# U.S.
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, 2006
| | ---------------------------------------------

|[   ] | 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
000-51896

COMMUNITYSOUTH BANCSHARES, INC.(Exact name of small business issuer 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 [ ]

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

State
the number of shares outstanding of each of the issuers classes of common equity, as
of the latest practicable date: 3,744,855 shares of common stock, par value $.01 per
share, outstanding as of April 25, 2006.

Transitional Small Business Disclosure Format (check one):     
  Yes          No

---

# CommunitySouth
Bancshares, Inc.

# Part I  Financial
Information

# Item 1.   Financial
Statements.

# CONSOLIDATED BALANCE
SHEETS

|                                               | March 31, 2006 | December 31, 2005
|---------------------------------------------- | -------------- | -----------------
|
|Assets                                         |                |                  
|Cash and cash equivalents                      |                |                  
|Cash and due from bank                         |                |                  
|Federal funds sold                             |                |                  
|                                               |                |                  
|Total cash and cash equivalents                |                |                  
|                                               |                |                  
|Other investments, at cost                     |                |                  
|Loans, net                                     |                |                  
|Accrued interest receivable                    |                |                  
|Property and equipment, net                    |                |                  
|Other assets                                   |                |                  
|                                               |                |                  
|Total assets                                   |                |                  
|                                               |                |                  
|Liabilities and Shareholders Equity           |                |                  
|Liabilities                                    |                |                  
|Noninterest bearing deposits                   |                |                  
|Interest bearing deposits                      |                |                  
|                                               |                |                  
|Total deposits                                 |                |                  
|Accrued expense                                |                |                  
|Accrued interest payable                       |                |                  
|Other liabilities                              |                |                  
|                                               |                |                  
|Total liabilities                              |                |                  
|                                               |                |                  
|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 3,744,855 issued  |                |                  
|and outstanding at March 31, 2006 and          |                |                  
|December 31, 2005                              |                |                  
|Additional paid-in capital                     |                |                  
|Retained deficit                               |                |                  
|                                               |                |                  
|Total shareholders' equity                     |                |                  
|                                               |                |                  
|Total liabilities and shareholders' equity     |                |                  
|                                               |                |                  

# See notes to
consolidated financial statements.

2

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# CommunitySouth
Bancshares, Inc.

# CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)

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

(1)    
          Adjusted for 5-for-4 stock split effective January 16, 2006.

# See notes to
consolidated financial statements.

3

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# CommunitySouth
Bancshares, Inc.

# CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY For the three months
ended March 31, 2006 and March 31, 2005 (Unaudited)

|                             |  |  |  |           | Total
|---------------------------- |  |  |  | --------- | -----
|
|
|Balance at December 31, 2004 |  |  |  | 3,744,855 |      
|                             |  |  |  |           |      
|Net loss                     |  |  |  | -         |      
|                             |  |  |  |           |      
|Additional offering expenses |  |  |  | -         |      
|                             |  | 
|Balance at March 31, 2005    |  |  |  | 3,744,855 |      
|                             |  | 

|                                |  |  |  |           | Total
|------------------------------- |  |  |  | --------- | -----
|
|
|Balance at December 31, 2005    |  |  |  | 3,744,855 |      
|                                |  |  |  |           |      
|Net income                      |  |  |  | -         |      
|                                |  |  |  |           |      
|Stock option compensation       |  |  |  | -         |      
|                                |  |  |  |           |      
|Cash paid for fractional shares |  |  |  | -         |      
|                                |  | 
|Balance at March 31, 2006       |  |  |  | 3,744,855 |      
|                                |  | 

(1)    
          Adjusted for 5-for-4 stock split effective January 16, 2006.

# See notes to
consolidated financial statements.

4

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# CommunitySouth
Bancshares, Inc.

# CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)

|                                                                   | Three Months | Three Months
|------------------------------------------------------------------ | ------------ | ------------
|
|
|
|Operating activities                                               |              |             
|Net income (loss)                                                  |              |             
|Adjustments to reconcile net income (loss) to net cash provided by |              |             
|(used in) operating activities:                                    |              |             
|Provision for loan losses                                          |              |             
|Depreciation and amortization                                      |              |             
|Stock option compensation                                          |              |             
|Increase in accrued interest receivable                            |              |             
|Increase in accrued interest payable                               |              |             
|Increase (decrease) in accrued expenses                            |              |             
|Increase in other assets                                           |              |             
|Increase (decrease) in other liabilities                           |              |             
|                                                                   |              |             
|Net cash provided by (used in) operating activities                |              |             
|                                                                   |              |             
|Investing activities                                               |              |             
|Net increase in loans outstanding                                  |              |             
|Purchase of investments                                            |              |             
|Purchase of property and equipment                                 |              |             
|                                                                   |              |             
|Net cash used in investing activities                              |              |             
|                                                                   |              |             
|Financing activities                                               |              |             
|Net increase in deposit accounts                                   |              |             
|Cash paid for fractional shares                                    |              |             
|Additional stock offering costs                                    |              |             
|Refunds of subscriptions                                           |              |             
|                                                                   |              |             
|Net cash provided by financing activities                          |              |             
|                                                                   |              |             
|Net increase (decrease) in cash and cash equivalents               |              |             
|                                                                   |              |             
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                     |              |             
|                                                                   |              |             
|CASH AND CASH EQUIVALENTS, END OF PERIOD                           |              |             
|                                                                   |              |             

# See notes to
consolidated financial statements.

5

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# 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 on March 20, 2004 through January 18, 2005, the Company engaged in
organizational and pre-opening activities necessary to obtain regulatory approvals and to
prepare its subsidiary, the Bank, to commence business as a financial institution. The
Company received approval from the Federal Deposit Insurance Corporation
(FDIC), Federal Reserve (FRB) and the State Board of Financial
Institutions in January 2005.

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

The Company sold 3,744,855 shares of
common stock at $8 per share in an initial public offering that was completed on February
15, 2005 (as adjusted for the 5-for-4 stock split effected in the form of a stock dividend
on January 16, 2006 to shareholders of record as of December 15, 2005). The offering
raised $29,430,810, net of offering costs. The directors and officers of the Company
purchased 527,625 shares at $8 per share for a total of $4,221,000.

# 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, 2006 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. For further information, refer to the audited consolidated
financial statements and footnotes dated December 31, 2005 included in the Companys
Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange
Commission.

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

# 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.

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

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

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

The Company makes loans to
individuals and small businesses for various personal and commercial purposes primarily in
the upstate region of South Carolina. The Companys loan portfolio is not
concentrated in loans to any single borrower or in a

6

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relatively small number of borrowers.
Additionally, management is not aware of any concentrations of loans to classes of
borrowers or industries that would be similarly affected by economic conditions.

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

The Company places its deposits and
correspondent accounts with and sells its federal funds to high quality institutions.
Management believes credit risk associated with correspondent accounts is not significant.

Other investments Other
investments consist primarily of the Companys investment in the stock of the Federal
Home Loan Bank of Atlanta (FHLB). The stock has no quoted market value and no
ready market exists. Investment in the FHLB is a condition of borrowing from the FHLB, and
the stock is pledged to collateralize such borrowings. At March 31, 2006, the
Companys investment in FHLB stock was $271,200. The dividend received on this stock
is included in interest and dividends on investments.

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

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

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

Allowance for Loan Losses
 The Company provides for loan losses using the allowance method. Provisions for
loan losses are added to the allowance through charges to operating expenses. Loans which
are determined to be uncollectible are charged against the allowance and recoveries on
loans previously charged off are added to the allowance. The provision for loan losses is
the amount deemed appropriate by management to establish an adequate allowance to meet the
present and foreseeable risk characteristics of the current loan portfolio.
Managements judgment is based on periodic and regular evaluation of individual
loans, the overall risk characteristics of the various portfolio segments, delinquency
trends, and prevailing and anticipated economic conditions. While management uses the best
information available to make evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions used in making
the evaluation. The allowance for loan losses is subject to periodic evaluation by various
regulatory authorities and may be subject to adjustment upon their examination.

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

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

7

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

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

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

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

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

|                                                               | Three Months Ended March 31,
|-------------------------------------------------------------- | ----------------------------
|
|
|
|Net income as reported                                         |                             
|Add: Stock-based employee compensation expense included in     |                             
|reported net income, net of related tax effects                |                             
|Deduct:  Total stock-based employee compensation  expense      |                             
|determined  under fair value based method for all awards,  net |                             
|of related tax effects                                         |                             
|                                                               |                             
|Pro forma net income including stock-based compensation cost   |                             
|based on fair-value method                                     |                             
|                                                               |                             
|Earnings per share:                                            |                             
|Basicas reported                                              |                             
|                                                               |                             
|Basicpro forma                                                |                             
|                                                               |                             
|Dilutedas reported                                            |                             
|                                                               |                             
|Dilutedpro forma                                              |                             
|                                                               |                             

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

8

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

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

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

Risks and Uncertainties 
In the normal course of its business, the Company encounters two significant types of
risks: economic and regulatory. There are three main components of economic risk: interest
rate risk, credit risk and market risk. The Company is subject to interest rate risk to
the degree that its interest-bearing liabilities mature or reprice at different speeds, or
on different basis, than its interest-earning assets. Credit risk is the risk of default
on the Companys loan portfolio that results from borrowers inability or
unwillingness to make contractually required payments. Market risk reflects changes in the
value of collateral underlying loans receivable and the valuation of real estate held by
the Company.

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

Reclassifications 
Certain captions and amounts in the 2005 financial statements were reclassified to conform
with the 2006 presentation. Such reclassifications had no effect on previously reported
net loss or shareholders equity.

# NOTE 3  LEASES

Easley location  The
Company leases the site, modular facility and equipment on a month-to-month basis for
$7,154 per month for the temporary modular banking facility being used during the
construction of the main office in Easley.

Spartanburg location 
The Company has a ten year lease beginning November 15, 2005 for its Spartanburg office
with an initial monthly rental payment of $6,500, which increases over the term of the
lease up to $9,275 in the tenth year. The lease may be renewed for two consecutive
five-year terms with rental payments increasing 3% each year.

Greenwood location  The
Company has a six month lease for its Greenwood office with monthly rental payments of
$725, which was renewed in September 2005.

9

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Mauldin location  The
Company has a ten year lease beginning November 15, 2005 for its Mauldin office with an
initial monthly rental payment of $2,417, which increases over the life of the lease up to
$2,872 per month in years seven through ten. The lease may be renewed for one five-year
term at a monthly rent of $3,302.

Greer location  The
Company has a ten year lease for its Greer office with an initial monthly rental payment
of $4,200, which will begin upon completion of construction which is anticipated to be
September 1, 2006.

Anderson location  The
Company has a ten year lease beginning June 1, 2005 for its Anderson office with an
initial monthly rental payment of $3,690, which increases over the life of the lease up to
$4,803 per month in years six through ten. The lease may be renewed for two consecutive
five-year terms with rental payments increasing 2% each year.

# NOTE 4  RELATED
PARTY TRANSACTIONS

Certain parties (principally certain
directors and executive officers of the Company, their immediate families and business
interests) (affiliates) are loan customers in the normal course of business
with the Bank. These loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than the normal risk of collectibility.

# 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:

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

| |  | our plans to open two new  full-service  branches  and the  resulting  pressure  this  could  cause on our
management team;
| | - | ---------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10

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# Overview

CommunitySouth Bancshares, Inc. is a
bank holding company headquartered in Easley, South Carolina. Our subsidiary,
CommunitySouth Bank and Trust, opened for business on January 18, 2005. The principal
business activity of the bank is to provide banking services to domestic markets,
principally in the upstate of South Carolina. The deposits of the bank are insured by the
Federal Deposit Insurance Corporation. We completed an initial public offering of our
common stock in which we sold a total of 3,744,855 shares at $8.00 per share as adjusted
for the 5-for-4 stock split effected in the form of a stock dividend on January 16, 2006
to shareholders of record as of December 15, 2005. All share and per share information has
been adjusted for the stock split. Proceeds of the offering were used to pay
organizational costs and provide the initial capital for the bank.

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.

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

Our net income was $192,286 for the
three months ended March 31, 2006. We incurred a net loss of $553,934 for the three months
ended March 31, 2005. We began operations in the three-month period ended March 31, 2005.
Since then, our company has had significant growth that has led to a substantial increase
in revenues and expenses. Due to the growth of the company over the past year, we have now
attained a level of earning assets that supports our costs and we are currently operating
profitably. For the three months ended March 31, 2006, we realized $2,636,710 in interest
income, of which $183,746 was from investment activities and $2,452,964 was from loan
activities. For the three months ended March 31, 2005, we realized $284,163 in interest
income, of which $72,714 was from investment activities and $211,449 was from loan
activities. The substantial increase in our interest income is primarily a result of our
rapid loan growth during our first year of operation. 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. We incurred interest expense of $1,111,304
for the three months ended March 31, 2006. We incurred interest expense of $20,249 in the
first quarter of 2005. All of the interest expense was related to deposit accounts.

Our provision for loan losses for the
three months ended March 31, 2006 was $338,500 compared to $510,000 for the comparable
prior year period. The decrease was because the current periods loan growth was less
than that of the prior year period.

We had noninterest income of $202,758
and $49,646 for the three-month periods ended March 31, 2006 and March 31, 2005,
respectively. Mortgage origination fee income for the three months ended March 31, 2006
was $165,461. We had $36,386 in mortgage origination fee income in the first quarter of
2005. The increase was the result of additions to our mortgage lending staff over the past
year.

We incurred noninterest expense of
$1,055,483 during the three months ended March 31, 2006. Included in the expense was
$623,432 of salaries and benefits, $70,543 of occupancy expenses, $36,618 of professional
expense, $65,338 of data processing expense, and $22,072 of advertising expense. We also
incurred $48,739 of expenses related to supplies. The noninterest expense incurred in the
three months ended March 31, 2005 was $559,563. Included in the expense was $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.

11

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For the three months ended March 31,
2006, we incurred $80,317 in other fixed asset expenses, which included $56,143 in
depreciation and $24,174 in equipment maintenance and rental. For the three months ended
March 31, 2005, we incurred $43,560 in other fixed asset expense, which included $24,168
in depreciation and $19,392 in equipment maintenance and rental. We incurred $70,543 and
$31,511 in occupancy expense related to our offices in Easley, Spartanburg, Mauldin and
Greenwood for the three months ended March 31, 2006 and 2005, respectively. The increase
in non-interest expense is the result of the addition of new branches and personnel over
the past year.

As described above under Note 2
 Recently Issued Accounting Standards, beginning with calendar year 2006, SFAS No.
123(R) requires us to measure all employee stock-based compensation awards using a fair
value method and record this expense in our financial statements. Consequently, our
noninterest expense includes a compensation expense of $42,750 for the fair value of stock
options we granted in the three months ended March 31, 2006.

# Assets and Liabilities

General

At March 31, 2006, total assets had
increased 19% to $162.9 million as compared to $136.8 million as of December 31, 2005.
Gross loans increased $22.5 million, or 19% during the first three months of 2006. Federal
funds sold remained constant at $17.6 million as of March 31, 2006 compared to $17.5
million at December 31, 2005. Cash increased $2.2 million, or 133%, since December 31,
2005. Deposits increased $25.6 million, or 24%, during the first three months of 2006. At
March 31, 2006, shareholders equity was $28.5 million.

Investment Securities

Other investments increased $288,500,
principally due to the purchase of additional FHLB stock.

Loans

Since loans typically provide higher
interest yields than other types of interest earning assets, we allocate the majority of
our earning assets to our loan portfolio. Loans increased by $22.5 million, or 19%, during
the first three months of 2006. Balances within major loan categories are as follows:
(in thousands)

|                               | March 31, 2006 | December 31, 2005
|------------------------------ | -------------- | -----------------
|Real estate - construction     |                |                  
|Real estate - mortgage         |                |                  
|Commercial and industrial      |                |                  
|Consumer and other             |                |                  
|                               |                |                  
|Total loans, gross             |                |                  
|Less allowance for loan losses |                |                  
|                               |                |                  
|Total loans, net               |                |                  
|                               |                |                  

We will discontinue accrual of
interest on a loan when we conclude it is doubtful that we will be able to collect
interest from the borrower. We will reach this conclusion by taking into account factors
such as the borrowers financial condition, economic and business conditions, and the
results of our previous collection efforts. Generally, we will place a delinquent loan in
nonaccrual status when the loan becomes 90 days or more past due. When we place a loan in
nonaccrual status, we will reverse all interest which has been accrued on the loan but
remains unpaid and we will deduct this interest from earnings as a reduction of reported
interest income. We will not accrue any additional interest on the loan balance until we
conclude the collection of both principal and interest is reasonably certain. At March 31,
2006, 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 is 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 is 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,

12

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our historical loan loss experience,
and a review of specific problem loans. We 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 adjust the amount of the
allowance based on changing circumstances. We 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.

Deposits

Our primary source of funds for loans
and investments is our deposits. 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. As of March 31, 2006, total deposits had increased by $25.6
million, or 24%, from December 31, 2005. The largest increase was in time deposits less
than $100,000, which increased $7.5 million, or 48%, from December 31, 2005 to March 31,
2006. The increase was attributed to new accounts and the opening of our Spartanburg
branch in January 2006.

Balances within the major deposit
categories are as follows: (in thousands)

|                              | March 31, 2006 | December 31, 2005
|----------------------------- | -------------- | -----------------
|Non-interest bearing demand   |                |                  
|Interest bearing demand       |                |                  
|Savings                       |                |                  
|Time deposits less than $100  |                |                  
|Time deposits of $100 or over |                |                  
|Brokered deposits             |                |                  
|                              |                |                  
|Total deposits                |                |                  
|                              |                |                  

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. Individual and commercial deposits and borrowings are our primary
source of funds for credit activities. We have lines of credit with unrelated banks
totaling $9.1 million. These lines, which are unsecured, 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 as well as our construction commitments. The level of liquidity
is measured by the cash and cash equivalents-to-total assets ratio, which was at 13.2% at
March 31, 2006.

As members of the Federal Home Loan
Bank of Atlanta, we have credit availability of up to 10% of the banks total assets
which meant $16.2 million was available as of March 31, 2006. Advances under this credit
facility are subject to qualifying collateral.

Impact of Off-Balance
Sheet Instruments
Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of our
business activities. These commitments are legally binding agreements to lend money to our
customers at predetermined interest rates for a specified period of time. At March 31,
2006, we had issued commitments to extend credit of $29.8 million through various types of
lending arrangements. We evaluate each customers credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by us upon extension of
credit, is based on our credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment,

13

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commercial and residential real
estate. We manage the credit risk on these commitments by subjecting them to normal
underwriting and risk management processes. The following table summarizes the
Companys off-balance-sheet financial instruments whose contract amounts represent
credit risk:

|                             | March 31, 2006 | December 31, 2005
|---------------------------- | -------------- | -----------------
|
|Commitments to extend credit |                |                  
|                             |                |                  
|Standby letters of credit    |                |                  
|                             |                |                  

Capital Resources
Total shareholders equity
increased from $28.3 million at December 31, 2005 to $28.5 million at March 31, 2006. The
increase is principally due to the net income for the period of $192,286.

The Federal Reserve and bank
regulatory agencies require bank holding companies and financial institutions to maintain
capital at adequate levels based on a percentage of assets and off-balance sheet
exposures, adjusted for risk weights ranging from 0% to 100%. The Federal Reserve
guidelines contain an exemption from the capital requirements for small bank holding
companies. On March 31, 2006, the Federal Reserve changed the definition of a small
bank holding company to bank holding companies with less than $500 million in total assets
(an increase from $150 million under the prior rule). However, bank holding companies will
not qualify under the new definition if they (i) are engaged in significant nonbanking
activities either directly or indirectly through a subsidiary, (ii) conduct significant
off-balance sheet activities, including securitizations or managing or administering
assets for third parties, or (iii) have a material amount of debt or equity securities
(including trust preferred securities) outstanding that are registered with the SEC.
Although we have less than $500 million in assets, it is unclear at this point whether we
otherwise meet the requirements for qualifying as a small bank holding
company. According to the Federal Reserve Board, the revision of the criterion to
exclude any bank holding company that has outstanding a material amount of SEC-registered
debt or equity securities reflects the fact that SEC registrants typically exhibit a
degree of complexity of operations and access to multiple funding sources that warrants
excluding them from the new policy statement and subjecting them to the capital
guidelines. In the adopting release for the new rule, the Federal Reserve Board stated
that what constitutes a material amount of SEC-registered debt or equity for a
particular bank holding company depends on the size, activities and condition of the
relevant bank holding company. In lieu of using fixed measurable parameters of materiality
across all institutions, the rule provides the Federal Reserve with supervisory
flexibility in determining, on a case-by-case basis, the significance or materiality of
activities or securities outstanding such that a bank holding company should be excluded
from the policy statement and subject to the capital guidelines. Prior to adoption of this
new rule, our holding company was subject to these capital guidelines, as it had less more
than $150 million in assets. Until the Federal Reserve provides further guidance on the
new rules, it will be unclear whether our holding company will be subject to the exemption
from the capital requirements for small bank holding companies. Regardless, our bank falls
under these minimum capital requirements as set per bank regulatory agencies.

Under the capital adequacy
guidelines, regulatory capital is classified into two tiers. These guidelines require an
institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted
assets. Tier 1 capital consists of common shareholders equity, excluding the
unrealized gain or loss on securities available for sale, minus certain intangible assets.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on
the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1
capital plus the general reserve for loan losses, subject to certain limitations. We are
also required to maintain capital at a minimum level based on total average assets, which
is known as the Tier 1 leverage ratio.

At both the holding company and bank
level, we are subject to various regulatory capital requirements administered by the
federal banking agencies.  To be considered adequately capitalized at
both the holding company and bank level, we must maintain a minimum total risk-based
capital of 8%, with at least 4% being Tier 1 capital. In addition, we must maintain a
minimum Tier 1 leverage ratio of at least 4%. To be considered
well-capitalized, we must maintain total risk-based capital of at least 10%,
Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

14

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The following table summarizes the capital  amounts and ratios of the bank and the holding  company.  (Dollars in
thousands)

|                                       | March 31, 2006
|-------------------------------------- | --------------
|
|
|The Bank                               |               
|Total capital to risk weighted assets  |               
|Tier 1 capital to risk weighted assets |               
|Tier 1 capital to average assets       |               
|                                       |               
|The Holding Company                    |               
|Total capital to risk weighted assets  |               
|Tier 1 capital to risk weighted assets |               
|Tier 1 capital to average assets       |               

Critical Accounting
PoliciesWe 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 Note 1 to
the financial statements in Item 1.

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

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

15

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# 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

# Item 5.   Other
Information.

Not applicable

# Item 6.   Exhibits.

31.1        Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2        Rule 13a-14(a) Certification of the Principal Financial Officer.

32           Section 1350
Certifications.

16

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# 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 12, 2006 |  | By:   /s/  C. Allan Ducker, III
|------------------- |  | -------------------------------
|                    |  | C. Allan Ducker, III           
|                    |  | Chief Executive Officer        

|Date:  May 12, 2006 |  | By:   /s/  John W. Hobbs
|------------------- |  | ------------------------
|                    |  | John W. Hobbs           
|                    |  | Chief Financial Officer 

17

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# EXHIBIT INDEX

ExhibitNumber                    
Description

31.1        Rule 13a-14(a) Certification of the Principal Executive Officer.

31.2        Rule 13a-14(a) Certification of the Principal Financial Officer.

32           Section 1350
Certifications.

18