EXHIBIT 13


















                            REGIONAL BANKSHARES, INC.

                            Portions of Registrant's
                              2004 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2004 Form 10-KSB




<PAGE>

                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                           Forward Looking Statements

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

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

     o    Our growth and our ability to maintain growth;

     o    Governmental  monetary and fiscal policies, as well as legislative and
          regulatory changes;

     o    The effect of interest  rate changes on our level and  composition  of
          deposits,  loan  demand  and the  value  of our  loan  collateral  and
          securities;

     o    The effects of competition from other financial institutions operating
          in our market area and  elsewhere,  including  institutions  operating
          locally,  regionally,  nationally and  internationally,  together with
          competitors   that  offer  banking  products  and  services  by  mail,
          telephone and computer and/or the Internet;

     o    Failure of assumptions  underlying the  establishment of our allowance
          for loan losses, including the value of collateral securing loans; and

     o    Loss of consumer  confidence and economic  disruptions  resulting from
          terrorist activities.

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



















<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations


                              Basis of Presentation

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

                                     General

On  June  15,  1999,  Hartsville  Community  Bank  (the  "Bank")  completed  its
organization and began operations in temporary  facilities in Hartsville,  South
Carolina.  On January 1, 2001,  the Bank  became a  wholly-owned  subsidiary  of
Regional Bankshares,  Inc. (the Company),  when the Company acquired 100% of the
outstanding  common  stock of the Bank.  The  Company  was  formed to serve as a
holding  company for the Bank. On January 10, 2001,  the Bank  converted  from a
national bank charter to a state bank charter.

On May 10, 2001, the Company moved its operations to its newly constructed 8,250
square  foot  headquarters  at 206  South  Fifth  Street  in  Hartsville,  South
Carolina. In April 2003, the Bank moved its operations center to 226 W. Carolina
Avenue,  near the Bank's  headquarters.  The new site provided additional needed
space for operations as well as valuable storage space for the Bank.

The principal  business  activity of the Bank is to provide banking  services to
domestic  markets,  principally in Darlington  County and  Chesterfield  County,
South  Carolina.  The deposits of the Bank are insured up to legal limits by the
Federal  Deposit  Insurance  Corporation.  In addition to providing  traditional
banking  services,  the Bank has a mortgage  loan  division.  The mortgage  loan
division  originates loans to purchase existing homes or construct new homes and
to refinance existing mortgages. During 2001, the Bank began to offer investment
and  brokerage  services  to  the  Company's  customers  through  Raymond  James
Financial Services, Inc., a registered broker-dealer firm.

On May 28,  2003 the Bank  opened the doors of its new  branch  office in McBee,
South  Carolina,  an area in which the Bank saw a need for a community bank that
could provide full service  banking.  The McBee branch  offers  deposit and loan
services to many consumers and local industries in the area.




                                       2
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                              Results of Operations


Year ended December 31, 2004, compared with year ended December 31, 2003

Net interest  income  increased  $586,475,  or 28.69% in 2004 from $2,043,917 in
2003.  The increase in net interest  income was due  primarily to an increase in
average earning assets, which increased $11,601,000, or 22.93%, due to continued
growth in the loan portfolio,  principally  loans to new borrowers.  The primary
components  of  interest  income  were  interest on loans,  including  fees,  of
$3,237,824 and interest on securities available for sale of $77,727.

The Company's net interest  spread and net interest margin were 4.38% and 4.59%,
respectively,  in 2004 compared to 4.21% and 4.44%,  respectively,  in 2003. The
increase  in net  interest  spread was  primarily  the result of an  increase in
interest rates.  Yields on earning assets  decreased from 5.99% in 2003 to 5.83%
in 2004. Rates on interest-bearing  liabilities  decreased from 1.78% in 2003 to
1.45% in 2004.

The provision for loan losses was $125,000 in 2004 compared to $132,000 in 2003.
The Company  continues  to  maintain  the  allowance  for loan losses at a level
management  believes to be sufficient to cover known and inherent  losses in the
loan portfolio.

Noninterest  income  increased  $40,256,  or  7.98%,  to  $544,583  in 2004 from
$504,327 in 2003.  The  increase  is  primarily  attributable  to an increase in
service charges on deposit  accounts,  which increased  $55,638,  or 24.35%,  to
$284,170 for the year ended December 31, 2004.  Residential mortgage origination
fees decreased  $15,514,  or 15.62%,  to $83,797 for the year ended December 31,
2004 due to the decline in the number of mortgage  refinances as interest  rates
began to increase and most of the demand for refinancing had been satisfied.

Noninterest  expense increased  $339,402,  or 15.42%, to $2,541,092 in 2004 from
$2,201,690 in 2003. Noninterest expenses increased in all categories as a result
of the Company's  continued growth.  Other operating expenses increased $122,434
to  $852,747  for the year  ended  December  31,  2004.  Salaries  and  benefits
increased  $159,604,  or 13.46%,  to $1,345,559 in 2004 from $1,185,955 in 2003.
This  increase  is  attributable  to  normal  pay  increases  and the  hiring of
additional  staff to meet  needs  associated  with  the  Company's  growth.  The
Company's  efficiency  ratio was 80.04% in 2004 compared to 86.40% in 2003.  The
efficiency  ratio is defined as  noninterest  expense  divided by the sum of net
interest  income  and  noninterest  income,  net of gains and losses on sales of
assets.

Net income was  $321,122  in 2004  compared to a net income of $135,169 in 2003.
The  net  income  reflects  our  continued  growth,  as  average-earning  assets
increased from  $46,018,000  for the year ended December 31, 2003 to $57,619,000
for the year ended  December 31, 2004.  Return on average assets during 2004 was
0.52%  compared to 0.27%  during  2003,  and return on average  equity was 6.28%
during 2004 compared to 2.91% during 2003.




                                       3
<PAGE>

                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                               Net Interest Income

General.  The largest  component of the Company's net income is its net interest
income, which is the difference between the income earned on assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the yields earned on the Company's  interest-earning assets and
the rates paid on its  interest-bearing  liabilities,  the  relative  amounts of
interest-earning  assets  and  interest-bearing  liabilities,  and the degree of
mismatch and the maturity and repricing  characteristics of its interest-earning
assets and interest-bearing  liabilities.  Total  interest-earning  assets yield
less total  interest-bearing  liabilities  rate  represents  the  Company's  net
interest rate spread.

Average  Balances,  Income and Expenses,  and Rates.  The  following  table sets
forth, for the years  indicated,  certain  information  related to the Company's
average  balance  sheet and its average  yields on assets and  average  costs of
liabilities.  Such  yields  are  derived  by  dividing  income or expense by the
average balance of the  corresponding  assets or liabilities.  Average  balances
have been derived from the daily balances throughout the periods indicated.

Average Balances, Income and Expenses, and Rates

<TABLE>
<CAPTION>
                                                                          2004                                     2003
                                                                          ----                                     ----
                                                         Average         Income/      Yield/       Average        Income/     Yield/
(Dollars in thousands)                                   Balance        Expense        Rate        Balance       Expense       Rate
                                                      ------------     ----------  ----------    ----------     ----------  --------
Assets:
  Earning Assets:
<S>                                                   <C>              <C>              <C>      <C>            <C>            <C>
     Loans (1) ..................................     $     51,709     $    3,238       6.26%    $   41,352     $    2,655     6.42%
     Securities, taxable (2) ....................            3,292             78       2.37          2,287             67     2.93
     Nonmarketable securities ...................              214              4       1.87            159              7     4.40
     Federal funds sold .........................            2,404             37       1.54          2,220             25     1.17
                                                      ------------     ----------                ----------     ----------
       Total earning assets .....................           57,619          3,357       5.83         46,018          2,754     5.99
                                                      ------------     ----------                ----------     ----------
  Cash and due from banks .......................            1,976                                    1,832
  Premises and equipment ........................            2,476                                    2,362
  Other assets ..................................              789                                      803
  Allowance for loan losses .....................             (532)                                    (417)
                                                      ------------                               ----------
       Total assets .............................     $     62,328                               $   50,598
                                                      ============                               ==========
Liabilities:
  Interest-bearing liabilities:
     Interest-bearing transaction accounts ......     $      6,055             14       0.23%    $    4,892             14     0.29%
     Savings deposits ...........................           17,677            183       1.04         11,117            136     1.22
     Time deposits ..............................           23,728            482       2.03         23,423            557     2.38
  Note Payable ..................................              255             13       5.09              -              -        -
Federal Home Loan Bank Advances .................            2,524             34       1.35            562              3     0.53
  Other short-term borrowings ...................               44              1       2.27              5              0
                                                      ------------     ----------                ----------     ----------
       Total interest-bearing
         liabilities ............................           50,283            727       1.45         39,999            710     1.78
                                                      ------------     ----------                ----------     ----------
  Demand deposits ...............................            6,757                                    5,730
  Accrued interest and other liabilities ........              178                                      227
  Shareholders' equity ..........................            5,110                                    4,642
                                                      ------------                               ----------
       Total liabilities and
         Shareholders' equity ...................     $     62,328                               $   50,598
                                                      ============                               ==========
  Net interest spread ...........................                                       4.38%                                  4.21%
  Net interest income ...........................                      $    2,630                               $    2,044
                                                                       ==========                               ==========
  Net interest margin ...........................                                       4.59%                                  4.44%
</TABLE>

(1)  The  effect  of  fees  collected  on  loans  is  not   significant  to  the
     computations.  Nonaccrual  loans are not  included  in average  balances on
     loans.  All  loans  and  deposits  are  domestic.
(2)  Average investment securities exclude the valuation allowance on securities
     available-for-sale.



                                       4
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                              Rate/Volume Analysis

Analysis of Changes in Net  Interest  Income.  Net  interest  income can also be
analyzed  in terms of the impact of  changing  rates and  changing  volume.  The
following  table  reflects  the extent to which  changes in  interest  rates and
changes in the volume of earning assets and  interest-bearing  liabilities  have
affected the Company's  interest income and interest  expense during the periods
indicated.  Information on changes in each category  attributable to (i) changes
due to volume (change in volume  multiplied by prior period rate),  (ii) changes
due to rates  (changes in rates  multiplied  by prior  period  volume) and (iii)
changes in  rate/volume  (change in rate  multiplied by the change in volume) is
provided as follows:

<TABLE>
<CAPTION>
                                                                                                2004 Compared to 2003
                                                                                                    Variance due to
                                                                                                    ---------------
(Dollars in thousands)                                                            Volume(1)              Rate(1)              Total
                                                                                  ---------              -------              -----
Interest income:
<S>                                                                                <C>                  <C>                   <C>
   Loans ..........................................................                $ 650                $ (67)                $ 583
   Securities, taxable ............................................                   26                  (15)                   11
   Nonmarketable securities .......................................                    2                   (5)                   (3)
   Federal funds sold and other ...................................                    2                   10                    12
                                                                                   -----                -----                 -----

     Total interest income ........................................                  680                  (77)                  603
                                                                                   -----                -----                 -----

Interest expense:
   Interest-bearing deposits ......................................                   80                 (108)                  (28)
   Federal Home Loan Bank Advances ................................                   21                   10                    31
   Note Payable ...................................................                    7                    6                    13
   Other short-term borrowings ....................................                    -                    -                     -
                                                                                   -----                -----                 -----

     Total interest expense .......................................                  108                  (92)                   16
                                                                                   -----                -----                 -----

     Net interest income ..........................................                $ 572                $  15                 $ 587
                                                                                   =====                =====                 =====
</TABLE>

(1)  Volume-rate  changes  have  been  allocated  to each  category  based  on a
     consistent basis between rate and volume.

                               Net Interest Income

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




                                       5
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                         Net Interest Income - continued


The  following  table sets forth the  Company's  interest  rate  sensitivity  at
December 31, 2004.

Interest Sensitivity Analysis
<TABLE>
<CAPTION>
                                                                      After one    After Three                  Greater
                                                                       Through       Through                    Than One
December 31, 2004                                        Within One     Three         Twelve      Within one   Year or Non-
(Dollars in thousands)                                     Month        Months        Months         Year       Sensitive    Total
                                                           -----        ------        ------         ----       ---------    -----
Assets
Interest-earning assets
<S>                                                       <C>           <C>           <C>          <C>          <C>          <C>
  Loans .............................................     $29,765       $1,237        $1,675       $32,677      $21,785      $54,462
  Securities, taxable ...............................          15           29           132           176        3,380        3,556
  Nonmarketable securities ..........................           -            -             -             -          446          446
  Federal funds sold ................................       6,396            -             -         6,396            -        6,396
                                                         --------     --------      --------      --------     --------     --------
       Total earning assets .........................      36,176        1,266         1,807        39,249       25,611       64,860
                                                         --------     --------      --------      --------     --------     --------
Liabilities
Interest-bearing liabilities:
  Interest-bearing deposits:
     Demand deposits ................................       5,776            -             -         5,776            -        5,776
     Savings deposits ...............................       2,141            -             -         2,141            -        2,141
     Time deposits ..................................       1,166        5,711        13,805        20,682        3,983       24,665
                                                         --------     --------      --------      --------     --------     --------
       Total interest-bearing deposits ..............       9,083        5,711        13,805        28,599        3,983       32,582
                                                         --------     --------      --------      --------     --------     --------
  Note Payable ......................................           -            -             -                      1,000        1,000
  Federal Home Loan Bank advances ...................       2,000            -             -         2,000        4,250        6,250
                                                         --------     --------      --------      --------     --------     --------
       Total interest-bearing liabilities ...........      11,083        5,711        13,805        30,599        9,233       38,832
                                                         --------     --------      --------      --------     --------     --------
Period gap ..........................................     $25,093      $(4,445)     $(11,998)       $8,650      $14,810      $16,378
                                                         ========     ========      ========      ========     ========     ========
Cumulative gap ......................................     $25,093      $20,648        $8,650        $8,650      $23,460      $25,028
                                                         ========     ========      ========      ========     ========     ========
Ratio of cumulative gap to total
  earning assets ....................................       38.69%       31.83%        13.34%        13.34%       38.58%
</TABLE>

The  above  table   reflects  the  balances  of   interest-earning   assets  and
interest-bearing  liabilities  at the  earlier of their  repricing  or  maturity
dates.  Overnight  federal funds are reflected at the earliest  pricing interval
due to the immediately available nature of the instruments.  Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate  amortizing  loans are reflected at each  scheduled  payment date.
Scheduled  payment  amounts of variable rate  amortizing  loans are reflected at
each scheduled  payment date until the loan may be repriced  contractually;  the
unamortized  balance is  reflected at that point.  Interest-bearing  liabilities
with no  contractual  maturity,  such as savings  deposits and  interest-bearing
transaction  accounts,  are  reflected in the earliest  repricing  period due to
contractual  arrangements  which give the  Company the  opportunity  to vary the
rates paid on those deposits within a thirty-day or shorter period. However, the
Company is not  obligated  to vary the rates paid on these  deposits  within any
given period. Fixed rate time deposits, principally certificates of deposit, are
reflected at their  contractual  maturity dates.  Advances from the Federal Home
Loan Bank and the note  payable  are  reflected  at their  contractual  maturity
dates.






                                       6
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                         Net Interest Income - continued

The Company  generally  would benefit from  increasing  market rates of interest
when it has an  asset-sensitive  gap position and  generally  would benefit from
decreasing market rates of interest when it is liability-sensitive.  The Company
is asset-sensitive on a cumulative basis within one year. However, the Company's
gap analysis is not a precise  indicator of its interest  sensitivity  position.
The  analysis  presents  only a static  view of the  timing  of  maturities  and
repricing  opportunities,  without  taking into  consideration  that  changes in
interest rates do not affect all assets and  liabilities  equally.  For example,
rates paid on a substantial  portion of core  deposits may change  contractually
within a relatively  short time frame,  but those rates are viewed by management
as significantly less  interest-sensitive  than market-based rates such as those
paid  on  noncore  deposits.   Accordingly,   management  believes  its  current
asset-sensitive  gap  position  is  acceptable  relative  to  the  current  rate
environment,  as the Company would be expected to benefit from rising rates. Net
interest  income may also be  impacted by other  significant  factors in a given
interest rate  environment,  including  changes in the volume and mix of earning
assets and interest-bearing liabilities.

                     Provision and Allowance for Loan Losses

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

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

The Company's  allowance for loan losses is based upon judgments and assumptions
about risk elements in the  portfolio,  future  economic  conditions,  and other
factors  affecting  borrowers.  The  process of setting the  allowance  includes
identification  and analysis of inherent  losses in various  portfolio  segments
utilizing a credit risk grading process and specific  reviews and evaluations of
significant  problem  credits.  In  addition,  management  monitors  the overall
portfolio  quality through  observable  trends in delinquency,  chargeoffs,  and
general and economic conditions in the service area. Management has an immediate
goal of  1.00%  and a  long-term  goal of  1.10%  of  total  loans to be held in
reserve. This is based upon industry data as well as the inherent credit risk in
the bank's loan portfolio. The adequacy of the allowance for loan losses and the
effectiveness of the Company's  monitoring and analysis system are also reviewed
periodically by the banking regulators and the Company's independent auditors.

Based on present information and an ongoing evaluation, management considers the
allowance  for loan losses to be adequate to meet  presently  known and inherent
losses in the loan  portfolio.  Management's  judgment about the adequacy of the
allowance is based upon a number of  assumptions  about  future  events which it
believes to be reasonable but which may or may not be accurate.  Thus, there can
be no assurance that  chargeoffs in future periods will not exceed the allowance
for loan losses or that  additional  increases in the  allowance for loan losses
will not be  required.  The Company does not  allocate  the  allowance  for loan
losses to specific  categories of loans but evaluates the adequacy on an overall
portfolio basis  utilizing a risk grading system.  Although real estate mortgage
loans comprise the largest category of total loans, the relative risk associated
with these loans is considered  lower than the risk associated with  traditional
commercial and consumer loans. Commercial and consumer loans are usually secured
by  collateral  other than real estate and  therefore  carry a higher  degree of
risk.


                                       7
<PAGE>

                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

               Provision and Allowance for Loan Losses - continued

The  following  table  sets forth  information  with  respect  to the  Company's
allowance for loan losses and the  composition  of chargeoffs and recoveries for
the years ended December 31, 2004 and 2003.

Allowance for Loan Losses
(Dollars in thousands)                                        2004        2003
                                                              ----        ----
Total loans outstanding at end of year .................    $55,052     $48,263
                                                            =======     =======
Average loans outstanding ..............................    $51,709     $41,352
                                                            =======     =======
Balance of allowance for loan losses
 at beginning of year ..................................       $483        $369
Loans charged off:
     Real estate - construction ........................          -           -
     Real estate - mortgage ............................          -           -
     Commercial and industrial .........................          -           -
     Consumer and other ................................         32          24
                                                            -------     -------
         Total loan losses .............................         32          24
                                                            -------     -------
Recoveries of previous loan losses:
     Real estate - construction ........................          -           -
     Real estate - mortgage ............................          -           -
     Commercial and industrial .........................          -           -
     Consumer and other ................................         14           6
                                                            -------     -------
         Total recoveries ..............................         14           6
                                                            -------     -------
Net charge-offs ........................................         18          18
Provision for loan losses ..............................        125         132
                                                            -------     -------
Balance of allowance for loan losses at end of year ....    $   590     $   483
                                                            =======     =======

Allowance for loan losses to year end loans ............       1.07%       1.00%
Ratio of charge-offs to average loans ..................       0.05%       0.06%

                              Nonperforming Assets

Nonperforming   Assets.  There  were  loans  totaling  $23,847  and  $10,833  in
nonaccrual status at December 31, 2004 and 2003, respectively.  There were loans
totaling  $2,157 and  $7,874  past due  ninety  days or more and still  accruing
interest at December 31, 2004 and 2003, respectively. There were no restructured
loans at December 31, 2004 or 2003.

Accrual of interest is discontinued on a loan when  management  believes,  after
considering  economic and business conditions and collection  efforts,  that the
borrower's  financial  condition  is such that the  collection  of  interest  is
doubtful.  A delinquent  loan is generally  placed in nonaccrual  status when it
becomes 90 days or more past due unless the  estimated net  realizable  value of
collateral  exceeds the principal balance and accrued  interest.  When a loan is
placed in nonaccrual status, all interest which has been accrued on the loan but
remains unpaid is reversed and deducted from current  earnings as a reduction of
reported interest income. No additional  interest is accrued on the loan balance
until the collection of both principal and interest becomes reasonably  certain.
When a problem  loan is  finally  resolved,  there may  ultimately  be an actual
write-down  or  chargeoff  of the  principal  balance  of the loan  which  would
necessitate  additional  charges to  earnings.  For all periods  presented,  the
additional  interest  income,  which would have been recognized into earnings if
the  Company's  nonaccrual  loans had been  current  in  accordance  with  their
original terms and the amount of interest income on such loans that was included
in net income, is immaterial.



                                       8
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                        Nonperforming Assets - continued

Potential  Problem  Loans.  Management  has  identified  and maintains a list of
potential problem loans. These are loans that are not included in impaired loans
(nonaccrual or past due 90 days or more and still accruing).  A loan is added to
the potential  problem loan list when  management  becomes aware of  information
about  possible  credit  problems of  borrowers  that causes  doubts about their
ability to comply with the current loan repayment  terms.  At December 31, 2004,
the  Company  had  identified  $578,868  in  criticized  loans  (loans  that are
typically  60-89 days past due) and $30,160 in classified  loans (loans that are
typically 90 days or more past due) through its internal review  mechanisms.  At
December 31, 2003, the Company had identified  $449,876 in criticized  loans and
$17,009 in  classified  loans  through its  internal  review  mechanisms.  These
amounts do not  represent  management's  estimate of  potential  losses  since a
portion of such loans is secured by various types of collateral.  The results of
this  internal  review  process  are  considered  in  determining   management's
assessment of the adequacy of the allowance for loan losses.

                         Noninterest Income and Expense

Noninterest Income.  Noninterest income for the year ended December 31, 2004 was
$544,583,  an increase of $40,256 from $504,327 for the year ended  December 31,
2003. The increase is primarily due to an increase in service charges on deposit
accounts which totaled $284,170 in 2004 as compared to $228,532 in 2003.

The following  table sets forth the principal  components of noninterest  income
for the years ended December 31, 2004 and 2003.

     (Dollars in thousands)                                    2004         2003
                                                               ----         ----
Service charges on deposit accounts ..................         $284         $229
Credit life insurance commissions ....................            5            4
Residential mortgage origination fees ................           84           99
Brokerage commissions ................................          102          110
Other income .........................................           70           62
                                                               ----         ----
Total noninterest income .............................         $545         $504
                                                               ====         ====

Noninterest  Expense.  Noninterest  expense  increased  $339,402  or  15.42%  to
$2,541,092  for the year ended  December 31, 2004 when compared to 2003. Of this
total,  other operating expenses  increased  $122,434,  or 16.76% to $852,747 in
2004 from $730,313 in 2003. The increase is mainly  attributable to the addition
of our McBee branch office and our new operations center.  Salaries and employee
benefits  increased  $159,604,  or 13.46%, in 2004 from $1,185,955 in 2003. This
increase is  attributable  to normal pay  increases and the hiring of additional
staff to meet needs  associated with our growth.  Occupancy  expense,  including
depreciation  charges,  increased  $35,342,  or 25.51% to $173,885  for the year
ended December 31, 2004. Furniture and equipment expense increased from $146,879
in 2003 to $168,901 for the year ended December 31, 2004. Increases in occupancy
and  furniture  and  equipment  expense  are also a result of the opening of our
McBee branch and operations center.




                                       9
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                   Noninterest Income and Expense - continued

The following table sets forth the primary components of noninterest expense for
the years ended December 31, 2004 and 2003.

     (Dollars in thousands)                                 2004           2003
                                                            ----           ----
Salaries and employee benefits .....................       $1,346        $1,186
Net occupancy and equipment expense ................          174           285
Advertising and public relations ...................           67            90
Office supplies, stationery, and printing ..........           57            64
Data processing and related expense ................          179           138
Professional fees and services .....................          117            74
Telephone expenses .................................           54            48
Other ..............................................          547           317
                                                           ------        ------
    Total noninterest expense ......................       $2,541        $2,202
                                                           ======        ======
Efficiency ratio ...................................        80.04%        86.40%

                                 Earning Assets

Loans.  Loans are the largest  category of earning assets and typically  provide
higher yields than the other types of earning assets. Associated with the higher
loan  yields  are the  inherent  credit and  liquidity  risks  which  management
attempts to control  and  counterbalance.  Loans  averaged  $51,709,000  in 2004
compared  to  $41,352,000  in 2003,  an increase of  $10,357,000  or 25.05%.  At
December 31,  2004,  total loans were  $55,052,377  compared to  $48,262,788  at
December 31, 2003.

The following table sets forth the composition of the loan portfolio by category
at the dates  indicated and  highlights  the Company's  general  emphasis on all
types of lending.

Composition of Loan Portfolio
<TABLE>
<CAPTION>
December 31,                                                           2004                                    2003
                                                                       ----                                    ----
(Dollars in thousands)                                                            Percent                                   Percent
                                                             Amount               of Total           Amount                of Total
                                                             ------               --------           ------                --------

<S>                                                         <C>                    <C>             <C>                      <C>
Commercial and industrial ......................            $ 5,324                  9.67%         $  6,925                  14.35%
Real estate
     Construction ..............................              1,589                  2.89             3,899                   8.08
     Mortgage-residential ......................             17,029                 30.93            15,526                  32.17
     Mortgage-nonresidential ...................             25,030                 45.47            15,956                  33.06
Consumer .......................................              6,080                 11.04             5,957                  12.34
                                                            -------                ------          --------                 -------
     Total loans ...............................             55,052                100.00%           48,263                 100.00%
Allowance for loan losses ......................               (590)                                   (483)
                                                            -------                                --------
     Net loans .................................            $54,462                                $47,780
                                                            =======                                ========
</TABLE>

The largest  component of the Company's loan  portfolio is real estate  mortgage
loans. At December 31, 2004, real estate mortgage loans totaled  $43,647,681 and
represented  79.29% of the total loan  portfolio,  compared  to  $31,481,432  or
65.23% at December 31, 2003.

In the context of this  discussion,  a "real estate mortgage loan" is defined as
any loan,  other than loans for construction  purposes,  secured by real estate,
regardless  of the  purpose of the loan.  It is common  practice  for  financial
institutions in the Company's market area to obtain a security  interest in real
estate whenever possible,  in addition to any other available  collateral.  This
collateral is taken to reinforce the likelihood of the ultimate repayment of the
loan and tends to increase  the  magnitude  of the real  estate  loan  portfolio
component.



                                       10
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                           Earning Assets - continued

Residential  mortgage  loans  totaled  $17,028,802  at  December  31,  2004  and
represented  30.93% of the total loan  portfolio,  compared  to  $15,525,959  at
December 31,  2003.  Residential  real estate loans  consist of first and second
mortgages  on  single  or  multi-family  residential  dwellings.  Nonresidential
mortgage  loans,  which  include  commercial  loans and other  loans  secured by
multi-family properties and farmland,  totaled $25,030,062 at December 31, 2004,
compared to  $15,955,503  at December 31, 2003.  This  represents an increase of
$9,074,559  or  56.87%  from the  December  31,  2003  amount.  The  demand  for
residential  and  commercial  real  estate  loans in the  Hartsville  market has
increased due to a lower interest rate environment. The Company has been able to
compete   favorably  for   residential   mortgage  loans  with  other  financial
institutions  by offering  fixed rate  products  having three and five year call
provisions.

Consumer and other loans increased  $123,522 or 2.07%, to $6,080,445 at December
31, 2004 from $5,956,923 at December 31, 2003.

Commercial and industrial loans increased $1,872,569 or 54.25%, to $5,324,250 at
December 31, 2004 from $3,451,681 at December 31, 2003.

The Company's loan portfolio reflects the diversity of its market. The Company's
home office is located in Hartsville in Darlington County,  South Carolina.  The
Company has a second branch in McBee,  which is in  Chesterfield  County,  South
Carolina.  The  economy  of  Hartsville  contains  elements  of medium and light
manufacturing,   higher  education,   regional  health  care,  and  distribution
facilities.  The  economy  of  McBee  contains  elements  of  medium  and  light
manufacturing  and farming.  Management  expects the areas to remain stable with
continued  growth in the near  future.  The  diversity  of the  economy  creates
opportunities  for all types of lending.  The Company does not engage in foreign
lending.

The repayment of loans in the loan  portfolio as they mature is also a source of
liquidity for the Company.  The following  table sets forth the Company's  loans
maturing within specified intervals at December 31, 2004.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
<TABLE>
<CAPTION>
                                                                                      Over One Year
                                                                      One Year or        Through          Over Five
(Dollars in thousands)                                                   Less           Five Years          Years            Total
                                                                         ----           ----------          -----            -----
<S>                                                                     <C>              <C>                <C>              <C>
Commercial and industrial ..................................            $2,208           $ 2,635            $  481           $ 5,324
Real estate ................................................             2,197            33,634             7,816            43,648
Consumer and other .........................................             1,066             4,509               505             6,080
                                                                        ------           -------            ------           -------
                                                                        $5,471           $40,778            $8,802           $55,052
                                                                        ======           =======            ======           =======

Loans maturing after one year with:
     Fixed interest rates ..................................                                                                 $20,155
     Floating interest rates ...............................                                                                  29,425
                                                                                                                             -------
                                                                                                                             $49,580
</TABLE>

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

Investment  Securities.  The investment securities portfolio is also a component
of the  Company's  total earning  assets.  Total  securities  available-for-sale
averaged  $3,292,000  in 2004,  compared to  $2,287,000 in 2003. At December 31,
2004,  total   securities   available-for-sale   were  $3,555,552.   Other  than
nonmarketable   equity   securities,   all   securities   were   designated   as
available-for-sale  and were recorded at their estimated fair value.  Investment
securities  also  include  certain  nonmarketable  equity  securities  including
Federal Home Loan Bank of Atlanta stock and Community Financial  Services,  Inc.
(parent of The Bankers  Bank)  stock.  These  securities  are  recorded at their
original cost and totaled $446,153 at December 31, 2004.



                                       11
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                           Earning Assets - continued

The   following   table   sets   forth   the  book   value  of  the   securities
available-for-sale held by the Company at December 31, 2004 and 2003.

Book Value of Securities
     (Dollars in thousands)                                   2004         2003
                                                              ----         ----
        U.S. government agencies and corporations ....       $3,000       $1,500
        Mortgage backed ..............................          597         $866
                                                             ------       ------
              Total securities available-for-sale ....       $3,597       $2,366
                                                             ======       ======

The following  table sets forth the scheduled  maturities  and weighted  average
yields of securities available-for-sale held at December 31, 2004.

Investment Securities Maturity Distribution and Yields

<TABLE>
<CAPTION>
                                                                                 After One But
December 31, 2004                                                               Within Five Years                   Total
                                                                                -----------------                   -----
                                                                                             Weighted                      Weighted
                                                                                              Average                       Average
(Dollars in thousands)                                                       Amount            Yield        Amount           Yield
                                                                             ------            -----        ------           -----
<S>                                                                          <C>               <C>          <C>              <C>
U.S. government agencies and corporations ........................           $3,000            2.75%        $3,000           2.75%
Mortgage Backed ..................................................              597            4.00%           597           4.00%
                                                                             ------                         ------
     Total securities available for sale .........................           $3,597            2.96%        $3,597           2.96%
                                                                             ======                         ======
</TABLE>

Other attributes of the securities  portfolio,  including yields and maturities,
are discussed above in "Net Interest Income- Interest Sensitivity Analysis."

Short-Term  Investments.  Short-term  investments,  which  consist  primarily of
federal funds sold, averaged $2,404,000 in 2004, compared to $2,220,000 in 2003.
At December 31, 2004, short-term investments totaled $6,395,757. These funds are
an important  source of the  Company's  liquidity.  Federal  funds are generally
invested in an earning capacity on an overnight basis.

                 Deposits and Other Interest-Bearing Liabilities

Average  interest-bearing   liabilities  increased  $10,284,000,  or  25.71%  to
$50,283,000 in 2004, from $39,999,000 in 2003. Average interest-bearing deposits
increased  $8,028,000 or 20.36%,  to  $47,460,000 in 2004,  from  $39,432,000 in
2003.   These   increases   resulted  from   increases  in  all   categories  of
interest-bearing  liabilities,  primarily as a result of the continued growth of
the Company.

Deposits.   Average  total  deposits  increased   $9,055,000,   or  20.051%,  to
$54,217,000  in 2004,  from  $45,162,000  in 2003.  At December 31, 2004,  total
deposits were $57,691,196,  compared to $50,439,904 a year earlier,  an increase
of 14.38%.  The largest  increase in  deposits  was in savings and money  market
deposits  which  increased  $4,485,466 or 30.97% to  $18,969,783 at December 31,
2004 when compared to 2003.



                                       12
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

           Deposits and Other Interest-Bearing Liabilities - continued

The  following  table sets forth the  deposits  of the  Company by  category  at
December 31, 2004 and 2003.

Deposits
<TABLE>
<CAPTION>
December 31,                                                                 2004                               2003
                                                                             ----                               ----
                                                                                     Percent of                         Percent of
(Dollars in thousands)                                               Amount           Deposits           Amount          Deposits
                                                                     ------           --------           ------          --------
<S>                                                                 <C>               <C>             <C>                <C>
Demand deposit accounts ................................            $ 8,281            14.35%         $ 6,969             13.82%
NOW accounts ...........................................              5,776            10.01            5,284             10.48
Money market accounts ..................................             16,829            29.17           12,421             24.63
Savings accounts .......................................              2,140             3.71            2,063              4.09
Time deposits less than $100 ...........................             18,888            32.74           16,144             32.00
Time deposits of $100 or more ..........................              5,777            10.02            7,559             14.98
                                                                    -------           ------          -------            ------
     Total deposits ....................................            $57,691           100.00%         $50,440            100.00%
                                                                    =======                           =======
</TABLE>

The average  amounts and average rates paid on deposits held by the Bank for the
years ended December 31, 2004 and 2003 are summarized below:
<TABLE>
<CAPTION>
December 31,                                                                      2004                               2003
                                                                                  ----                               ----
                                                                      Average            Average         Average           Average
(Dollars in thousands)                                                Amount            Rate Paid         Amount           Rate Paid
                                                                      ------            ---------         ------           ---------
<S>                                                                  <C>                  <C>            <C>                  <C>
Demand deposit accounts ................................             $ 6,757              0.00%          $ 5,730              0.00%
NOW accounts ...........................................               6,055              0.23             4,892              0.28
Money market accounts ..................................              15,629              1.13             9,877              1.32
Savings accounts .......................................               2,048              0.29             1,240              0.44
Time deposits less than $100 ...........................              17,398              2.07             7,605              2.39
Time deposits of $100 or more ..........................               6,330              1.91            15,818              2.38
                                                                     -------              ----           -------              ----
     Total deposits ....................................             $54,217              1.25%          $45,162              1.79%
                                                                     =======                             =======
</TABLE>

Core  deposits,  which  exclude  time  deposits of  $100,000 or more,  provide a
relatively  stable  funding  source for the Company's  loan  portfolio and other
earning  assets.  The Company's  core deposits were  $51,914,499 at December 31,
2004.

Deposits, and particularly core deposits, have been the Company's primary source
of funding and have enabled the Company to meet successfully both its short-term
and long-term  liquidity needs.  Management  anticipates that such deposits will
continue  to be the  Company's  primary  source of  funding in the  future.  The
Company's  loan-to-deposit  ratio was 95.43% at December 31, 2004, and 95.68% at
December 31, 2003. The maturity  distribution  of the Company's time deposits of
$100,000 or more at December 31, 2004, is set forth in the following table:

Maturities of Time Deposits of $100,000 or More

<TABLE>
<CAPTION>
                                                                                           After Six
                                                                        After Three         Through
                                                      Within Three      Through Six          Twelve       After Twelve
(Dollars in thousands)                                    Months           Months            Months           Months           Total
                                                          ------           ------            ------           ------           -----
<S>                                                       <C>              <C>              <C>                <C>            <C>
Certificates of deposit
  of $100,000 or more .........................           $1,602           $2,475           $1,578             $122           $5,777
</TABLE>

Approximately  27.73% of the  Company's  time  deposits  of $100,000 or more had
scheduled  maturities within three months,  and 42.84% had maturities within six
months. Large certificate of deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits.



                                       13
<PAGE>

                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations
           Deposits and Other Interest-Bearing Liabilities - continued

Advances from the Federal Home Loan Bank.  Total  advances from the Federal Home
Loan Bank were $6,250,000 at December 31, 2004. The average of Federal Home Loan
Bank advances was  $2,524,000 in 2004 as compared to $562,000 in 2003.  Advances
from Federal Home Loan Bank serve as a secondary funding source.

Advances from Federal Home Loan Bank mature at different periods as discussed in
the notes to the financial  statements and are secured by the Bank's one to four
family residential mortgage loans and the Bank's investment in Federal Home Loan
Bank stock.

Note Payable.  During 2004, the Company executed a note with The Bankers Bank to
borrow $1,000,000 for purposes of providing  additional capital to the Bank. The
note is  secured  by the  stock  owned by the  Company  in the Bank and  matures
September 30, 2016.

The following table sets forth information with respect to the Company's Federal
Home Loan Bank advances and Note Payable for the years ending  December 31, 2004
and 2003.

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                              -----------------------
                                           Maximum        Average        Weighted                    Weighted
                                        Outstanding      Amounts          Average                     Average
                                            at any     Outstanding       Interest     Balance     Interest Rate at
(Dollars in thousands)                    Month End    During Period       Rate     December 31,   December 31,
                                          ---------    -------------       ----     ------------   ------------
2004
<S>                                     <C>            <C>                   <C>      <C>                  <C>
Advances from Federal Home
   Loan Bank .......................    $     6,250    $     2,524           1.35%    $     6,250          2.80%
Note Payable .......................          1,000            250           5.09%          1,000          5.25%

2003
Advances from Federal Home
   Loan Bank .......................    $     2,000    $       562           1.31%    $     2,000          1.15%
</TABLE>










                                       14
<PAGE>










                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                                     Capital

The Federal  Reserve  Board 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 form 0% to 100%. Under the risk-based standard,  capital is
classified into two tiers.  The Bank's Tier 1 capital of the Company consists of
common  shareholders'  equity minus certain intangible assets. The Bank's Tier 2
capital   consists  of  the  allowance  for  loan  losses   subject  to  certain
limitations.  The qualifying capital base for purposes of the risk-based capital
ratio  consists  of the sum of its Tier 1 and  Tier 2  capital.  The  regulatory
minimum  requirements are 4% for Tier 1 and 8% for total risk-based capital. The
holding company and banking  subsidiary are also required to maintain capital at
a  minimum  level  based  on  quarterly  average  assets,  which is known as the
leverage ratio.  Only the strongest bank holding companies and banks are allowed
to  maintain  capital at the  minimum  requirement.  All  others are  subject to
maintaining  ratios  100 to 200 basis  points  above the  minimum.  The  Federal
Reserve applies its guidelines on a bank-only  basis for holding  companies with
less than $150 million in consolidated assets.

Analysis of Capital and Capital Ratios
<TABLE>
<CAPTION>
December 31, 2004                                                                                   The Bank           The Company
                                                                                                    --------           -----------
(Dollars in thousands)
<S>                                                                                                 <C>                 <C>
Tier 1 capital .............................................................................        $ 6,049             $ 6,073
Tier 2 capital .............................................................................            590                 590
                                                                                                    -------             -------
     Total qualifying capital ..............................................................        $ 6,639             $ 6,663
                                                                                                    =======             =======

Risk-adjusted total assets (including off-balance-sheet exposures) .........................        $59,495             $59,555
                                                                                                    =======             =======

Risk-based capital ratios:
  Tier 1 risk-based capital ratio ..........................................................          10.17%              10.16%
  Total risk-based capital ratio ...........................................................          11.16%              11.15%
  Tier 1 leverage ratio ....................................................................           9.71%               9.71%
</TABLE>

The Company and the Bank met all applicable capital requirements at December 31,
2004 and the Bank was "well  capitalized"  under FDIC standards.  See Note 17 to
the Company's  Consolidated  Financial  Statements for further information about
the Bank's capital amounts and ratios.



                                       15
<PAGE>

                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                   Liquidity Management and Capital Resources

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

Liquidity  management  is made more  complex  because  different  balance  sheet
components are subject to varying  degrees of management  control.  For example,
the timing of maturities of the  investment  portfolio is very  predictable  and
subject to a high degree of control at the time  investment  decisions are made.
However,  net deposit inflows and outflows are far less  predictable and are not
subject to nearly the same degree of control. Nevertheless,  management believes
that cash and cash  equivalents  in  combination  with deposit  inflows and loan
repayments  are  adequate  to meet  reasonably  foreseeable  demands for deposit
withdrawals and the funding of new loans.  The Company also has a line of credit
available  with  Federal  Home Loan Bank to borrow up to 10% of the Bank's total
assets as of December 31, 2004, or  $7,020,051,  $6,250,000 of which has already
been  advanced.  In addition,  the Company has unused lines to purchase  federal
funds from unrelated banks totaling $3,750,000 at December 31, 2004.

                         Off-Balance Sheet Arrangements

Through its  operations,  the Bank has made  contractual  commitments  to extend
credit in the ordinary course of its business activities.  These commitments are
legally   binding   agreements  to  lend  money  to  the  Bank's   customers  at
predetermined  interest  rates for  specified  periods of time.  At December 31,
2004,  the Bank had issued  commitments  to extend credit of $7,532,145  through
various types of commercial lending  arrangements.  Approximately  $7,086,760 of
these commitments to extend credit had variable rates.

The following  table sets forth the length of time until  expiration  for unused
commitments to extend credit at December 31, 2004.

<TABLE>
<CAPTION>
                                                        After One     After Three
                                                         Through         Through                         Greater
                                       Within One          Three          Twelve         Within One         Than
  (Dollars in thousands)                   Month          Months          Months           Year          One Year           Total
                                    -------------     -----------     -----------     -------------      --------   -  -----------
<S>                                 <C>               <C>             <C>             <C>                <C>           <C>
  Unused commitments
    to extend credit ............   $          20     $       185     $     2,449     $       2,654      $  4,878      $     7,532
                                    =============     ===========     ===========     =============      ========      ===========
</TABLE>
The total amount of loan commitments does not necessarily  represent future cash
requirements  because many of the  commitments  are  expected to expire  without
being fully drawn.  The Bank evaluates each  customer's  credit  worthiness on a
case-by-case  basis. The amount of collateral  obtained,  if deemed necessary by
the Bank upon  extension  of credit,  is based on its credit  evaluation  of the
borrower.  Collateral  varies but may include  accounts  receivable,  inventory,
property, plant and equipment,  commercial and residential real estate. See Note
20 to the Company's financial statements for further information about financial
instruments with off-balance sheet risk.

                               Impact of Inflation

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



                                       16
<PAGE>

                            REGIONAL BANKSHARES, INC.

           Management's Discussion and Analysis of Financial Condition
                            and Results of Operations

                    Accounting and Financial Reporting Issues

We have adopted  various  accounting  policies  which govern the  application of
accounting principles generally accepted in the United States in the preparation
of our consolidated  financial statements.  Our significant  accounting policies
are described in the notes to the consolidated  financial statements at December
31,  2004  included in this Annual  Report to  Shareholders  and as filed in our
Annual Report on Form 10-KSB.  Certain accounting  policies involve  significant
judgments and assumptions  which have a material impact on the carrying value of
certain  assets and  liabilities.  We consider these  accounting  policies to be
critical accounting policies.  The judgments 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 judgments and  assumptions  we
make, actual results could differ from these judgments and estimates which could
have a material  impact on our carrying values of assets and liabilities and our
results of operations.

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



                                       17
<PAGE>











             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors
Regional Bankshares, Inc.
Hartsville, South Carolina


We have  audited  the  accompanying  consolidated  balance  sheets  of  Regional
Bankshares,  Inc. (the Company) and subsidiary as of December 31, 2004 and 2003,
and the related  consolidated  statements  of income,  changes in  shareholders'
equity and comprehensive income (loss), and cash flows for the years then ended.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

In our opinion,  the consolidated  financial  statements  present fairly, in all
material respects,  the consolidated  financial position of Regional Bankshares,
Inc. and  subsidiary as of December 31, 2004 and 2003,  and the results of their
operations  and their cash flows for the years then ended,  in  conformity  with
U.S. generally accepted accounting principles.


                                        s/Elliott Davis, LLC

Elliott Davis, LLC
Columbia, South Carolina
January 7, 2005





                                       18
<PAGE>

                            REGIONAL BANKSHARES, INC.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                           December 31,
                                                                                                           ------------
                                                                                                    2004                 2003
                                                                                                    ----                 ----
Assets:
<S>                                                                                            <C>                     <C>
   Cash and cash equivalents:
     Cash and due from banks .......................................................           $  2,201,849            $  1,413,904
     Federal funds sold ............................................................              6,395,757               2,371,780
                                                                                               ------------            ------------
         Total cash and cash equivalents ...........................................              8,597,606               3,785,684
                                                                                               ------------            ------------
   Investment securities:
     Securities available-for-sale .................................................              3,555,552               2,344,649
     Nonmarketable equity securities ...............................................                446,153                 164,853
                                                                                               ------------            ------------
         Total investment securities ...............................................              4,001,705               2,509,502
                                                                                               ------------            ------------
   Loans receivable ................................................................             55,052,377              48,262,788
     Less allowance for loan losses ................................................               (589,765)               (482,875)
                                                                                               ------------            ------------
         Loans receivable, net .....................................................             54,462,612              47,779,913
                                                                                               ------------            ------------
   Premises, furniture and equipment, net ..........................................              2,454,548               2,514,985
   Accrued interest receivable .....................................................                237,244                 190,352
   Other assets ....................................................................                506,686                 626,061
                                                                                               ------------            ------------
         Total assets ..............................................................           $ 70,260,401            $ 57,406,497
                                                                                               ============            ============
Liabilities:
   Deposits:
     Noninterest-bearing transaction accounts ......................................           $  8,280,977            $  6,968,579
     Interest-bearing transaction accounts .........................................              5,775,786               5,283,574
     Savings .......................................................................             18,969,783              14,484,317
     Time deposits $100,000 and over ...............................................              5,776,697               7,559,762
     Other time deposits ...........................................................             18,887,953              16,143,672
                                                                                               ------------            ------------
         Total deposits ............................................................             57,691,196              50,439,904
                                                                                               ------------            ------------
   Note payable ....................................................................              1,000,000                       -
   Advances from Federal Home Loan Bank ............................................              6,250,000               2,000,000
   Accrued interest payable ........................................................                117,773                 136,441
   Other liabilities ...............................................................                107,833                 102,256
                                                                                               ------------            ------------
         Total liabilities .........................................................             65,166,802              52,678,601
                                                                                               ------------            ------------
Commitments and Contingencies (Notes 13 and 20)
Shareholders' equity:
   Preferred stock, $1.00 par value, 1,000,000 shares
     authorized, none issued .......................................................                      -                       -
   Common stock, $1.00 par value, 10,000,000 shares
     authorized; 572,070 and 566,770 shares issued and
     outstanding at December 31, 2004 and 2003, respectively .......................                572,070                 566,770
   Capital surplus .................................................................              5,079,471               5,031,771
   Retained deficit ................................................................               (535,783)               (856,905)
   Accumulated other comprehensive income (loss), net of tax .......................                (22,159)                (13,740)
                                                                                               ------------            ------------
         Total shareholders' equity ................................................              5,093,599               4,727,896
                                                                                               ------------            ------------
         Total liabilities and shareholders' equity ................................           $ 70,260,401            $ 57,406,497
                                                                                               ============            ============
</TABLE>

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



                                       19
<PAGE>


                            REGIONAL BANKSHARES, INC.

                        Consolidated Statements of Income


<TABLE>
<CAPTION>
                                                                                                       Years ended December 31,
                                                                                                       ------------------------
                                                                                                     2004                    2003
                                                                                                     ----                    ----
 Interest income:
<S>                                                                                              <C>                      <C>
   Loans, including fees .........................................................               $3,237,824               $2,654,561
   Investment securities:
      Taxable ....................................................................                   77,727                   67,443
      Nonmarketable equity securities ............................................                    4,353                    7,416
   Federal funds sold ............................................................                   36,608                   24,688
                                                                                                 ----------               ----------
         Total ...................................................................                3,356,512                2,754,108
                                                                                                 ----------               ----------
Interest expense:
   Time deposits $100,000 and over ...............................................                  120,548                  181,688
   Other deposits ................................................................                  558,027                  525,041
   Note payable ..................................................................                   12,743                        -
   Advances from Federal Home Loan Bank ..........................................                   34,096                    3,382
   Short-term borrowings .........................................................                      706                       80
                                                                                                 ----------               ----------
         Total ...................................................................                  726,120                  710,191
                                                                                                 ----------               ----------
Net interest income ..............................................................                2,630,392                2,043,917
Provision for loan losses ........................................................                  125,000                  132,000
                                                                                                 ----------               ----------
Net interest income after provision for loan losses ..............................                2,505,392                1,911,917
                                                                                                 ----------               ----------
Noninterest income:
   Service charges on deposit accounts ...........................................                  284,170                  228,532
   Credit life insurance commissions .............................................                    4,956                    4,480
   Residential mortgage origination fees .........................................                   83,797                   99,311
   Brokerage commissions .........................................................                  101,912                  109,598
   Other .........................................................................                   69,748                   62,406
                                                                                                 ----------               ----------
         Total ...................................................................                  544,583                  504,327
                                                                                                 ----------               ----------
Noninterest expenses:
   Salaries and employee benefits ................................................                1,345,559                1,185,955
   Net occupancy .................................................................                  173,885                  138,543
   Furniture and equipment .......................................................                  168,901                  146,879
   Other operating ...............................................................                  852,747                  730,313
                                                                                                 ----------               ----------
         Total ...................................................................                2,541,092                2,201,690
                                                                                                 ----------               ----------
Income before income taxes .......................................................                  508,883                  214,554
Income tax provision .............................................................                  187,761                   79,385
                                                                                                 ----------               ----------
Net income .......................................................................               $  321,122               $  135,169
                                                                                                 ==========               ==========
Earnings per share
Basic earnings per share .........................................................               $     0.56               $     0.24
                                                                                                 ==========               ==========
Diluted earnings per share .......................................................               $     0.56               $     0.23
                                                                                                 ==========               ==========
</TABLE>

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



                                       20
<PAGE>


                            REGIONAL BANKSHARES, INC.

           Consolidated Statements of Changes in Shareholders' Equity
                         and Comprehensive Income (Loss)
                 For the years ended December 31, 2004 and 2003


<TABLE>
<CAPTION>
                                                                                                     Accumulated
                                                                                                       other
                                         Common stock               Capital          Retained      comprehensive
                                    Shares          Amount          surplus           deficit       income (loss)          Total
                                    ------          ------          -------           -------       -------------          -----
Balance,
<S>                                 <C>          <C>            <C>              <C>               <C>                 <C>
  December 31, 2002 ..............  563,670      $  563,670     $  5,003,871     $    (992,074)    $       8,367       $  4,583,834
                                                                                                                       ------------

Net income                                                                             135,169                              135,169

Other comprehensive loss,
  net of tax benefit of $12,984 ..                                                                       (22,107)           (22,107)
                                                                                                                       ------------

Comprehensive income .............                                                                                          113,062

Exercise of stock warrants .......    3,100           3,100           27,900                                                 31,000
                                    -------      ----------     ------------     -------------     -------------       ------------

Balance,
  December 31, 2003 ..............  566,770         566,770        5,031,771          (856,905)          (13,740)         4,727,896
                                                                                                                       ------------

Net income .......................                                                     321,122                              321,122

Other comprehensive loss,
  net of tax benefit of $4,943 ...                                                                        (8,419)            (8,419)
                                                                                                                       ------------
Comprehensive income .............                                                                                          312,703

Exercise of stock warrants .......    5,300           5,300           47,700                                                 53,000
                                    -------      ----------     ------------     -------------     -------------       ------------

Balance,
  December 31, 2004 ..............  572,070      $  572,070     $  5,079,471     $    (535,783)    $     (22,159)      $  5,093,599
                                    =======      ==========     ============     =============     =============       ============

</TABLE>













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



                                       21
<PAGE>

                            REGIONAL BANKSHARES, INC.

                      Consolidated Statements of Cash Flows



<TABLE>
<CAPTION>
                                                                                                      Years ended December 31,
                                                                                                      ------------------------
                                                                                                   2004                      2003
                                                                                                   ----                      ----
Cash flows from operating activities:
<S>                                                                                          <C>                       <C>
  Net income ...................................................................             $    321,122              $    135,169
  Adjustments to reconcile net income to
    net cash provided by operating activities:
      Provision for loan losses ................................................                  125,000                   132,000
      Depreciation and amortization expense ....................................                  167,034                   161,448
      Discount accretion and premium
        amortization on securities .............................................                   15,263                     3,162
      Deferred income tax provision ............................................                  210,675                    59,994
      Increase in accrued interest receivable ..................................                  (46,892)                  (37,037)
      Decrease in accrued interest payable .....................................                  (18,668)                  (73,055)
      Increase in other assets .................................................                  (86,356)                  (14,829)
      Increase in other liabilities ............................................                    5,577                    49,014
                                                                                             ------------              ------------
        Net cash provided by operating activities ..............................                  692,755                   415,866
                                                                                             ------------              ------------
Cash flows from investing activities:
  Purchases of securities available-for-sale ...................................               (2,005,592)               (2,526,094)
  Calls and maturities of securities available-for-sale ........................                  766,063                 2,656,473
  Purchases of nonmarketable equity securities .................................                 (281,300)                  (27,300)
  Net increase in loans receivable .............................................               (6,807,699)              (13,047,880)
  Purchases of premises, furniture and equipment ...............................                 (106,597)                 (636,834)
                                                                                             ------------              ------------
        Net cash used by investing activities ..................................               (8,435,125)              (13,581,635)
                                                                                             ------------              ------------
Cash flows from financing activities:
  Net increase in demand deposits, interest-bearing
    transaction accounts and savings accounts ..................................                6,290,076                 9,304,245
  Net increase in certificates of deposit and
    other time deposits ........................................................                  961,216                 1,756,935
  Proceeds from advances from Federal Home Loan Bank ...........................                6,250,000                 2,000,000
  Repayments of advances from Federal Home Loan Bank ...........................               (2,000,000)                        -
  Proceeds from note payable ...................................................                1,000,000                         -
  Proceeds from exercise of stock warrants .....................................                   53,000                    31,000
                                                                                             ------------              ------------
        Net cash provided by financing activities ..............................               12,554,292                13,092,180
                                                                                             ------------              ------------
Net increase (decrease) in cash and cash equivalents ...........................                4,811,922                   (73,589)
Cash and cash equivalents, beginning of year ...................................                3,785,684                 3,859,273
                                                                                             ------------              ------------
Cash and cash equivalents, end of year .........................................             $  8,597,606              $  3,785,684
                                                                                             ============              ============
</TABLE>







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




                                       22
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - Regional Bankshares, Inc. (the Company) was incorporated to serve
as a bank holding company for Hartsville  Community Bank (the Bank).  Hartsville
Community  Bank  was  incorporated  as a  national  bank on March  24,  1999 and
commenced business on June 15, 1999. The Company acquired the Bank on January 1,
2001, and the Bank converted to a South Carolina state chartered bank on January
10, 2001.  The  principal  business  activity of the Bank is to provide  banking
services  to  domestic  markets,  principally  in  Darlington  and  Chesterfield
Counties  in South  Carolina.  The Bank's  deposits  are  insured by the Federal
Deposit Insurance Corporation. The consolidated financial statements include the
accounts of the parent company and its wholly-owned subsidiary after elimination
of all significant intercompany balances and transactions.

Management's Estimates - The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America  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
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.

Significant  Group  Concentrations  of  Credit  Risk  - Most  of  the  Company's
activities  are  with  customers  located  within  Darlington  and  Chesterfield
Counties in South Carolina. The types of securities in which the Company invests
are  discussed in Note 3. The types of lending in which the Company  engages are
discussed in Note 4. The Company does not have any significant concentrations of
loans or deposits to or from any one industry or customer.

Securities  Available-for-Sale  - Securities  available-for-sale  are carried at
amortized  cost and  adjusted  to  estimated  market  value by  recognizing  the
aggregate  unrealized gains or losses in a valuation  account.  Aggregate market
valuation  adjustments  are  recorded  in  shareholders'  equity net of deferred
income taxes.  Reductions  in market value  considered by management to be other
than temporary are reported as a realized loss and a reduction in the cost basis
of the security.  The adjusted cost basis of investments  available-for-sale  is
determined by specific  identification and is used in computing the gain or loss
upon sale.

Nonmarketable  Equity Securities - Nonmarketable  equity securities  include the
cost of the  Company's  investment  in the stock of  Federal  Home Loan Bank and
Community Financial Services, Inc. The stocks have no quoted market value and no
ready  market for them  exists.  Investment  in the Federal  Home Loan Bank is a
condition of borrowing from the Federal Home Loan Bank, and the stock is pledged
to  collateralize  such  borrowings.  At December 31, 2004 and 2003,  the Bank's
investment   in  Federal  Home  Loan  Bank  stock  was  $396,100  and  $114,800,
respectively.  At December 31, 2004 and 2003,  investment in Community Financial
Services, Inc. was $50,053. Dividends received on these stocks are included as a
separate component of interest income.

                                       23
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Loans  receivable  - Loans  receivable  are  stated  at their  unpaid  principal
balance.  Interest  income is computed using the simple  interest  method and is
recorded in the period earned.

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.  Loans are not
considered  impaired if a minimal  payment  delay  occurs and all  amounts  due,
including  accrued  interest at the contractual  interest rate for the period of
delay,  are  expected to be  collected.  At December 31,  2004,  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.  The allowance is based upon a continuing
review of past loan loss  experience,  current  and future  economic  conditions
which may affect the borrowers'  ability to pay, and the  underlying  collateral
value of the loans.  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.

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

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
furniture and  equipment of 5 to 7 years and buildings of 40 years.  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.

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 and depreciable premises and equipment.

Advertising  Expense -  Advertising  and public  relations  costs are  generally
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 expended in the period in which the direct mailings are
sent.  Advertising  and public  relations  costs of $48,229  and  $65,328,  were
included in the Company's results of operations for 2004 and 2003, respectively.

Retirement   Plan  -  The  Company  has  a  SIMPLE   retirement   plan  covering
substantially all employees. Under the plan, participants were permitted to make
discretionary  contributions in 2004 up to $9,000,  unless age 50 and over as to
which the amount was $10,500.  The Company can match employee  contributions  by
contributing up to 3% of each employee's annual  compensation up to a maximum of
$3,000.  The  Company  matched  contributions  in 2004 and 2003 and  charges  to
earnings were $23,592 and $17,969, respectively.




                                       24
<PAGE>

                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Stock-Based  Compensation - The Company has a stock-based employee  compensation
plan and outstanding  stock warrants (both herein referred to as "Option Plans")
which are further  described  in Notes 14 and 15. The Company  accounts  for the
Option Plans under the  recognition  and  measurement  principles  of Accounting
Principles  Board  ("APB")  Opinion  No.  25,  Accounting  for  Stock  Issued to
Employees, and Related Interpretations. No compensation cost is reflected in net
income,  as all warrants and options  granted  under these plans had an exercise
price equal to the market  value of the  underlying  common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the  Company  had  applied  the fair value  recognition  provisions  of
Financial  Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards  ("SFAS") No. 123,  Accounting for  Stock-Based  Compensation,  to the
Option Plans.

                                                       Years ended December 31,
                                                       ------------------------
                                                         2004             2003
                                                         ----             ----

Net income, as reported .........................   $      321,122   $   135,169
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects ....           59,003        24,525
                                                    --------------   -----------

Pro forma net income ............................   $      262,119   $   110,644
                                                    ==============   ===========

Earnings per share:
  Basic - as reported ...........................   $         0.56   $      0.24
                                                    ==============   ===========
  Basic - pro forma .............................   $         0.46   $      0.20
                                                    ==============   ===========

  Diluted - as reported .........................   $         0.56   $      0.23
                                                    ==============   ===========
  Diluted - pro forma ...........................   $         0.45   $      0.19
                                                    ==============   ===========

In calculating the pro forma  disclosures,  the fair value of options granted is
estimated as of the date granted using the  Black-Scholes  option  pricing model
with  the  following  weighted-average  assumptions  used  for  grants  in 2002:
dividend  yield  of 0  percent;  expected  volatility  of 0  percent;  risk-free
interest  rate of 5.40  percent;  and expected  life of 10 years.  There were no
options granted in 2004 or 2003.

Earnings Per Share - Basic  earnings per share  represents  income  available to
shareholders divided by the weighted-average number of common shares outstanding
during the period.  Diluted earnings per share reflects additional common shares
that would have been  outstanding if dilutive  potential  common shares had been
issued using the treasury stock method.



                                       25
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Comprehensive  Income - Accounting  principles generally require that recognized
income, expenses,  gains, and losses be included in net income. Although certain
changes  in assets  and  liabilities,  such as  unrealized  gains and  losses on
available-for-sale  securities,  are  reported  as a separate  component  of the
equity  section of the balance  sheet,  such items,  along with net income,  are
components of comprehensive income.

The  components  of other  comprehensive  income and  related tax effects are as
follows:

                                                       Years ended December 31,
                                                       ------------------------
                                                        2004             2003
                                                        ----             ----
Unrealized gains (losses) on
   available-for-sale securities .............        $(13,362)        $(35,091)

Tax effect ...................................           4,943           12,984
                                                      --------         --------

Net-of-tax amount ............................        $ (8,419)        $(22,107)
                                                      ========         ========

Statements  of  Cash  Flows  - For  purposes  of  reporting  cash  flows  in the
consolidated  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.

Interest paid on deposits and other borrowings totaled $707,452 and $783,246 for
the years ended December 31, 2004 and 2003, respectively.

Income tax payments  totaled  $6,110 and $5,700 for the years ended December 31,
2004 and 2003, respectively.

Changes in the valuation account of securities available-for-sale, including the
deferred tax effects,  are considered  noncash  transactions for purposes of the
statement  of cash  flows  and are  presented  in  detail  in the  notes  to the
financial statements.

Off-Balance-Sheet  Financial  Instruments - In the ordinary  course of business,
the Company enters into  off-balance-sheet  consolidated  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.



                                       26
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent  Accounting  Pronouncements  - In April 2003,  the  Financial  Accounting
Standards  Board ("FASB")  issued  Statement of Financial  Accounting  Standards
("SFAS") No. 149,  "Amendment  of Statement 133 on  Derivative  Instruments  and
Hedging  Activities",  which amends and clarifies  accounting  and reporting for
derivative  instruments,  including certain derivative  instruments  embedded in
other contracts  (collectively  referred to as derivatives) and loan commitments
that relate to the  origination of mortgage loans held for sale, and for hedging
activities  under SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging Activities".  SFAS No. 149 clarifies under what circumstances a contract
with an  initial  net  investment  meets the  characteristics  of a  derivative,
clarifies  when  a  derivative  contains  a  financing  component,   amends  the
definition   of  an   underlying   to  conform  it  to  language  used  in  FASB
Interpretation ("FIN") No. 45, and amends certain other existing pronouncements.
The pronouncement was generally effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on the
financial condition or operating results of the Company.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments  with  Characteristics  of  both  Liabilities  and  Equity",   which
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments with characteristics of both liabilities and equity. SFAS
No. 150  requires  an issuer to  classify  certain  financial  instruments  that
include certain  obligations,  such as mandatory  redemption,  repurchase of the
issuer's  equity,  or settlement  by issuing  equity,  previously  classified as
equity,  as  liabilities  or  assets  in some  circumstances.  SFAS No.  150 was
generally effective for financial instruments entered into or modified after May
31, 2003,  and  otherwise  was  effective at the  beginning of the first interim
period  beginning  after  June  15,  2003,  except  for  mandatorily  redeemable
financial  instruments of nonpublic entities which are subject to the provisions
of SFAS No. 150 for the first fiscal period  beginning  after December 15, 2003.
The adoption of SFAS No. 150 did not have any impact on the financial  condition
or operating results of the Company.

In  December  2004,  the FASB issued SFAS No.  153,  "Exchanges  of  Nonmonetary
Assets,  an  amendment  of  APB  Opinion  No.  29,  Accounting  for  Nonmonetary
Transactions."  The  amendments  made by SFAS No. 153 are based on the principle
that exchanges of nonmonetary  assets should be measured based on the fair value
of the assets exchanged.  Further, the amendments eliminate the narrow exception
for  nonmonetary  exchanges of similar  productive  assets and replace it with a
broader  exception  for  exchanges  of  nonmonetary  assets  that  do  not  have
commercial  substance.  Previously,  Accounting Principles Board ("APB") Opinion
No. 29 required that the accounting for an exchange of a productive  asset for a
similar  productive  asset or an  equivalent  interest  in the  same or  similar
productive   asset  should  be  based  on  the  recorded  amount  of  the  asset
relinquished.  APB Opinion No. 29 provided an exception to its basic measurement
principle (fair value) for exchanges of similar productive assets.  SFAS No. 153
is  effective  for  nonmonetary  asset  exchanges  occurring  in fiscal  periods
beginning after June 15, 2005. Earlier  application is permitted for nonmonetary
asset  exchanges  occurring  in  fiscal  periods  beginning  after  the  date of
issuance. The provisions of this statement shall be applied  prospectively.  The
adoption of this  statement  is not  expected  to have a material  impact on the
financial condition or operating results of 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 interim or
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.



                                       27
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent Accounting Pronouncements (continued) - In November 2002, the FASB issued
FASB  Interpretation  ("FIN") No. 45,  "Guarantor's  Accounting  and  Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others".  FIN No. 45 elaborates  on the  disclosure to be made by a guarantor in
its interim and annual financial  statements about its obligations under certain
guarantees and warranties that it has issued. FIN 45 requires a company,  at the
time it issues a guarantee, to recognize an initial liability for the fair value
of obligations assumed under the guarantee. The initial recognition requirements
of FIN No. 45 were  effective for  guarantees  issued or modified after December
31, 2002. The disclosure  requirements  were effective for financial  statements
for periods  ending after  December 15, 2002. The adoption of FIN No. 45 did not
have a  material  impact on the  Company's  financial  position  or  results  of
operations.

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.

In November  2003, the Emerging  Issues Task Force ("EITF")  reached a consensus
that certain  quantitative  and qualitative  disclosures  should be required for
debt and  marketable  equity  securities  classified  as  available-for-sale  or
held-to-maturity  under SFAS No. 115 and SFAS No. 124 that are  impaired  at the
balance sheet date but for which  other-than-temporary  impairment  has not been
recognized.  Accordingly  the  EITF  issued  EITF  No.  03-1,  "The  Meaning  of
Other-Than-Temporary  Impairment and Its  Application  to Certain  Investments."
This issue  addresses  the meaning of  other-than-temporary  impairment  and its
application  to   investments   classified  as  either   available-for-sale   or
held-to-maturity  under SFAS No. 115 and provides  guidance on quantitative  and
qualitative  disclosures.  The  disclosure  requirements  of EITF  No.  03-1 are
effective for annual financial statements for fiscal years ending after June 15,
2004. The effective date for the measurement  and  recognition  guidance of EITF
No. 03-1 has been delayed.  The FASB staff has issued a proposed  Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a,  "Implementation  Guidance for the
Application  of Paragraph 16 of Issue No. 03-1".  The proposed FSP would provide
implementation guidance with respect to debt securities that are impaired solely
due   to   interest    rates   and/or   sector    spreads   and   analyzed   for
other-than-temporary   impairment   under  the   measurement   and   recognition
requirements  of  EITF  No.  03-1.  The  delay  of the  effective  date  for the
measurement  and  recognition  requirements  of EITF No. 03-1 will be superseded
concurrent  with the final issuance of FSP EITF 03-1-a.  Adopting the disclosure
provisions of EITF No. 03-1 did not have any impact on the  Company's  financial
position or results of operations.

In March 2004,  the  Securities  and Exchange  Commission  ("SEC")  issued Staff
Accounting  Bulletin ("SAB") No. 105,  "Application of Accounting  Principles to
Loan Commitments", to inform registrants of the Staff's view that the fair value
of the recorded loan  commitments  should not consider the expected  future cash
flows related to the associated  servicing of the future loan. The provisions of
SAB No. 105 must be applied to loan  commitments  accounted  for as  derivatives
that are  entered  into after March 31,  2004.  The Staff will not object to the
application of existing accounting  practices to loan commitments  accounted for
as  derivatives  that  are  entered  into on or  before  March  31,  2004,  with
appropriate  disclosures.  The Company  adopted the provisions of SAB No. 105 on
April 1, 2004. The adoption of SAB No. 105 did not have a material impact on the
Company's financial condition 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.



                                       28
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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 and investment  securities portfolios that results
from  borrowers'  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  2003  financial
statements were reclassified to conform with the 2004 presentation.


NOTE 2 - CASH AND DUE FROM BANKS

The  Company is  required  to  maintain  cash  balances to cover all cash letter
transactions. At December 31, 2004 and 2003, the requirement was met by the cash
balance in an account with the Bankers Bank and by cash in the vault.


NOTE 3 - INVESTMENT SECURITIES

The amortized  cost and estimated  fair values of securities  available-for-sale
are as follows:

<TABLE>
<CAPTION>
                                                                                             Gross Unrealized
                                                                    Amortized                ----------------            Estimated
                                                                       Cost             Gains              Losses        Fair Value
                                                                       ----             -----              ------        ----------
December 31, 2004
<S>                                                                 <C>               <C>               <C>               <C>
U.S. government agencies and corporations ..................        $3,000,000        $        -        $   29,190        $2,970,810
Mortgage-backed securities .................................           590,725                 -             5,983           584,742
                                                                    ----------        ----------        ----------        ----------
                                                                    $3,590,725        $        -        $   35,173        $3,555,552
                                                                    ==========        ==========        ==========        ==========
December 31, 2003
U.S. government agencies and corporations ..................        $1,500,000        $    1,094        $   17,188        $1,483,906
Mortgage-backed securities .................................           866,460                 -             5,717           860,743
                                                                    ----------        ----------        ----------        ----------
                                                                    $2,366,460        $    1,094        $   22,905        $2,344,649
                                                                    ==========        ==========        ==========        ==========
</TABLE>

There were no sales of securities in 2004 or 2003.



                                       29
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 3 - INVESTMENT SECURITIES - continued

The following is a summary of maturities of securities  available-for-sale as of
December 31, 2004. The amortized cost and estimated fair values are based on the
contractual  maturity  dates.  Actual  maturities  may differ  from  contractual
maturities  because  borrowers may have the right to call or prepay  obligations
with or without penalty.

                                                             Securities
                                                         Available-for-sale
                                                         ------------------
                                                     Amortized        Estimated
                                                        Cost         Fair Value
                                                        ----         ----------

     Due after one year but within five years ..  $   3,590,725    $   3,555,552
                                                  =============    =============

The following table shows gross unrealized losses and fair value,  aggregated by
investment category,  and length of time that individual securities have been in
a continuous unrealized loss position, at December 31, 2004.

Securities available-for-sale:
<TABLE>
<CAPTION>
                                                Less than                    Twelve months
                                               twelve months                    or more                           Total
                                               -------------                    -------                           -----
                                                         Unrealized                     Unrealized                      Unrealized
                                        Fair value         losses       Fair value         losses        Fair value        losses
                                        ----------         ------       ----------         ------        ----------        ------
<S>                                   <C>              <C>             <C>             <C>             <C>             <C>
     U.S. government agencies
       and corporations ............  $  2,482,529     $    17,471     $   488,281     $    11,719     $  2,970,810    $    29,190
     Mortgage-backed securities ....       584,742           5,983              -               -           584,742          5,983
                                      ------------     -----------     -----------     -----------     ------------    -----------
                                      $  3,067,271     $    23,454     $   488,281     $    11,719     $  3,555,552    $    35,173
                                      ============     ===========     ===========     ===========     ============    ===========
</TABLE>

One U.S.  government agency security had an unrealized loss for more than twelve
months. This loss was a result of the interest rate environment.

At December 31, 2004 and 2003, securities with an amortized cost of $450,000 and
estimated  fair values of $442,766 and $447,469,  respectively,  were pledged to
secure public deposits.


NOTE 4 - LOANS RECEIVABLE

Major classifications of loans receivable are summarized as follows:

                                                         December 31,
                                                         ------------
                                                     2004             2003
                                                     ----             ----
     Real estate - construction .............   $   5,152,299    $   3,898,644
     Real estate - mortgage .................      38,976,263       31,481,432
     Commercial and industrial ..............       4,941,323        6,925,789
     Consumer and other .....................       5,982,492        5,956,923
                                                -------------    -------------
       Total gross loans ....................   $  55,052,377    $  48,262,788
                                                =============    =============

                                       30
<PAGE>

                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued
Transactions in the allowance for loan losses are summarized below:

                                                        Years ended December 31,
                                                        ------------------------
                                                          2004             2003
                                                          ----             ----
Balance, beginning of year .......................      $482,875       $368,656
Provision charged to operations ..................       125,000        132,000
Recoveries on loans previously charged-off .......        13,424          5,897
Loans charged-off ................................       (31,534)       (23,678)
                                                        --------       --------
  Balance, end of year ...........................      $589,765       $482,875
                                                        ========       ========

At December 31, 2004 and 2003, the Bank had loans in nonaccrual  status totaling
$23,847 and $10,883,  respectively.  There were loans totaling $2,157 and $7,874
past due ninety days or more and still  accruing  interest at December  31, 2004
and 2003, respectively. There were no restructured loans at December 31, 2004 or
2003.

Management is not aware of any significant concentrations of loans to classes of
borrowers or industries that would be affected similarly by economic conditions.
Although the Company's loan portfolio is diversified,  a substantial  portion of
its  borrowers'  ability to honor the terms of their loans is  dependent  on the
economic conditions in Darlington County and Chesterfield County and surrounding
areas.

At December 31, 2004, the Company had pledged approximately $13,754,060 of loans
as collateral for advances from the Federal Home Loan Bank (see Note 7).

NOTE 5 - PREMISES,  FURNITURE  AND EQUIPMENT  Premises,  furniture and equipment
consisted of the following:
                                                               December 31,
                                                               ------------
                                                          2004            2003
                                                          ----            ----
Land and land improvements .......................     $  659,470     $  652,790
Buildings ........................................      1,509,012      1,485,432
Furniture and equipment ..........................        966,179        899,527
                                                       ----------     ----------
  Total ..........................................      3,134,661      3,037,749
Less, accumulated depreciation ...................        680,113        522,764
                                                       ----------     ----------
  Premises, furniture and equipment, net .........     $2,454,548     $2,514,985
                                                       ==========     ==========

Depreciation  and  amortization  expense  totaled  $167,034 and $161,448 for the
years ended December 31, 2004 and 2003, respectively.

NOTE 6 - DEPOSITS

At December 31, 2004, the scheduled  maturities of  certificates of deposit were
as follows:


         Maturing In                                             Amount
         -----------                                       -------------
         2005                                              $  23,246,542
         2006                                                    968,437
         2007                                                    194,215
         2008 and thereafter                                     255,456
                                                           -------------
            Total                                          $  24,664,650
                                                           =============

Of the total time deposits  outstanding  at December 31, 2004,  $7,317,229  were
brokered  deposits.  Of this amount,  $6,921,229  and $396,000 were scheduled to
mature in 2005 and 2006, respectively.



                                       31
<PAGE>

                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 7 - ADVANCES FROM THE FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank  consisted of the following at December
31, 2004 and 2003:

<TABLE>
<CAPTION>
                                                                                                 2004                2003
     Description                                                         Interest Rate          Balance             Balance
                                                                         -------------          -------             -------
     Variable rate advances maturing:
<S>                                                                          <C>             <C>                  <C>
       January 31,2005 ..................................                    2.44%           $ 2,000,000          $        -
       January 29, 2004 .................................                    1.15%                    -             2,000,000
     Fixed rate advances maturing:
       March 14, 2006 ...................................                    2.62%               750,000                   -
       September 14, 2006 ...............................                    2.91%               750,000                   -
       December 8, 2006 .................................                    3.34%               500,000                   -
       September 14, 2007 ...............................                    3.28%               750,000                   -
       December 10, 2007 ................................                    3.59%               500,000                   -
     Convertible advances maturing:
       December 10, 2009 ................................                    2.56%             1,000,000                   -
                                                                                             -----------          -----------
           Total ........................................                                    $ 6,250,000          $ 2,000,000
                                                                                             ===========          ===========
</TABLE>

Scheduled  principal  reductions  of  Federal  Home  Loan Bank  advances  are as
follows:

        2005                                          $    2,000,000
        2006                                               2,000,000
        2007                                               1,250,000
        2008                                                      -
        2009                                               1,000,000
                                                      --------------
           Total                                      $    6,250,000
                                                      ==============

As  collateral,  the  Company has pledged  first  mortgage  loans on one to four
family  residential  loans  totaling  $4,215,921,   multifamily  loans  totaling
$381,225,  home  equity  lines and second  mortgages  totaling  $6,769,945,  and
commercial real estate loans totaling  $2,386,969 at December 31, 2004 (see Note
4). In addition, the Company's Federal Home Loan Bank stock is pledged to secure
the borrowings. Certain advances are subject to prepayment penalties.

NOTE 8 - NOTE PAYABLE

On  September  30,  2004,  the Company  executed a note with The Bankers Bank to
borrow $1,000,000. The principal balance is payable in ten equal annual payments
beginning  January 1, 2007.  Interest  is based on the prime rate and is payable
quarterly,  in arrears  beginning January 1, 2005. The interest rate on the note
payable at  December  31,  2004 was 5.25%.  All  principal  and  interest is due
September 30, 2016. The note is secured by the stock owned by the Company in the
Bank. Proceeds from the note were used to provide capital to the Bank.

Scheduled  principal  reductions  of the  note  over  the next  five  years  are
summarized as follows:

     2005                                            $          -
     2006                                                       -
     2007                                                  100,000
     2008                                                  100,000
     2009                                                  100,000
     Thereafter                                            700,000
                                                     -------------
                                                     $   1,000,000



                                       32
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 9 - OTHER OPERATING EXPENSES

Other operating expenses are summarized below:

                                                         Year ended December 31,
                                                         -----------------------
                                                            2004           2003
                                                            ----           ----
   Professional fees ...............................      $117,378      $ 67,531
   Telephone .......................................        54,227        47,959
   Office supplies, stationery, and printing .......        56,833        57,071
   Data processing and related .....................       179,359       137,983
   Advertising and public relations ................        48,229        65,328
   ATM related expenses ............................        57,482        48,909
   Other ...........................................       339,239       305,532
                                                          --------      --------
      Total ........................................      $852,747      $730,313
                                                          ========      ========

NOTE 10 - INCOME TAXES

Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
                                                                                                            Year ended December 31,
                                                                                                            -----------------------
                                                                                                            2004             2003
                                                                                                            ----             ----
Currently payable:
<S>                                                                                                      <C>              <C>
   Federal .......................................................................................       $       -        $       -
   State .........................................................................................          15,571            6,083
                                                                                                         ---------        ---------
      Total current ..............................................................................          15,571            6,083
                                                                                                         ---------        ---------
Deferred income taxes ............................................................................         167,246           60,318
                                                                                                         ---------        ---------
Income tax expense ...............................................................................       $ 182,817        $  66,401
                                                                                                         =========        =========
Income tax expense is allocated as follows:
   To continuing operations ......................................................................       $ 187,761        $  79,385
   To shareholders' equity .......................................................................          (4,944)         (12,984)
                                                                                                         ---------        ---------
      Income tax expense .........................................................................       $ 182,817        $  66,401
                                                                                                         =========        =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                              ------------
                                                                                                       2004                   2003
                                                                                                       ----                   ----
Deferred tax assets:
<S>                                                                                                  <C>                    <C>
     Allowance for loan losses .......................................................               $189,701               $156,153
     Net operating loss carryforward .................................................                123,240                307,698
     Organization costs ..............................................................                  2,057                 15,352
     Other ...........................................................................                  1,136                  2,043
     Unrealized loss on securities available-for-sale ................................                 13,014                  8,070
                                                                                                     --------               --------
         Total deferred tax assets ...................................................                329,148                489,316
                                                                                                     --------               --------
Deferred tax liabilities:
     Accumulated depreciation ........................................................                 46,438                 44,304
                                                                                                     --------               --------
         Total deferred tax liabilities ..............................................                 46,438                 44,304
                                                                                                     --------               --------
         Net deferred tax asset ......................................................               $282,710               $445,012
                                                                                                     ========               ========
</TABLE>



                                       33
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 10 - INCOME TAXES - continued

Deferred tax assets  represent the future tax benefit of deductible  differences
and,  if it is more  likely  than not that a tax asset will not be  realized,  a
valuation  allowance is required to reduce the  recorded  deferred tax assets to
net realizable value. As of December 31, 2004, management has determined that it
is more likely than not that all of the deferred tax asset will be realized, and
accordingly, has not established a valuation allowance.

The Company has a net  operating  loss for income tax  purposes of $40,632 as of
December 31, 2004. This net operating loss expires in the year 2022.

Reconciliation  between  the  income tax  expense  and the  amount  computed  by
applying  the  federal  statutory  rate of 34% to  income  before  income  taxes
follows:
                                                        Year ended December 31,
                                                        -----------------------
                                                         2004             2003
                                                         ----             ----
Tax expense at statutory rate ..................        $173,020         $72,948
State income tax, net of federal
   income tax benefit ..........................          10,466           4,014
Other, net .....................................           4,275           2,423
                                                        --------        --------
     Total .....................................        $187,761         $79,385
                                                        ========        ========

NOTE 11 - LEASES

The Company leases its operations center from an entity controlled by a director
of the  Company.  The lease is  renewable  on an annual  basis until  2008.  The
current  monthly rental amount is $1,000 per month.  Rental  expense  associated
with this lease was $12,000 for the year ended  December 31, 2004.  Assuming the
lease is renewed at the same monthly rate,  future  minimum lease payments would
be $12,000 per year over the next five years or $60,000.

The Company also signed a lease on October 11, 2004 with Carolina Partners, LLC.
The property is located in Bluffton,  SC and will be used for future  expansion.
The lease is renewable on a three-year  basis.  Rent  associated with this lease
was $4,563 for the year ended  December 31, 2004.  Assuming the lease is renewed
at the same monthly rate,  future  minimum lease  payments  would be $54,750 per
year over the next five years or $273,750.


NOTE 12 - RELATED PARTY TRANSACTIONS

Certain parties  (principally  certain  directors and executive  officers of the
Company, their immediate families and business interests) were loan customers of
and had other  transactions  in the normal  course of business with the Company.
Related party loans are made on substantially the same terms, including interest
rates  and  collateral,   as  those   prevailing  at  the  time  for  comparable
transactions with unrelated persons and do not involve more than the normal risk
of  collectibility.  As of December  31, 2004 and 2003,  the Company had related
party loans  totaling  $3,172,011  and  $2,719,111,  respectively.  During 2004,
advances on related party loans totaled $889,950 and repayments were $437,050.


NOTE 13 - COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company may, from time to time, become a
party to legal claims and  disputes.  At December 31,  2004,  management,  after
consultation  with legal  counsel,  is not aware of any  pending  or  threatened
litigation or unasserted  claims or assessments that could result in losses,  if
any, that would be material to the financial statements.


                                       34
<PAGE>

                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 14 - STOCK COMPENSATION PLAN

On May 10, 2001, the shareholders  approved the Regional Bankshares,  Inc. "2001
Stock Option Plan" (the Plan).  The Plan provides for grants of "Incentive Stock
Options,"  within the meaning of section 422 of the  Internal  Revenue  Code and
"Non-qualified  Stock Options" that do not so qualify. The Plan provides for the
issuance of up to 50,000  shares of the  Company's  common stock to officers and
key  employees.  Options  may be granted  for a term of up to ten years from the
effective  date of grant.  Options become  exercisable  ratably over three years
after  being  granted.  The Board of  Directors  will  determine  the  per-share
exercise price,  but for incentive stock options the price will not be less than
100% of the fair  value of a share of  common  stock on the date the  option  is
granted.  As of December 31, 2004,  the Company had 35,000  shares  reserved for
issuance upon exercise of options under the Plan.

The following table summarizes the stock option plan:

<TABLE>
<CAPTION>
                                                                                2004                         2003
                                                                                ----                         ----
                                                                                      Weighted-                      Weighted-
                                                                                       Average                        Average
                                                                        Shares      Exercise Price     Shares     Exercise Price
                                                                        ------      --------------     ------     --------------
<S>                                                                     <C>             <C>            <C>            <C>
Outstanding at beginning of year ...........................            17,000          $13.00         17,000         $13.00
Granted ....................................................                 -                              -
Exercised ..................................................                 -                              -
Cancelled ..................................................             2,000           13.00              -
                                                                        ------                         ------
Outstanding at end of year .................................            15,000           13.00         17,000          13.00
                                                                        ======                         ======
</TABLE>

At December  31, 2004,  5,666  options were  exercisable.  The weighted  average
remaining  life and  exercise  price for both  exercisable  and non  exercisable
options was 7.25 years and $13.00 per option, respectively.


NOTE 15 - STOCK WARRANTS

In connection  with the Company's  initial public stock sale, each of the twelve
organizers  received 5,000 stock warrants which gives them the right to purchase
5,000 shares of the Company's  common stock at a price of $10.00 per share.  The
warrants  vested  equally over a three-year  period  beginning June 15, 2000 and
expire on June 15, 2010 or ninety days after the warrant  holder ceases to serve
as a  member  of the  Board of  Directors.  On  November  18,  2004  the  eleven
organizers  who are  still  serving  on the  Board of  Directors,  were  granted
additional  warrants which give them the right to purchase an additional  10,000
shares  of the  Company's  common  stock at a price of  $13.50  per  share.  The
warrants vest equally over a three-year  period beginning  November 18, 2004 and
expire on November 18, 2014.

A summary of the status of the Company's  stock  warrants and changes during the
year is presented below:
                                                             December 31,
                                                             ------------
                                                         2004             2003
                                                         ----             ----
Outstanding at beginning of year                        48,500           51,600
Granted                                                110,000               -
Exercised                                               (5,300)          (3,100)
Cancelled                                                   -                -
                                                      --------         --------
Outstanding at end of year                             153,200           48,500
                                                      ========         ========

At December 31, 2004, 43,200 warrants were exercisable.


                                       35
<PAGE>

                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 16 - EARNINGS PER SHARE

Basic   earnings   per  share  is  computed  by  dividing   net  income  by  the
weighted-average number of common shares outstanding. Diluted earnings per share
is  computed  by dividing  net income by the  weighted-average  number of common
shares  outstanding  and dilutive  common share  equivalents  using the treasury
stock method.  Dilutive common share equivalents  include common shares issuable
upon exercise of outstanding stock warrants and stock options.

Basic and diluted earnings per share are computed below:

                                                         Year ended December 31,
                                                         -----------------------
                                                             2004          2003
                                                             ----          ----
Basic earnings per share computation:
Net income available to common shareholders ..........     $321,122     $135,169
                                                           ========     ========
Average common shares outstanding - basic ............      569,500      565,446
                                                           ========     ========
Basic net income per share ...........................     $   0.56     $   0.24
                                                           ========     ========
Diluted earnings per share computation:
Net income available to common shareholders ..........     $321,122     $135,169
                                                           ========     ========
Average common shares outstanding - basic ............      569,500      565,446
Incremental shares from assumed conversions:
     Stock options and warrants ......................        8,000       15,450
                                                           --------     --------
Average common shares outstanding - diluted ..........      577,500      580,896
                                                           --------     --------
Diluted earnings per share ...........................     $   0.56     $   0.23
                                                           ========     ========


NOTE 17 - REGULATORY MATTERS

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to  maintain  minimum  ratios of Tier 1 and total  capital as a
percentage of assets and off-balance-sheet exposures,  adjusted for risk weights
ranging  from  0% to  100%.  The  Bank's  Tier  1  capital  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 and
8% for total risk-based capital.

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

As of December 31, 2004,  the most recent  notification  from the Bank's primary
regulator categorized it as well-capitalized  under the regulatory framework for
prompt  corrective  action.  There are no conditions  or events that  management
believes have changed the Bank's category.



                                       36
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 17 - REGULATORY MATTERS - continued

The following  table  summarizes the capital  amounts and ratios of the Bank and
the regulatory minimum requirements.

<TABLE>
<CAPTION>
                                                                                                                  To Be Well-
                                                                                                               Capitalized Under
                                                                                         For Capital           Prompt Corrective
                                                                     Actual           Adequacy Purposes        Action Provisions
                                                                     ------           -----------------        -----------------
                                                               Amount     Ratio       Amount       Ratio       Amount         Ratio
                                                               ------     -----       ------       -----       ------         -----
December 31, 2004
<S>                                                         <C>           <C>       <C>             <C>      <C>             <C>
  Total capital (to risk-weighted assets) .............     $6,639,869    11.15%    $4,762,397      8.00%    $5,952,996      10.00%
  Tier 1 capital (to risk-weighted assets) ............      6,049,104    10.16%     2,381,198      4.00      3,571,797       6.00
  Tier 1 capital (to average assets) ..................      6,049,104     9.71%     2,493,113      4.00      3,116,391       5.00

December 31, 2003
  Total capital (to risk-weighted assets) .............     $5,179,587    10.31%    $4,019,458      8.00%    $5,024,322      10.00%
  Tier 1 capital (to risk-weighted assets) ............      4,696,712     9.35      2,009,729      4.00      3,014,593       6.00
  Tier 1 capital (to average assets) ..................      4,696,712     9.28      2,023,920      4.00      2,529,900       5.00
</TABLE>

The Federal Reserve has similar  requirements  for bank holding  companies.  The
Company is not  currently  subject to these  requirements  because  the  Federal
Reserve applies its guidelines on a bank-only  basis for bank holding  companies
with less than $150,000,000 in consolidated assets.

NOTE 18 - UNUSED LINES OF CREDIT

As of December  31,  2004,  the  Company had unused  lines of credit to purchase
federal funds from unrelated  banks totaling  $3,750,000.  These lines of credit
are available on a one to fourteen day basis for general corporate purposes. The
Company  also has a line of credit to borrow  funds from the  Federal  Home Loan
Bank,  under various  maturity terms and interest rates, up to 10% of the Bank's
total assets,  which totaled  $7,020,051 as of December 31, 2004. As of December
31, 2004, the Bank has borrowed $6,250,000 on this line.

NOTE 19 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS, OR ADVANCES

South  Carolina  banking   regulations  require  that  cash  dividends  paid  to
shareholders  receive the prior written approval of the Commissioner of Banking.
However,  the Bank is authorized to pay cash  dividends up to 100% of net income
in any calendar year without obtaining the prior approval of the Commissioner of
Banking  provided that the Bank received a composite rating of one or two at the
last  Federal or State  regulatory  examination.  Under  Federal  Reserve  Board
regulations,  the  amounts  of loans  or  advances  from the Bank to the  parent
company are also restricted.

NOTE 20 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with  off-balance-sheet  risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These financial  instruments consist of commitments to extend credit and standby
letters of credit.  Commitments  to extend  credit are  agreements  to lend to a
customer as long as there is no violation of any  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses  and may require  payment of a fee. A  commitment  involves,  to varying
degrees,  elements  of credit  and  interest  rate risk in excess of the  amount
recognized in the balance  sheet.  The Company's  exposure to credit loss in the
event of  nonperformance  by the other party to the instrument is represented by
the contractual notional amount of the instrument. Since certain commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company uses the same credit
policies in making commitments to extend credit as it does for  on-balance-sheet
instruments. Letters of credit are conditional commitments issued to guarantee a
customer's  performance  to a third party and have  essentially  the same credit
risk as other lending facilities.



                                       37
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 20 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - continued

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

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

                                                            December 31,
                                                            ------------
                                                        2004             2003
                                                        ----             ----
Commitments to extend credit ...............    $   7,532,145    $   7,229,066
Standby letters of credit ..................           60,000           45,000


NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

Investment Securities - The fair values of securities  available-for-sale  equal
the carrying  amounts,  which are the quoted  market  prices.  If quoted  market
prices  are not  available,  fair  values are based on quoted  market  prices of
comparable  securities.  The carrying value of nonmarketable  equity  securities
approximates the fair value since no ready market exists for the stocks.

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

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

Advances  from Federal Home Loan Bank - The  carrying  amounts of variable  rate
borrowings are  reasonable  estimates of fair value because they can be repriced
frequently.

Note  Payable - The  carrying  amounts of  variable  rate  notes are  reasonable
estimates of fair value because they can be repriced frequently.

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

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.


                                       38
<PAGE>

                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

The  carrying  values  and  estimated  fair  values of the  Company's  financial
instruments as are as follows:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------
                                                                             2004                                  2003
                                                                             ----                                  ----
                                                                  Carrying         Estimated            Carrying          Estimated
                                                                   Amount          Fair Value            Amount           Fair Value
                                                                   ------          ----------            ------           ----------
Financial Assets:
<S>                                                             <C>                <C>                <C>                <C>
  Cash and due from banks ..............................        $ 2,201,849        $ 2,201,849        $ 1,413,904        $ 1,413,904
  Federal funds sold ...................................          6,395,757          6,395,757          2,371,780          2,371,780
  Securities available-for-sale ........................          3,555,552          3,555,552          2,344,649          2,344,649
  Nonmarketable equity securities ......................            446,153            446,153            164,853            164,853
  Loans receivable .....................................         55,052,377         54,986,814         48,262,788         47,524,615
  Accrued interest receivable ..........................            237,244            237,244            190,352            190,352

Financial Liabilities:
  Demand deposit, interest-bearing
    transaction, and savings accounts ..................         33,026,546         33,026,546         26,736,470         26,736,470
  Certificates of deposit and
    other time deposits ................................         24,664,650         24,702,019         23,703,434         23,747,584
  Note payable .........................................          1,000,000          1,000,000                  -                  -
  Advances from Federal Home Loan Bank .................          6,250,000          6,250,000          2,000,000          2,000,000
  Accrued interest payable .............................            117,773            117,773            136,441            136,441
</TABLE>

<TABLE>
<CAPTION>
                                                                 Notional          Estimated          Notional           Estimated
                                                                  Amount           Fair Value          Amount            Fair Value
                                                                  ------           ----------          ------            ----------
Off-Balance Sheet Financial Instruments:
<S>                                                             <C>               <C>                 <C>               <C>
  Commitments to extend credit .........................        $7,532,145        $          -        $7,229,066        $          -
  Letters of credit ....................................            60,000                   -            45,000                   -
</TABLE>


NOTE 22 - REGIONAL BANKSHARES, INC. (PARENT COMPANY ONLY)

Presented below are the condensed financial  statements for Regional Bankshares,
Inc. (Parent Company Only).

                            Condensed Balance Sheets

                                                               December 31,
                                                               ------------
                                                           2004           2003
                                                           ----           ----
Assets
  Cash ...........................................     $   42,653     $   34,691
  Investment in banking subsidiary ...............      6,026,944      4,682,971
  Other assets ...................................         59,894         10,234
                                                       ----------     ----------
     Total assets ................................     $6,129,491     $4,727,896
                                                       ==========     ==========
Liabilities
  Note payable ...................................     $1,000,000     $        -
  Other ..........................................         35,892              -
                                                       ----------     ----------
     Total liabilities ...........................      1,035,892              -
                                                       ----------     ----------
Shareholders' equity .............................      5,093,599      4,727,896
                                                       ----------     ----------
Total liabilities and shareholders' equity .......     $6,129,491     $4,727,896
                                                       ==========     ==========



                                       39
<PAGE>


                            REGIONAL BANKSHARES, INC.

                   Notes to Consolidated Financial Statements

NOTE 22 - REGIONAL BANKSHARES, INC. (PARENT COMPANY ONLY) - continued

                         Condensed Statements of Income

<TABLE>
<CAPTION>
                                                                                                        Year ended December 31,
                                                                                                        -----------------------
                                                                                                     2004                    2003
                                                                                                     ----                    ----
<S>                                                                                                <C>                     <C>
Income ..............................................................................              $       -               $       -
Expenses
  Other expenses ....................................................................                (49,635)                      -
                                                                                                   ---------               ---------
Loss before income taxes and equity in
  undistributed earnings of banking subsidiary ......................................                (49,635)                      -
Income tax benefit ..................................................................                 18,365                       -
Equity in undistributed earnings of banking subsidiary ..............................                352,392                 135,169
                                                                                                   ---------               ---------
Net income ..........................................................................              $ 321,122               $ 135,169
                                                                                                   =========               =========
</TABLE>


                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                                       Year ended December 31,
                                                                                                       -----------------------
                                                                                                    2004                    2003
                                                                                                    ----                    ----
Cash flows from operating activities:
<S>                                                                                           <C>                       <C>
   Net income ..................................................................              $   321,122               $   135,169
   Adjustments to reconcile net income
      to net cash used by operating activities:
      Equity in undistributed earnings
        of banking subsidiary ..................................................                 (352,392)                 (135,169)
   Increase in other liabilities ...............................................                   35,892                         -
   Increase in other assets ....................................................                  (49,660)                        -
                                                                                              -----------               -----------
         Net cash used by operating activities .................................                  (45,038)                        -
                                                                                              -----------               -----------
Cash flows from investing activities:
   Transfer of capital to the Bank .............................................               (1,000,000)                        -
                                                                                              -----------               -----------
         Net cash used by investing activities .................................               (1,000,000)                        -
                                                                                              -----------               -----------
Cash flows from financing activities:
   Proceeds from note payable ..................................................                1,000,000                         -
   Proceeds from exercise of stock warrants ....................................                   53,000                    31,000
                                                                                              -----------               -----------
         Net cash provided by financing activities .............................                1,053,000                    31,000
                                                                                              -----------               -----------
Increase in cash ...............................................................                    7,962                    31,000
Cash and cash equivalents, beginning of year ...................................                   34,691                     3,691
                                                                                              -----------               -----------
Cash and cash equivalents, end of year .........................................              $    42,653               $    34,691
                                                                                              ===========               ===========
</TABLE>



                                       40