Issuer's telephone number, including area code)

______________________________

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

Yes X   No

State the number of shares  outstanding  of each of the  issuer's  classes of common  equity,  as of the latest
practicable  date:2,995,942 shares of common stock, par value $.01 per share, were issued and outstanding as of May 6, 2005.

Transitional Small Business Disclosure
Format (check one):        Yes    NoX

---

# CommunitySouth
Bancshares, Inc.

# Part I  Financial
Information

# Item 1. Financial
Statements

# CONSOLIDATED BALANCE
SHEETS March 31, 2005(Unaudited)

|                                               | March 31, 2005 | December 31, 2004
|---------------------------------------------- | -------------- | -----------------
|
|
|Assets                                         |                |                  
|Cash and cash equivalents                      |                |                  
|Cash and due from bank                         |                |                  
|Restricted cash                                |                |                  
|Federal funds sold                             |                |                  
|                                               |                |                  
|Total cash and cash equivalents                |                |                  
|Loans                                          |                |                  
|Less reserve for loan losses                   |                |                  
|                                               |                |                  
|                                               |                |                  
|                                               |                |                  
|Accrued interest receivable                    |                |                  
|Property and equipment, net                    |                |                  
|Other assets                                   |                |                  
|                                               |                |                  
|Total assets                                   |                |                  
|                                               |                |                  
|Liabilities and Shareholders' Equity           |                |                  
|Liabilities                                    |                |                  
|Noninterest bearing deposits                   |                |                  
|Interest bearing deposits                      |                |                  
|Subscriptions to be refunded                   |                |                  
|Accrued expense                                |                |                  
|Accrued interest payable                       |                |                  
|Other liabilities                              |                |                  
|                                               |                |                  
|                                               |                |                  
|                                               |                |                  
|Commitments and Contingencies                  |                |                  
|Shareholders' Equity                           |                |                  
|Preferred stock, par value $.01 per share      |                |                  
|10,000,000 shares authorized, no shares issued |                |                  
|Common Stock, par value $.01 per share         |                |                  
|10,000,000 shares authorized 2,995,942 issued  |                |                  
|and outstanding at March 31, 2005 and          |                |                  
|December 31, 2004                              |                |                  
|Additional paid-in capital                     |                |                  
|Retained deficit                               |                |                  
|                                               |                |                  
|Total shareholders' equity                     |                |                  
|                                               |                |                  
|Total liabilities and shareholders' equity     |                |                  
|                                               |                |                  

# See notes to
consolidated financial statements.

2

---

# CommunitySouth
Bancshares, Inc.

# CONSOLIDATED STATEMENT
OF INCOME For the Three Months Ended
March 31, 2005(Unaudited)

|                                                    | 
|--------------------------------------------------- | 
|Interest income                                     | 
|Interest and dividends on investments               | 
|Interest and fees on loans                          | 
|                                                    | 
|Total interest income                               | 
|Interest expense                                    | 
|                                                    | 
|Net interest income                                 | 
|Provision for loan loss                             | 
|                                                    | 
|Net interest income after provision for loan losses | 
|                                                    | 
|Noninterest income                                  | 
|Mortgage Origination Fee Income                     | 
|Other income                                        | 
|                                                    | 
|Total noninterest income                            | 
|Noninterest expense                                 | 
|Salaries and benefits                               | 
|Professional fees                                   | 
|Advertising                                         | 
|Supplies                                            | 
|Data processing                                     | 
|Occupancy                                           | 
|Depreciation                                        | 
|Equipment maintenance and rental                    | 
|Telephone                                           | 
|Other                                               | 
|                                                    | 
|Total noninterest expense                           | 
|Net loss before taxes                               | 
|Benefit for income taxes                            | 
|                                                    | 
|Net loss                                            | 
|                                                    | 
|Basic and diluted loss per share                    | 
|Weighted average shares outstanding                 | 

# See notes to
consolidated financial statements.

3

---

# CommunitySouth
Bancshares, Inc. CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY For the three months ended March 31,
2005(Unaudited)

|                              |  |  |  |           | Total
|----------------------------- |  |  |  | --------- | -----
|
|
|Balance at  December 31, 2004 |  |  |  | 2,995,942 |      
|Net loss                      |  |  |  |           |      
|Additional offering expenses  |  |  |  |           |      
|                              |  |  |  |           |      
|Balance at  March 31, 2005    |  |  |  | 2,995,942 |      
|                              |  |  |  |           |      

# See notes to
consolidated financial statements.

4

---

# CONSOLIDATED STATEMENT
OF CASH FLOWS For the three months ended March 31, 2005(Unaudited)

|                                                                            | 
|--------------------------------------------------------------------------- | 
|Operating activities                                                        | 
|Net loss                                                                    | 
|Adjustments to reconcile net loss to net cash used in operating activities: | 
|Provision for loan losses                                                   | 
|Depreciation and amortization                                               | 
|Change in accrued interest receivable                                       | 
|Change in accrued interest payable                                          | 
|Change in accrued expenses                                                  | 
|Change in other assets                                                      | 
|Change in other liabilities                                                 | 
|                                                                            | 
|Net cash used in operating activities                                       | 
|                                                                            | 
|Investing activities                                                        | 
|Increase (decrease) in cash realized from:                                  | 
|Net increase in loans outstanding                                           | 
|Purchase of property and equipment                                          | 
|                                                                            | 
|Net cash used in investing activities                                       | 
|                                                                            | 
|Financing activities                                                        | 
|Refund of subscriptions                                                     | 
|Additional stock offering costs                                             | 
|                                                                            | 
|Net increase in deposit accounts                                            | 
|                                                                            | 
|Net cash provided by financing activities                                   | 
|Net decrease in cash                                                        | 
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              | 
|                                                                            | 
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                    | 
|                                                                            | 

# See notes to
consolidated financial statements.

5

---

# Notes to Unaudited
Consolidated Financial Statements

# NOTE 1 - NATURE OF
BUSINESS AND BASIS OF PRESENTATION

# Business activity and
organization

CommunitySouth Bancshares, Inc. (the
Company) is a South Carolina corporation organized for the purpose of owning
and controlling all of the capital stock of CommunitySouth Bank and Trust (the
Bank). The Bank is a state chartered bank organized under the laws of South
Carolina in Pickens County, South Carolina. From inception in March 2004 through January
18, 2005, the Company engaged in organizational and pre-opening activities necessary to
obtain regulatory approvals and to prepare its subsidiary, the Bank, to commence business
as a financial institution. The company received approval from the FDIC, Federal Reserve
and the State Board of Financial Institutions in January 2005. The Bank began operations
on January 18, 2005. The Bank is primarily engaged in the business of accepting deposits
insured by the Federal Deposit Insurance Corporation, and providing commercial, consumer
and mortgage loans to the general public.

# Basis of Presentation

The accompanying financial statements
have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly, they do not
include all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period ended March
31, 2005 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005. For further information, refer to the audited consolidated
financial statements and footnotes dated December 31, 2004 included in the companys
Form 10-KSB for the year ended December 31, 2004 as filed with the Securities and Exchange
Commission.

Until the Bank opened for business on
January 18, 2005, the Company was accounted for as a development stage enterprise as
defined by Statement of Financial Accounting Standards No. 7, Accounting and
Reporting by Development Stage Enterprises, as the Company devoted substantially all
of its efforts to establishing a new business, and thus, comparison of the quarter ended
March 31, 2005 to March 31, 2004 is not meaningful. When the Bank opened, certain
reclassifications and adjustments were made to the financial statements to reflect that
the Company is now accounted for as an operating company.

# NOTE 2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

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

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

Material estimates that are
particularly susceptible to significant change relate to the determination of the
allowance for losses on loans, including valuation allowances for impaired loans, and the
valuation of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on loans and
valuation of foreclosed real estate, management obtains independent appraisals for
significant properties. Management must also make estimates in determining the estimated
useful lives and methods for depreciating premises and equipment.

While management uses available
information to recognize losses on loans and foreclosed real estate, future additions to
the allowances may be necessary based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the Companys allowances for losses on loans and foreclosed real
estate. Such agencies may require the Company to recognize additions to the allowances
based on their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near term.

6

---

Loans receivable - Loans
are stated at their unpaid principal balance. Interest income is computed using the simple
interest method and is recorded in the period earned. Fees earned on loans are amortized
over the life of the loan.

When serious doubt exists as to the
collectibility of a loan or when a loan becomes contractually 90 days past due as to
principal or interest, interest income is generally discontinued unless the estimated net
realizable value of collateral exceeds the principal balance and accrued interest. When
interest accruals are discontinued, income earned but not collected is reversed.

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

Allowance for Loan Losses
- An allowance for loan losses is maintained at a level deemed appropriate by
management to provide adequately for known and inherent losses in the loan portfolio.
Management evaluates current and future economic conditions which may affect the
borrowers ability to pay and the underlying collateral value of the loans in
determining the estimate of the allowance for loan losses. Loans which are deemed to be
uncollectible are charged off and deducted from the allowance. The provision for loan
losses and recoveries of loans previously charged off are added to the allowance.

Premises, Furniture and
Equipment - Premises, furniture and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed by the straight-line
method, based on the estimated useful lives for buildings of 40 years and for furniture
and equipment of 5 to 10 years. Leasehold improvements are amortized over the life of the
lease. The cost of assets sold or otherwise disposed of and the related allowance for
depreciation are eliminated from the accounts and the resulting gains or losses are
reflected in the income statement when incurred. Maintenance and repairs are charged to
current expense. The costs of major renewals and improvements are capitalized.

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

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

Loss Per Share - Basic
loss per share represents income available to shareholders divided by the weighted-average
number of common shares outstanding during the period. Dilutive loss per share reflects
additional common shares that would have been outstanding if dilutive potential common
shares had been issued. Potential common shares that may be issued by the Company relate
to both outstanding warrants and stock options, and are determined using the treasury
stock method. Due to the net loss, the outstanding warrants and stock options are not
considered common stock equivalents and therefore, dilutive loss per share is not
presented.

Warrants and stock options -Upon completion of the offering, the Company agreed to issue warrants to the
organizing directors for the purchase of one share of common stock at $10.00 per share for
every two shares purchased in the stock offering, up to a maximum of 10,000 warrants per
director. The Company issued a total of 109,700 warrants. In addition, the Company has
adopted a stock option plan. The Company accounts for the warrants and stock options under
the recognition and measurement principals of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No stock-based compensation cost will be reflected in the net
income, as all warrants and stock options granted under these plans will have the exercise
price equal to the market value of the underlying common stock on the date of grant.

Statement of Cash Flows -
For purposes of reporting cash flows in the financial statements, the Company considers
certain highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents. Cash equivalents include amounts due from banks and federal funds
sold. Generally, federal funds are sold for one-day periods.

7

---

# NOTE 3 - LEASES

Easley location -  The
Company leases the site, modular facility and equipment for $7,154 per month for the
temporary modular banking facility being used during the construction of the main office
in Easley. The Company purchased land for the main office in Easley on March 16, 2005 for
$775,000. Construction is expected to start in the second quarter of 2005.

Spartanburg location -
The Company has a six month lease for its Spartanburg office with monthly rental payments
of $2,528, which began in March 2005.

Greenwood location - The
Company has a six month lease for its Greenwood office with monthly rental payments of
$725, which began in March 2005.

# NOTE 4 - RECENTLY
ISSUED ACCOUNTING STANDARDS

The following is a summary of recent
authoritative pronouncements that affect accounting, reporting, and disclosure of
financial information by the Company:

In December 2004, the FASB issued
SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No.
123(R)). SFAS No. 123(R) will require companies to measure all employee stock-based
compensation awards using a fair value method and record such expense in its financial
statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting
and disclosure related to the income tax and cash flow effects resulting from share-based
payment arrangements. SFAS No. 123(R) is effective beginning as of the first annual
reporting period beginning after December 15, 2005. The Company is currently evaluating
the impact that the adoption of SFAS No. 123(R) will have on its financial position,
results of operations and cash flows. The cumulative effect of adoption, if any, will be
measured and recognized in the statement of operations on the date of adoption.

In April 2005, the Securities and
Exchange Commissions Office of the Chief Accountant and its Division of Corporation
Finance has released Staff Accounting Bulletin (SAB) No.107 to provide guidance regarding
the application of FASB Statement No.123 (revised 2004), Share-Based Payment.
Statement No.123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SAB 107 provides interpretive guidance related
to the interaction between Statement No.123R and certain SEC rules and regulations, as
well as the staffs views regarding the valuation of share-based payment arrangements
for public companies. SAB 107 also reminds public companies of the importance of including
disclosures within filings made with the SEC relating to the accounting for share-based
payment transactions, particularly during the transition to Statement No.123R.

In December 2003, the FASB issued FIN
No. 46 (revised), Consolidation of Variable Interest Entities (FIN No.
46(R)), which addresses consolidation by business enterprises of variable interest
entities. FIN No. 46(R) requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a majority of the entitys
residual returns, or both. FIN No. 46(R) also requires disclosures about variable interest
entities that a company is not required to consolidate, but in which it has a significant
variable interest. FIN No. 46(R) provides guidance for determining whether an entity
qualifies as a variable interest entity by considering, among other considerations,
whether the entity lacks sufficient equity or its equity holders lack adequate
decision-making ability. The consolidation requirements of FIN No. 46(R) applied
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements applied to the Companys existing variable interest
entities in the first reporting period ending after December 15, 2004.Certain of the disclosure requirements applied to all financial statements
issued after December 31, 2003, regardless of when the variable interest entity was
established. The adoption of FIN No. 46(R) did not have any impact on the Companys
financial position or results of operations.

Other accounting standards that have
been issued or proposed by the FASB or other standards-setting bodies that do not require
adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.

8

---

# Item 2.
Managements Discussion and Analysis or Plan of Operation.

The following discussion reviews
our results of operations and assesses our financial condition. You should read the
following discussion and analysis in conjunction with the accompanying consolidated
financial statements. The commentary should be read in conjunction with the discussion of
forward-looking statements, the financial statements, and the related notes and the other
statistical information included in this report.

# DISCUSSION OF
FORWARD-LOOKING STATEMENTS

This report contains
forward-looking statements relating to, without limitation, future economic
performance, plans and objectives of management for future operations, and projections of
revenues and other financial items that are based on the beliefs of management, as well as
assumptions made by and information currently available to management. The words
may, will, anticipate, should,
would, believe, contemplate, expect,
estimate, continue, and intend, as well as other
similar words and expressions of the future, are intended to identify forward-looking
statements. Our actual results may differ materially from the results discussed in the
forward-looking statements, and our operating performance each quarter is subject to
various risks and uncertainties that are discussed in detail in our filings with the
Securities and Exchange Commission, including, without limitation:

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

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

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

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

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

| | o | changes in technology;
| | - | ----------------------

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

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

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

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

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

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

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

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

# Overview

The following discussion describes
our results of operations for the quarter ended March 31, 2005 and also analyzes our
financial condition as of March 31, 2005. Because our bank opened for business on January
18, 2005, a comparison of the quarter ended March 31, 2005 to quarter ended March 31, 2004
is not meaningful. Until January 2005, our principal activities related to our
organization, the conducting of our initial public offering, the pursuit of approvals from
the State Board of Financial Institutions for our application to charter the bank, and the
pursuit of approvals from the FDIC for our application for insurance of the deposits of
the bank. We received approval from the FDIC, Federal Reserve, and the State Board of
Financial Institutions in January 2005 and commenced business on January 18, 2005. We
completed our stock offering in February 2005, upon the issuance of 2,995,942 shares for a
total of $29,959,420. We capitalized the bank with $20,500,000 of the proceeds from the
stock offering.

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

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

9

---

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

# Results of Operations

We incurred a net loss of $553,934
for the three months ended March 31, 2005. Included in the $553,934 of loss is a non-cash
expense of $510,000 related to the provision for loan loss. We realized $284,163 in
interest income, of which $72,714 was from investment activities and $211,449 was from
loan activities. We anticipate the growth in loans will continue to drive the growth in
assets and the growth in interest income. The primary source of funding for our loan
portfolio is deposits that are acquired both locally and via the national brokered
certificate market. The bank incurred interest expense of $20,249 in the first quarter of
2005. All of the interest expense was related to deposit accounts. The bank had $36,386 in
mortgage origination fee income.

We incurred general and
administrative expenses of $559,563 during the three months ended March 31, 2005. Included
in the expense is $293,712 of salaries and benefits, $31,511 of occupancy expenses,
$17,561 of professional expense, $11,773 of data processing expense, and $55,048 of
advertising expense. We also incurred $43,580 of expenses related to supplies. We incurred
$43,560 in other fixed asset cost, which included $24,168 in depreciation and $19,392 in
equipment maintenance and rental. The company incurred $31,511 in occupancy expense
related to our offices in Easley, Spartanburg and Greenwood. The primarily expense in
other expense relates to the various expenses that were required to form the bank.

# Assets and Liabilities

General

At March 31, 2005, we had total
assets of $42.0 million, consisting principally of $37.8 million in loans, $2.3 million in
federal funds sold, and $843,647 in cash and due from banks. Liabilities at March 31, 2005
totaled $13.6 million, consisting principally of $13.6 million in deposits. At March 31,
2005, shareholders equity was $28.3 million.

Loans

Since loans typically provide higher
interest yields than other types of interest earning assets, we intend to invest a
substantial percentage of our earning assets in our loan portfolio. At March 31, 2005, our
loan portfolio consisted primarily of $29.7 million of commercial real estate loans, $7.0
million of commercial business loans, and $1.1 million of consumer and home equity loans.
At March 31, 2005, there were no non-performing loans, and we had no loans that were 90
days or more past due or non-accruing.

Provision and Allowance
for Loan Losses

We have established an allowance for
loan losses through a provision for loan losses charged to expense on our statement of
income. The allowance for loan losses represents an amount which we believe will be
adequate to absorb probable losses on existing loans that may become uncollectible. Our
judgment as to the adequacy of the allowance for loan losses is based on a number of
assumptions about future events, which we believe to be reasonable, but which may or may
not prove to be accurate. Our determination of the allowance for loan losses will be based
on evaluations of the collectibility of loans, including consideration of factors such as
the balance of impaired loans, the quality, mix, and size of our overall loan portfolio,
economic conditions that may affect the borrowers ability to repay, the amount and
quality of collateral securing the loans, our historical loan loss experience, and a
review of specific problem loans. We will also consider subjective issues such as changes
in the lending policies and procedures, changes in the local/national economy, changes in
volume or type of credits, changes in volume/severity of problem loans, quality of loan
review and board of director oversight, concentrations of credit, and peer group
comparisons. Due to our limited operating history, to date the provision for loan losses
has been made primarily as a result of our assessment of general loan loss risk compared
to banks of similar size and maturity. Due to our short operating history, the loans in
our loan portfolio and our lending relationships are of very recent origin. In general,
loans do not begin to show signs of credit deterioration or default until they have been
outstanding for some period of time, a process known as seasoning. As a result, a
portfolio of older loans will usually behave more predictably than a newer portfolio.
Because our loan portfolio is new, the current level of delinquencies and defaults may not
be representative of the level that will prevail when the portfolio becomes more seasoned,
which may be higher than current levels. If delinquencies and defaults increase, we may be
required to increase our provision for loan losses, which would adversely affect our
results of operations and financial condition. Periodically, we will adjust the amount of
the allowance based on changing circumstances. We will charge recognized losses to the
allowance and add subsequent recoveries back to the allowance for loan losses. There can
be no assurance that charge-offs of loans in future periods will not exceed the allowance
for loan losses as estimated at any point in time or that provisions for loan losses will
not be significant to a particular accounting period.

10

---

Deposits

Our primary source of funds for loans
and investments is our deposits, and short-term repurchase agreements. We have chosen to
obtain a portion of our certificates of deposits from areas outside of our market. The
deposits obtained outside of our market area generally have comparable rates compared to
rates being offered for certificates of deposits in our local market. At March 31, 2005,
we had $13.6 million in deposits which consisted primarily of $697,333 in personal
checking, $1.2 million in business checking, $4.8 million in certificates of deposit, $5.6
million in brokered deposits and $1.3 million of money market accounts.

# Liquidity

Liquidity is the ability to meet
current and future obligations through liquidation or maturity of existing assets or the
acquisition of liabilities. We manage both assets and liabilities to achieve appropriate
levels of liquidity. Cash and short-term investments are our primary sources of asset
liquidity. These funds provide a cushion against short-term fluctuations in cash flow from
both deposits and loans. The investment portfolio is our principal source of secondary
asset liquidity. However, the availability of this source of funds is influenced by market
conditions. Individual and commercial deposits and borrowings are ours primary source of
funds for credit activities. We have lines of credit with unrelated banks totaling $5.125
million. These lines are available on a one to seven day basis for general corporate
purposes. We believe our liquidity sources are adequate to meet our operating needs. The
level of liquidity is measured by the cash and securities available for sale-to-total
assets ratio, which was at 7.40% at March 31, 2005.

# Capital Resources

Total shareholders equity
decreased from $29.0 million at December 31, 2004 to $28.3 million at March 31, 2005. The
decrease is due to the net loss for the period of $553,934, and additional stock offering
expenses charged directly to shareholders equity of $82,183.

The bank is subject to various
regulatory capital requirements administered by the federal banking agencies. Because our
total assets are less than $150 million, we are judged only by the adequacy of the
banks capital and not at the holding company level. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a material effect on the banks
financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the bank must meet specific capital guidelines that involve
quantitative measures of the banks assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
banks capital amounts and classifications are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.

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

The bank is also required to maintain
capital at a minimum level based on quarterly average assets, which is known as the
leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum
requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the
minimum. The bank exceeded its minimum regulatory capital ratios as of March 31, 2005, as
well as the ratios to be considered well capitalized.

The following table summarizes the
capital amounts and ratios of the bank and the regulatory minimum requirements at March
31, 2005.

11

---

(Dollars in thousands)

|                                       |  |  |   |        | Adequately
|-------------------------------------- |  |  | - | ------ | ----------
|
|
|
|Total capital to risk weighted assets  |  |  | $ | 20,000 |           
|Tier 1 capital to risk weighted assets |  |  | $ | 19,497 |           
|Tier 1 capital to average assets       |  |  | $ | 19,497 |           

# Critical Accounting
Policies

We have adopted various accounting
policies that govern the application of accounting principles generally accepted in the
United States and with general practices within the banking industry in the preparation of
our financial statements. Our significant accounting policies are described in the
footnotes to our audited consolidated financial statements as of December 31, 2004, as
filed in our annual report on Form 10-KSB.

Certain accounting policies involve
significant judgments and assumptions by us that have a material impact on the carrying
value of certain assets and liabilities. We consider these accounting policies to be
critical accounting policies. The judgment and assumptions we use are based on historical
experience and other factors, which we believe to be reasonable under the circumstances.
Because of the nature of the judgment and assumptions we make, actual results could differ
from these judgments and estimates that could have a material impact on the carrying
values of our assets and liabilities and our results of operations.

We believe the allowance for loan
losses is the critical accounting policy that requires the most significant judgment and
estimates used in preparation of our consolidated financial statements. Some of the more
critical judgments supporting the amount of our allowance for loan losses include
judgments about the credit worthiness of borrowers, the estimated value of the underlying
collateral, the assumptions about cash flow, determination of loss factors for estimating
credit losses, the impact of current events, and conditions, and other factors impacting
the level of probable inherent losses. Under different conditions or using different
assumptions, the actual amount of credit losses incurred by us may be different from
managements estimates provided in our consolidated financial statements. Refer to
the portion of this discussion that addresses our allowance for loan losses for a more
complete discussion of our processes and methodology for determining our allowance for
loan losses.

# Item 3. Controls and
Procedures

As
of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 15d-15(e). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our current
disclosure controls and procedures are effective as of March 31, 2005. There have been no
significant changes in our internal controls over financial reporting during the fiscal
quarter ended March 31, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.

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

12

---

# Part II - Other
Information

# Item 1. Legal Proceedings

Not Applicable

# Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds

Not applicable

# Item 3. Defaults Upon
Senior Securities

Not applicable

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

Not applicable

# Items 5. Other
Information

Not applicable

# Item 6. Exhibits

31.1    Rule 15d-14(a) Certification of the Principal Executive Officer.

31.2    Rule 15d-14(a) Certification of the Principal Financial Officer.

32       Section 1350
Certifications.

13

---

# SIGNATURES

In accordance with the requirements
of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

|Date:  May 11, 2005 |  | By:   /s/  C. Allan Ducker, III
|------------------- |  | -------------------------------
|                    |  | C. Allan Ducker, III           
|                    |  | Chief Executive Officer        

|Date: May 11, 2005 |  | By:   /s/  John W. Hobbs
|------------------ |  | ------------------------
|                   |  | John W. Hobbs           
|                   |  | Chief Financial Officer 

14

---

# EXHIBIT INDEX

ExhibitNumber    Description

31.1    Rule 15d-14(a) Certification of the Principal Executive Officer.

31.2    Rule 15d-14(a) Certification of the Principal Financial Officer.

32       Section 1350
Certifications.

15