EXHIBIT 13

                       CORNERSTONE BANCORP AND SUBSIDIARY
                            Portions of Registrant's
                              2006 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2006 Form 10-KSB











<PAGE>

FORWARD LOOKING STATEMENTS

         Statements  included in this report which are not  historical in nature
are intended to be, and are hereby  identified as "forward  looking  statements"
for  purposes  of the safe  harbor  provided  by Section  21E of the  Securities
Exchange Act of 1934, as amended. Words such as "estimate", "project", "intend",
"expect",  "believe",  "anticipate",  "plan", and similar  expressions  identify
forward-looking  statements.  The Company  cautions readers that forward looking
statements  including  without  limitation,  those relating to the Company's new
offices, future business prospects,  revenues,  working capital, adequacy of the
allowance for loan losses, liquidity, capital needs, interest costs, and income,
are subject to certain risks and  uncertainties  that could cause actual results
to differ from those indicated in the forward looking statements, due to several
important factors  identified in this report,  among others, and other risks and
factors  identified  from time to time in the Company's other reports filed with
the Securities and Exchange Commission.

         These forward-looking statements are based on our 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 the Company's 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 the Company is a  relatively  new company with limited
operating  history.  Therefore,  actual results may differ materially from those
expressed  or  forecasted  in such  forward-looking  statements.  The  risks and
uncertainties include, but are not limited to:

     o    the Company's growth and 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 the Company's  market areas and elsewhere,  including  institutions
          operating locally, regionally, nationally and internationally;
     o    failure of our customers to repay loans;
     o    failure of assumptions  underlying the  establishment of the allowance
          for loan losses, including the value of collateral securing loans; and
     o    loss of consumer  confidence and economic  disruptions  resulting from
          terrorist activities.

         The Company  undertakes 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.

WEBSITE REFERENCES

         References  to the  Bank's  website  included  in, or  incorporated  by
reference  into,  this report are for  information  purposes  only,  and are not
intended to incorporate the website by reference into this report.




                                       1
<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         Cornerstone Bancorp,  (the "Company") is a bank holding company and has
no  operations  other than those  carried  on by its  wholly  owned  subsidiary,
Cornerstone National Bank (the "Bank"). The Bank commenced business on September
15,  1999.  It conducts a general  banking  business  from three  offices in the
Easley area of Pickens County,  in the Berea area of Greenville  County,  and in
the Powdersville area of Anderson County, South Carolina. The Bank established a
wholly owned subsidiary, Crescent Financial Services, Inc. ("Crescent") in 2004.

         The following  information  describes  various financial aspects of the
Bank's  business.  This  information  should  be read in  conjunction  with  the
consolidated financial statements of the Company, which appear elsewhere in this
document,  and the Company's Form 10-KSB, filed with the Securities and Exchange
Commission.

Services of the Bank

Deposits

         The Bank offers the full range of deposit services typically  available
in most banks and savings and loan  associations,  including  checking accounts,
NOW accounts,  retirement accounts (including  Individual  Retirement Accounts),
and savings and other time deposits of various  types,  ranging from daily money
market accounts to longer-term certificates of deposit. The transaction accounts
and  time  certificates  are  tailored  to the  principal  market  area at rates
competitive  with those offered in the area. All deposit accounts are insured by
the Federal  Deposit  Insurance  Corporation  ("FDIC") up to the maximum  amount
permitted by law. The Bank solicits these accounts from individuals, businesses,
associations and organizations,  and government  authorities.  Although the Bank
intends to be competitive in its efforts to attract  deposit  accounts,  it does
not  aggressively  seek jumbo  certificates of deposit  (certificates in amounts
greater than $100,000).

Lending Activities

         The Bank  offers a range of  lending  services,  including,  commercial
loans,  consumer  loans,  and real estate  mortgage  loans. To address the risks
inherent in making  loans,  management  maintains an  allowance  for loan losses
based on, among other things,  an evaluation of the Bank's loan loss experience,
management's experience at other financial institutions in the market area, peer
data,  the amount of and  trends in past due and  nonperforming  loans,  current
economic conditions and the values of loan collateral.  Based upon such factors,
management   makes  various   assumptions   and  judgments  about  the  ultimate
collectibility  of the loan  portfolio and provides an allowance for loan losses
based upon a percentage of the outstanding balances and specific loans. However,
because   there  are  certain   risks  that  cannot  be  precisely   quantified,
management's judgment of the allowance is necessarily approximate and imprecise.
The adequacy and methodology of the allowance for loan losses is also subject to
regulatory examination.

Real Estate Loans

         One of the primary  components  of the Bank's loan  portfolio  is loans
secured by first or second  mortgages on residential and commercial real estate.
These loans generally consist of short to mid-term commercial real estate loans,
construction and development  loans and residential real estate loans (including
home  equity  and  second  mortgage  loans).  Interest  rates  may be  fixed  or
adjustable and the Bank frequently charges an origination fee. The Bank seeks to
manage credit risk in the commercial real estate portfolio by emphasizing  loans
on  owner-occupied  office and retail buildings where the  loan-to-value  ratio,
established by  independent  appraisals,  does not exceed 80%. In addition,  the



                                       2
<PAGE>

Bank  generally  requires  personal  guarantees of the  principal  owners of the
property.  The  loan-to-value  ratio for first and second mortgage loans and for
construction  loans  generally  does not  exceed  80%.  In an effort to  control
interest rate risk, long-term  residential mortgages are underwritten and funded
by, and closed in the name of, third party investors.

         The principal  economic risk associated with all loans,  including real
estate loans, is the creditworthiness of the Bank's borrowers.  The ability of a
borrower to repay a real estate loan depends upon a number of economic  factors,
including employment levels and fluctuations in the value of real estate. In the
case of a real estate  construction  loan, there is generally no income from the
underlying property during the construction period, and the developer's personal
obligations under the loan are typically  limited.  In the case of a real estate
purchase  loan,  the  borrower may be unable to repay the loan at the end of the
loan  term and thus may be  forced to  refinance  the loan at a higher  interest
rate,  or,  in  certain  cases,  the  borrower  may  default  as a result of its
inability to refinance the loan.  In either case,  the risk of nonpayment by the
borrower is increased.

         The Bank also  faces  additional  credit  risks to the  extent  that it
engages in making  adjustable  rate mortgage loans  ("ARMs").  In the case of an
ARM, as interest rates increase, the borrower's required payments increase, thus
increasing  the  potential  for default.  The  marketability  of all real estate
loans,  including  ARMs, is also generally  affected by the prevailing  level of
interest rates.

Commercial Loans

         The Bank  makes  loans for  commercial  purposes  in  various  lines of
business.  Commercial loans include both secured and unsecured loans for working
capital  (including  inventory and  receivables),  loans for business  expansion
(including acquisition of real estate and improvements), and loans for purchases
of equipment and  machinery.  Equipment  loans are typically  made for a term of
five  years or less at  either  fixed or  variable  rates,  with the loan  fully
amortized over the term and secured by the financed  equipment.  Working capital
loans  typically  have terms not exceeding  one year and are usually  secured by
accounts  receivable,  inventory or personal guarantees of the principals of the
business.  Commercial loans vary greatly  depending upon the  circumstances  and
loan terms are  structured  on a  case-by-case  basis to better  serve  customer
needs.

         The risks  associated  with  commercial  loans vary with many  economic
factors,  including the economy in the Bank's market areas. The well-established
banks in the Bank's market areas make  proportionately  more loans to medium- to
large-sized  businesses than the Bank makes. Many of the Bank's commercial loans
are made to small- to  medium-sized  businesses,  which  typically  are not only
smaller, but also have shorter operating histories and less sophisticated record
keeping systems than larger entities. As a result, these smaller entities may be
less able to withstand adverse  competitive,  economic and financial  conditions
than  larger  borrowers.  In  addition,  because  payments  on loans  secured by
commercial  property  generally  depend  to a large  degree  on the  results  of
operations  and  management  of the  properties,  repayment of such loans may be
subject, to a greater extent than other loans, to adverse conditions in the real
estate market or the economy.

Consumer Loans

         The Bank  makes a variety  of loans to  individuals  for  personal  and
household purposes,  including secured and unsecured installment and term loans,
home equity loans and lines of credit and unsecured  revolving  lines of credit.
The secured  installment and term loans to consumers  generally consist of loans
to  purchase  automobiles,   boats,  recreational  vehicles,  mobile  homes  and
household  furnishings,  with the  collateral  for each loan being the purchased
property.  The  underwriting  criteria for home equity loans and lines of credit
are generally the same as applied by the Bank when making a first mortgage loan,
as described above, and home equity lines of credit typically expire 15 years or
less after origination, unless renewed or extended.

         Consumer  loans  generally  involve  more credit risks than other loans
because of the type and nature of the  underlying  collateral  or because of the
absence  of any  collateral.  Consumer  loan  repayments  are  dependent  on the
borrower's  continuing  financial  stability  and  are  likely  to be  adversely
affected by job loss,  divorce and  illness.  Furthermore,  the  application  of
various  federal and state laws,  including  federal  and state  bankruptcy  and
insolvency  laws,  may limit the amount  which can be recovered on such loans in
the case of default. In most cases, any repossessed  collateral will not provide
an adequate  source of repayment of the outstanding  loan balance.  Although the
underwriting  process for consumer  loans  includes a comparison of the value of
the security,  if any, to the proposed loan amount,  the Bank cannot predict the
extent to which the  borrower's  ability to pay, and the value of the  security,
will be affected by prevailing economic and other conditions.


                                       3
<PAGE>

Other Services

         The  Bank  participates  in a  regional  network  of  automated  teller
machines  that may be used by Bank  customers  in major  cities  throughout  the
Southeast. The Bank offers both VISA and MasterCard brands of bankcards together
with  related  lines of credit.  The lines of credit  may be used for  overdraft
protection as well as pre-authorized credit for personal purchases and expenses.
The Bank also provides  travelers  checks,  direct deposit of payroll and social
security  checks,  and  automatic  drafts  for  various  accounts,  but does not
currently provide  international or trust banking  services,  other than foreign
currency  exchange  through a  correspondent  bank.  The Bank offers an Internet
banking    product    accessible    via   the   Bank's    custom    website   at
www.cornerstonenationalbank.com.  The interactive  banking  product  includes an
electronic bill payment service that allows  customers to make scheduled  and/or
recurring bill payments electronically. Credit cards are underwritten and funded
by a third party  provider.  The Bank also offers  merchant  and other  business
related  services to its commercial  customers.  The Bank also has a residential
mortgage  loan  department  with a highly  experienced  staff  qualified to make
virtually any type of residential mortgage loan.

Critical Accounting Policies

         The Company has adopted various accounting  policies,  which govern the
application of accounting  principles generally accepted in the United States of
America  in  the  preparation  of  the  Company's  financial   statements.   The
significant accounting policies of the Company are described in the notes to the
consolidated financial statements.

         Certain   accounting   policies  involve   significant   judgments  and
assumptions by management, which have a material impact on the carrying value of
certain assets and liabilities. Management considers such accounting policies to
be  critical  accounting  policies.   The  judgments  and  assumptions  used  by
management  are based on  historical  experience  and other  factors,  which are
believed to be reasonable under the circumstances.  Because of the nature of the
judgments and assumptions  made by management,  actual results could differ from
these  judgments  and  estimates,  which  could  have a  material  impact on the
carrying  values of assets and  liabilities and the results of operations of the
Company.

         The  Company  believes  the  allowance  for loan  losses is a  critical
accounting  policy that  requires the most  significant  judgments and estimates
used in  preparation  of its  consolidated  financial  statements.  Refer to the
sections  "Allowance  for Loan Losses",  "Potential  Problem  Loans",  "Impaired
Loans"  and  note 1 to the  consolidated  financial  statements  for a  detailed
description of the Company's  estimation process and methodology  related to the
allowance for loan losses.

Earnings Performance

         The Company  earned $1.7 million in 2006 or $.94 per basic common share
and $.91 per diluted  common  share  compared to $1.1  million or $.81 per basic
common share and $.78 per diluted  common share for the year ended  December 31,
2005.  This  compares to $664,057 or $.52 per basic and $.51 per diluted  common
share  for the year  ended  December  31,  2004.  The  Company's  earnings  have
consistently  improved  due to the Bank's  growth.  The Company had net interest
income (the difference  between  interest earned on interest  earning assets and
interest paid on interest  bearing  liabilities) of $5.5 million,  $4.1 million,
and $3.2 million for 2006,  2005, and 2004,  respectively.  The Company also had
other noninterest income of $1.4 million,  $1.0 million, and $719,275,  in 2006,
2005, and 2004,  respectively.  The Company  provided  $445,896,  $140,347,  and
$197,010 to the allowance for loan losses in 2006, 2005, and 2004, respectively,
and had other operating  expenses of $3.9 million in 2006, $3.3 million in 2005,
and $2.7 million in 2004.

Net Interest Income

         Net  interest  income is the  amount  of  interest  earned on  interest
earning assets (loans,  investment securities,  time deposits in other banks and
federal funds sold),  less the interest  expenses  incurred on interest  bearing
liabilities (interest bearing deposits and borrowed money), and is the principal
source of the Bank's  earnings.  Net interest income is affected by the level of
interest  rates,  volume and mix of  interest  earning  assets and the  relative
funding of these  assets.  Due to the fact that the Bank's  and  therefore,  the
Company's,  assets are largely monetary in nature,  material changes in interest
rates can have a material impact on the Bank's net interest income.  The Company
and the  Bank  monitor  the  Bank's  assets  and  liabilities  and the  interest



                                       4
<PAGE>

sensitivity  of these assets and  liabilities  using  various  tools,  including
models which attempt to calculate  the impact on the Bank's net interest  margin
as interest rates change.  However, these models, as well as the tables included
here,  employ  assumptions  about  the  Bank's  interest  sensitive  assets  and
liabilities which may or may not prove to be accurate. Such assumptions include,
but are not limited to,  repayment  patterns of borrowers,  calls of securities,
and  unscheduled  redemptions  of  certificates  of  deposit.  The tables on the
following pages include  historical  analyses of yields earned and rates paid on
interest sensitive assets and liabilities,  the effects of changes in the volume
and relative mix of interest  sensitive  assets and  liabilities,  the effect of
changes in interest  rates,  and the ratio of assets and  liabilities  repricing
over specific  time  horizons.  While the  Company's  and the Bank's  management
cannot  predict  the timing and extent of  changes in  interest  rates,  they do
attempt to manage the Bank's interest rate  sensitivity to enable the Company to
react to protect the Company's  earnings stream throughout various interest rate
cycles.

         For the years ended  December 31, 2006,  2005,  and 2004,  net interest
income was $5.5 million,  $4.1  million,  and $3.2  million,  respectively.  The
consistent  increases were attributable to increases in the volume of loans (see
"Rate/Volume  Analysis of Net  Interest  Income"  below) as well as the interest
rate earned on loans.  In 2005,  increases in rates had a significant  impact on
interest  income,  particularly in interest  income from loans.  In 2006,  total
average  interest  earning assets  increased to $113.1 million compared to $94.5
million in 2005.  The average  yield on interest  earning  assets  increased 101
basis  points to 7.62% in 2006  compared to 6.61% in 2005.  The average  cost of
interest  bearing  liabilities  increased  80 basis points to 3.39% in 2006 from
2.59% in 2005. Rates on interest earning assets and interest bearing liabilities
have  continued to adjust as accounts have matured and  re-priced  from interest
rates  considered  historic  lows in 2004.  The net  yield on  average  interest
earning assets  increased in 2006 to 4.83% from 4.35% in 2005. The interest rate
spread in 2006 was 4.23% compared to 4.02% in 2005.


                                       5
<PAGE>

         The table,  "Average Balances,  Yields and Rates",  provides a detailed
analysis of the effective yields and rates on the categories of interest earning
assets and  interest  bearing  liabilities  for the  Company for the years ended
December 31, 2006 and 2005.

                       Average Balances, Yields and Rates
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                            Year ended December 31, 2006        Year ended December 31, 2005
                                                            ----------------------------        ----------------------------
                                                                        Interest                             Interest
                                                           Average       Income/    Yields/     Average       Income/    Yields/
                                                         Balances(1)     Expense    Rates(2)  Balances(1)     Expense   Rates(2)
                                                         -----------     -------    --------  -----------     -------   --------
Assets
<S>                                                         <C>            <C>        <C>        <C>            <C>        <C>
Securities ..............................................   $ 17,234       $  792     4.59%      $ 12,313       $  464     3.77%
Federal Funds Sold ......................................      5,864          294     5.01%         4,495          149     3.31%
Loans (3), (4) ..........................................     90,018        7,538     8.37%        77,654        5,631     7.25%
                                                            --------       ------                --------       ------
       Total interest earning assets ....................    113,116        8,624     7.62%        94,462        6,244     6.61%
Cash and due from banks .................................      2,396                                2,104
Allowance for loan losses ...............................     (1,120)                               (969)
Premises and equipment ..................................      4,472                                4,312
Cash surrender value of life insurance policies .........      1,600                                1,543
Other assets ............................................      1,250                                  842
                                                            --------                             --------
       Total assets .....................................   $121,714                             $102,294
                                                            ========                             ========

Liabilities and shareholders' equity
Interest bearing liabilities
     Interest bearing transaction accounts ..............   $ 14,112          155     1.10%      $ 13,510          140     1.04%
     Savings and money market ...........................     10,074          165     1.64%        11,689          137     1.17%
     Time deposits ......................................     60,252        2,577     4.28%        49,939        1,668     3.34%
                                                            --------       ------                --------       ------

       Total interest bearing deposits ..................     84,438        2,897     3.43%        75,138        1,945     2.59%
Federal Funds purchased and
    customer repurchase agreements ......................      4,795          116     2.42%         3,605           54     1.50%
FHLB advances ...........................................      3,973          149     3.75%         3,928          140     3.56%
                                                            --------       ------                --------       ------
       Total interest bearing liabilities ...............     93,206        3,162     3.39%        82,671        2,139     2.59%
                                                                           ------                               ------
Noninterest bearing demand deposits and other
    liabilities .........................................     12,389                                9,573
Shareholders' equity ....................................     16,119                               10,050
                                                            --------                             --------
       Total liabilities and shareholders' equity .......   $121,714                             $102,294
                                                            ========                             ========
Interest rate spread (5) ................................                             4.23%                                4.02%
                                                                                      -----                                -----
Net interest income and net yield on earning assets(6)                     $5,462     4.83%                     $4,105     4.35%
                                                                           ======     -----                     ======     -----
Interest free funds supporting earning assets (7) .......    $19,910                             $ 11,791
</TABLE>

(1)  Average balances calculated based on a daily basis.
(2)  Calculated  based on the number of days in the year that each type of asset
     or liability was in existence.  Yield  calculated on a pre-tax  basis.  The
     estimated tax equivalent yield on securities was 4.80% in 2006 and 3.82% in
     2005.
(3)  Nonaccruing  loans are included in the average loan  balances and income on
     such loans is recognized on a cash basis.
(4)  Interest  income on loans  includes  loan fee  income  as well as  interest
     income. The amount of loan fees included is not considered material.
(5)  Total yield on interest earning assets less the rate paid on total interest
     bearing liabilities.
(6)  Net interest income divided by total interest earning assets.
(7)  Total interest earning assets less total interest bearing liabilities.



                                       6
<PAGE>

Rate/Volume Analysis of Net Interest Income

         As  indicated  in the caption  "Net  Interest  Income",  the Bank's net
income is largely  dependent on net interest income.  The table below calculates
the  relative  impact on net  interest  income  caused by changes in the average
balances  (volume) of interest  sensitive  assets and liabilities and the impact
caused by changes in interest  rates  earned or paid.  Each table  compares  two
years as  indicated  below.  The effect of a change in average  balance has been
determined  by applying  the average  rate in the earlier  year to the change in
average balance in the later year, as compared with the earlier year. The effect
of a change in the average  rate has been  determined  by  applying  the average
balance in the earlier year to the change in the average rate in the later year,
as compared with the earlier year. In 2006 and 2005, increases in interest rates
had the greatest overall impact on net interest income.  However,  in both years
changes in balances also had a significant impact on net interest income.

                  Year ended December 31, 2006 compared to 2005

<TABLE>
<CAPTION>
                                                                                       Increase (Decrease) Due to
                                                                                       --------------------------
                                                                                         (Dollars in Thousands)
                                                                            Rate            Volume       Rate/Volume(1)       Change
                                                                            ----            ------       --------------       ------
Interest earned on:
<S>                                                                        <C>              <C>              <C>              <C>
     Securities (2) ............................................           $  102           $  185           $   41           $  328
     Federal Funds sold ........................................               77               45               24              146
     Loans .....................................................              872              896              139            1,907
                                                                           ------           ------           ------           ------
         Total interest income .................................            1,051            1,126              204            2,381

Interest paid on:
     Deposits ..................................................              531              332               89              952
     Federal Funds purchased and customer
             repurchase agreements .............................               33               18               11               62
     FHLB advances .............................................                7                2                -                9
                                                                           ------           ------           ------           ------
              Total interest expense ...........................              571              352              100            1,023
                                                                           ------           ------           ------           ------

Change in Net Interest Income ..................................           $  480           $  774           $  104           $1,358
                                                                           ======           ======           ======           ======

                  Year Ended December 31, 2005 compared to 2004
<CAPTION>
                                                                                        Increase (Decrease) Due to
                                                                                        --------------------------
                                                                                          (Dollars in Thousands)
                                                                        Rate             Volume       Rate/Volume(1)        Change
                                                                        ----             ------       ---------------        ------
Interest earned on:
<S>                                                                   <C>               <C>               <C>               <C>
   Securities (2) ..........................................          $   (13)          $   (17)          $     -           $   (30)
   Federal Funds sold ......................................               64                16                21               101
   Loans ...................................................              732               768               141             1,641
                                                                      -------           -------           -------           -------
         Total interest income .............................              783               767               162             1,712

Interest paid on:
   Deposits ................................................              286               373               109               768
   Federal Funds purchased and customer
        repurchase agreements ..............................               21               (26)               (8)              (13)
   FHLB advances ...........................................               42                27                24                93
                                                                      -------           -------           -------           -------
              Total interest expense .......................              349               374               125               848
                                                                      -------           -------           -------           -------

Change in Net Interest Income ..............................          $   434           $   393           $    37           $   864
                                                                      =======           =======           =======           =======
</TABLE>

(1)      Volume/Rate  is  calculated  as  the  difference  between  the  average
         balances  for the  periods  multiplied  by the  difference  between the
         average rates for the periods.
(2)      Income calculated on a pre-tax basis.


                                       7
<PAGE>

Interest Rate Sensitivity

         Interest  rate  sensitivity  measures  the timing and  magnitude of the
repricing  of  assets  compared  with the  repricing  of  liabilities  and is an
important  part of  asset/liability  management.  The objective of interest rate
sensitivity  management is to generate stable growth in net interest income, and
to  control  the risks  associated  with  interest  rate  movements.  Management
constantly  reviews  interest rate risk exposure and the expected  interest rate
environment so that  adjustments in interest rate  sensitivity  can be made in a
timely manner.

         On  a  cumulative  basis,  rate  sensitive  liabilities  exceeded  rate
sensitive assets, resulting in a liability sensitive position at the end of 2006
of $10.5  million,  for a cumulative gap ratio of .87 calculated at the one-year
time horizon.  When interest  sensitive  liabilities  exceed interest  sensitive
assets for a specific repricing  "horizon",  a negative interest sensitivity gap
results,  as was the case at the end of 2006 with respect to the  one-year  time
horizon.  The gap is positive when  interest  sensitive  assets exceed  interest
sensitive  liabilities.  For a bank with a negative gap,  falling interest rates
would  be  expected  to  have a  positive  effect  on net  interest  income  and
increasing rates would be expected to have the opposite effect.

         The table below  reflects the balances of interest  earning  assets and
interest  bearing  liabilities  at the  earlier of their  repricing  or maturity
dates.  Amounts of fixed rate loans are  reflected at the loans' final  maturity
dates.  Variable  rate loans are  reflected at the earlier of their  contractual
maturity  date or the date at which  the  loan  may be  repriced  contractually.
Deposits in other banks and debt securities are reflected at the earlier of each
instrument's  repricing  date for  variable  rate  instruments  or the  ultimate
maturity  date for fixed  rate  instruments.  Overnight  federal  funds sold are
reflected in the earliest  repricing  interval due to the immediately  available
nature  of  these  funds.  Interest  bearing  liabilities  with  no  contractual
maturity, such as interest bearing transaction accounts and savings deposits are
reflected in the earliest  repricing  interval due to  contractual  arrangements
which give  management the  opportunity to vary the rates paid on these deposits
within a thirty-day or shorter period.  However, the Bank is under no obligation
to vary the rates paid on those  deposits  within any given  period.  Fixed rate
time  deposits,  principally  certificates  of deposit,  are  reflected at their
contractual  maturity  dates.  Federal  funds  purchased  are  presented  in the
immediate  repricing  interval  because the  interest  rate paid  adjusts at the
beginning of each month.  The table does not reflect  repricing that could occur
as a result of  prepayment  of loans or early  withdrawal  of time  deposits  or
movement into or out of non-maturing deposit accounts.


                                       8
<PAGE>

                          Interest Sensitivity Analysis
<TABLE>
<CAPTION>
                                                                             December 31, 2006
                                                                             -----------------
                                                           1-3       3-12        1-3         3-5       5-15       > 15
                                             Immediate    Months    Months      Years       Years      Years      Years       Total
                                             ---------    ------    ------      -----       -----      -----      -----       -----
                                                                          (Dollars in Thousands)
Interest earning assets
<S>                                            <C>      <C>        <C>         <C>         <C>        <C>        <C>        <C>
    Securities (1) .......................     $    -   $  1,498   $  1,249    $    988    $  1,248   $  8,103   $  4,904   $ 17,990
    Federal funds sold ...................      3,215          -          -           -           -          -          -      3,215
    Loans (2) ............................     47,662      3,918     10,763      16,343      16,922      1,842        106     97,556
                                             --------   --------   --------    --------    --------   --------   --------   --------
        Total interest earning assets ....     50,877      5,416     12,012      17,331      18,170      9,945      5,010    118,761
                                             --------   --------   --------    --------    --------   --------   --------   --------

Interest bearing deposits
    Interest bearing transaction accounts      15,166          -          -           -           -          -          -     15,166
    MMDAs & Savings ......................     10,093          -          -           -           -          -          -     10,093
    Time deposits ........................          -     16,957     32,115      12,091       2,876          -          -     64,039
    Customer repurchase agreements .......          -      2,364      2,000         700           -          -          -      5,064
    FHLB advances ........................          -         38        113       1,953         302        290          -      2,696
                                             --------   --------   --------    --------    --------   --------   --------   --------
        Total interest bearing ...........     25,259     19,359     34,228      14,744       3,178        290          -     97,058
        liabilities
                                             --------   --------   --------    --------    --------   --------   --------   --------

Interest sensitivity gap .................   $ 25,618   $(13,943)  $(22,216)   $  2,587    $ 14,992   $  9,655   $  5,010   $ 21,703
Cumulative interest sensitivity gap ......   $ 25,618   $ 11,675   $(10,541)   $ (7,954)   $  7,038   $ 16,693   $ 21,703
Gap ratio ................................       2.01        .28        .35        1.18        5.72      34.21          -
Cumulative gap ratio .....................       2.01       1.26        .87         .92        1.07       1.17       1.22

<CAPTION>

                                                                               December 31, 2005
                                                                               -----------------
                                                           1-3        3-12       1-3         3-5       5-15       > 15
                                           Immediate     Months      Months     Years       Years      Years      Years       Total
                                           ---------     ------      ------     -----       -----      -----      -----       -----
                                                                           (Dollars in Thousands)
Interest earning assets
<S>                                          <C>       <C>         <C>         <C>         <C>        <C>        <C>        <C>
    Securities (1) ......................    $     -   $    700    $  5,955    $  3,236    $    989   $  2,514   $    610   $ 14,004
    Federal funds sold ..................      3,183          -           -           -           -          -          -      3,183
    Loans (2) ...........................     47,614      3,472       7,467      11,832      15,186      1,699         62     87,332
                                            --------   --------    --------    --------    --------   --------   --------   --------
        Total interest earning assets ...     50,797      4,172      13,422      15,068      16,175      4,213        672    104,519
                                            --------   --------    --------    --------    --------   --------   --------   --------

Interest bearing deposits
    Interest bearing transaction accounts     15,966          -           -           -           -          -          -     15,966
    MMDAs & Savings .....................      9,790          -           -           -           -          -          -      9,790
    Time deposits .......................          -     18,457      15,617      15,723       5,647          -          -     55,444
    Customer repurchase agreements ......      1,784      1,300           -           -           -          -          -      3,084
    FHLB advances .......................          -         38       1,613       1,953         302        440          -      4,346
                                            --------   --------    --------    --------    --------   --------   --------   --------
        Total interest bearing ..........     27,540     19,795      17,230      17,676       5,949        440          -     88,630
        liabilities
                                            --------   --------    --------    --------    --------   --------   --------   --------

Interest sensitivity gap ................   $ 23,257   $(15,623)   $ (3,808)   $ (2,608)   $ 10,226   $  3,773   $    672   $ 15,889
Cumulative interest sensitivity gap .....   $ 23,257   $  7,634    $  3,826    $  1,218    $ 11,444   $ 15,217   $ 15,889
Gap ratio ...............................       1.84        .21         .78         .85        2.72       9.57       1.00       1.18
Cumulative gap ratio ....................                  1.84        1.16        1.06        1.01       1.13       1.17       1.18
</TABLE>

(1)  Securities with call features have been included in the period in which the
     security matures.
(2)  There were no nonaccruing loans or unamortized  deferred loan fees, both of
     which would normally be subtracted from loans for purposes of this table.


                                       9
<PAGE>

Provision for Loan Losses

         The  provision  for  loan  losses  is  charged  to  earnings  based  on
management's  continuing review and evaluation of the loan portfolio and general
economic  conditions.  The  following  table  summarizes  the  activity  in  the
allowance for loan losses.

                                                      Year ended December 31,
                                                      -----------------------
                                                    2006       2005        2004
                                                    ----       ----        ----
                                                       (Dollars in thousands)
Allowance for loan losses, beginning of year ..   $ 1,058    $   919    $   728
Provision for loan losses .....................       446        140        197
Charge-offs ...................................      (304)        (1)        (6)
Recoveries ....................................         -          -          -
                                                  -------    -------    -------

Allowance for loan losses, end of year ........   $ 1,200    $ 1,058    $   919
                                                  =======    =======    =======


         See "Impaired  Loans" and  "Allowance for Loan Losses" for a discussion
of the  factors  management  considers  in its  review  of the  adequacy  of the
allowance and provision for loan losses.

Other Income

         Other income,  which  consists  primarily of mortgage loan  origination
fees,  service charges on deposit accounts,  and other fee income,  increased by
$375,887 to $1.4  million in 2006 from $1.0 million in 2005 and from $719,275 in
2004.  The increase in 2006 is primarily the result of a gain on sale of land of
$241,696 in 2006 which  related to the sale of  property  adjacent to one of the
Company's  branch  offices.  The Company also  reported  growth in mortgage loan
originations,  which  increased by more than $80,000  compared to 2005.  Service
fees on deposit accounts rose in 2006 by $63,859.

Other Expenses

         Other  expenses,  which  consist  primarily  of salaries  and  employee
benefits, occupancy costs, and data processing expenses, totaled $3.9 million in
2006,  $3.3  million in 2005,  and $2.7  million in 2004.  Salaries and employee
benefits rose to $2.3 million in 2006 from $2.0 million in 2005 and $1.5 million
in 2004.  The increases in each year were due to the hiring of additional  staff
to support the Bank's growth and annual salary increases. Incentive compensation
increased in 2006 and option  expense of $19,784 was included for the first time
in salaries and benefits in 2006 following the adoption of SFAS No. 123(R).  The
cost of health insurance benefits also increased in 2006 by 23.7%. Net occupancy
increased to $567,355 in 2006 over  $512,011 in 2005 and  $438,848 in 2004.  The
increase in 2006 is  primarily  due to a full year of  expenses to maintain  the
branch  opened in July  2005.  Equipment  maintenance  increases  accounted  for
$27,000 of the increase.  Data processing  expense increased 35.6% in 2006 after
increasing by 5.5% in 2005 as compared to 2004. The data processing increases in
2006 and 2005  are  primarily  due to  growth  in the  number  of  accounts  and
transactions  processed by the Company's data processing  provider.  Advertising
expenses  increased 21.3% in 2006.  Supplies expense decreased 5.7% in 2006. The
higher  supplies  expense  in 2005 was mainly due to set up costs for the branch
opened in July 2005.  Directors fees increased in 2006 due to two new directors,
including  one at the  holding  company  and one at the Bank  level,  and due to
increases in the per meeting  amount paid to directors.  Charge-offs on deposits
included one  fraudulent  transaction  for $25,000 that occurred in 2006.  Other
operating expenses increased mainly due to expenses  associated with a full year
of expense for the Powdersville branch. In addition,  ATM processing fees, which
are included in other expense,  increased 32.2% or $16,000 during 2006 over 2005
levels.  The  Company's  efficiency  ratio,  which is  measured  as the ratio of
noninterest  expense  to the  sum of  net  interest  income  plus  other  income
expressed as a  percentage,  improved in 2006 to 58% compared to 64% in 2005 and
68% in 2004 as the Company's fixed expenses continued to be spread over a larger
customer base.


                                       10
<PAGE>

Income Taxes

         For 2006 the Company  recorded income tax expense of $794,998  compared
to $620,658 in 2005 and $388,898 in 2004.  The  increases are due to an increase
in pretax income,  net of non-taxable  items. The Bank accounts for income taxes
under Financial  Accounting  Standards ("SFAS") No. 109,  "Accounting for Income
Taxes."  Certain  items of income and expense  (principally  provision  for loan
losses, depreciation, and prepaid expenses) are included in one reporting period
for financial accounting purposes and another for income tax purposes.  Refer to
the notes to the Company's consolidated financial statements contained elsewhere
herein for more information.

Investment Securities

         Management  assigns securities upon purchase into one of the categories
(trading,  available-for-sale  and held-to-maturity)  designated by Statement of
SFAS No. 115 based on intent,  taking into consideration other factors including
expectations  for  changes  in  market  rates  of  interest,   liquidity  needs,
asset/liability  management strategies,  and capital requirements.  The Bank has
not historically held securities for trading purposes.  As of December 31, 2006,
2005, and 2004, the Bank's investment  portfolio comprised  approximately 14.1%,
12.4%, and 13.1%, respectively, of total assets.

         The following table  summarizes the carrying amounts of securities held
by the Bank at December  31, 2006 and 2005.  Available-for-sale  securities  are
stated at  estimated  fair  value.  Held-to-maturity  securities  are  stated at
amortized  cost.  Federal Reserve Bank of Richmond and Federal Home Loan Bank of
Atlanta stocks have no quoted market value, but have  historically been redeemed
at par  value,  and are  therefore  carried  at cost.  There  are no  individual
issuers, other than government sponsored enterprises, whose securities represent
more than 10% of the Company's consolidated shareholders' equity at December 31,
2006.  Government  sponsored  enterprises ("GSEs") are agencies and corporations
established by the U. S.  Government,  including among others,  the Federal Home
Loan Banks,  Federal National Mortgage  Association,  Federal Home Loan Mortgage
Corporation  and  Federal  Farm  Credit  Banks.   Securities   issued  by  these
enterprises  are not  obligations of the U. S.  Government and are not backed by
the full faith and credit of the U. S. Government or otherwise guaranteed by the
U. S.  Government.  Because of the high-quality of the issuers,  however,  these
securities  generally are eligible to be used as security for public deposits of
the U. S. Treasury,  government  agencies and  corporations and states and other
political  subdivisions.  At December 31, 2006 and 2005,  securities with a fair
value of $8,669,970 and $7,467,531,  respectively, were pledged to collateralize
public deposits, sweep accounts, and repurchase agreements.

                   Investment Securities Portfolio Composition

                                                                December31,
                                                                -----------
                                                            2006           2005
                                                            ----           ----
                                                          (Dollars in thousands)
Available for sale:
   Government sponsored enterprises ................       $ 9,191       $ 7,676
   Mortgage-backed securities ......................         4,018           663
   Municipal bonds .................................         2,967         1,351
                                                           -------       -------
      Total available for sale .....................        16,176         9,690

Held to maturity
   Government sponsored enterprises ................         1,000         3,704

Federal Reserve Bank of Richmond stock .............           388           210
Federal Home Loan Bank of Atlanta stock ............           425           400
                                                           -------       -------

Total ..............................................       $17,989       $14,004
                                                           =======       =======

         The  following  table  presents  contractual  maturities  and  weighted
average  yields of  securities  at December  31, 2006 and 2005.  Securities  are
presented at their carrying value  (available for sale securities are carried at
fair value and held to maturity  securities are carried at book value,  which is
equal to their amortized cost.)


                                       11
<PAGE>

              Investment Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                                              December 31, 2006               December 31, 2005
                                                                              -----------------               -----------------
                                                                            Amount           Yield(1)        Amount        Yield(1)
                                                                            ------           --------        ------        --------
                                                                             (Dollars in thousands)          (Dollars in thousands)
Available for sale securities:
Government sponsored enterprises
<S>                                                                        <C>                  <C>          <C>               <C>
     Within one year ...........................................           $ 1,747              3.59%        $ 3,953           2.90%
     After one through five years ..............................             1,991              5.02%          3,223           4.40%
     After five through ten years ..............................             5,453              5.90%            500           5.75%

FNMA and FHLMC Mortgage-backed securities (2)
     After five through ten years ..............................               507              3.80%            663           3.80%
     After 10 years ............................................             3,511              5.91%              -              -%

Municipal bonds
        After five through ten years ...........................             1,453              3.59%          1,351           3.53%
        After 10 years .........................................             1,514              4.09%              -              -%

Held to maturity securities:
Government sponsored enterprises
     Within one year ...........................................             1,000              4.92%          2,703           4.55%
     After one through five years ..............................                 -                 -%          1,002           4.93%

Other securities
     No stated maturity ........................................               813              5.94%            609           5.08%
                                                                           -------                           -------
     Total .....................................................           $17,989              5.08%        $14,004           4.00%
                                                                           =======                           =======
</TABLE>

(1)  Yields calculated on a pre-tax basis.
(2)  The securities mature on an amortizing basis. They are included here in the
     period of final maturity.

         While thirteen of the Company's  government sponsored enterprise bonds,
municipal  bonds  and  mortgage-backed  securities  are  in an  unrealized  loss
position as of December 31, 2006, none of these securities is expected to have a
loss of principal at final  maturity.  The Company has the intent and ability to
hold these  securities  until such time as the value  recovers or the securities
mature.  The  Company  believes,  based on industry  analyst  reports and credit
ratings,  that the  deterioration  in value is attributable to changes in market
interest rates and not in the credit quality of the issuers and therefore, these
losses are not considered  other-than-temporary.  The Company's  investments are
obligations  of the United  States,  its  sponsored  enterprises,  or  municipal
securities.  In the opinion of Management,  there is no  concentration of credit
risk in the investment portfolio.

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no significant  concentrations of loans to any particular  individuals or in
industries which management believes pose a material risk to the Bank, and there
are no foreign loans.  The Bank does have loans in certain broad categories that
comprise over 25% of Tier 1 Capital  adjusted for the allowance for loan losses.
Those categories are as follows:  real estate rental and leasing,  construction,
retail trade, health care and social assistance, and other services. The Company
believes that the Bank has  appropriate  controls in place to monitor risks that
may arise due to  concentrations  in the loan portfolio.  Loans made outside the
policy guidelines may present additional credit risk to the Company. In order to
monitor  these  loans  and the  total  number  and  amount  of loans  made  with
exceptions to loan  policies,  the Bank monitors all loans  approved with policy
exceptions.  Monthly, statistics regarding the number of loans and the amount of
loans with policy exceptions are reported to the Board of Directors.  One of the
policy exceptions  reported is for loans exceeding the regulatory  guidelines on
loan to value ratios.  The regulatory loan to value guidelines permit exceptions
to the  guidelines  not to exceed  100% of Total  Regulatory  Capital for single
family  residential  mortgage loans ($17.8 million at December 31, 2006), or for
real estate loans other than single family  residential  loans,  exceptions must


                                       12
<PAGE>

not exceed 30% of Total  Regulatory  Capital  ($5.3  million as of December  31,
2006).  As of December 31, 2006, the Bank has $2.6 million of loans which exceed
regulatory  loan to  value  guidelines,  an  amount  which  is well  within  the
allowable maximum of exceptions to the guidelines.

         The banking  industry  offers  products  that can increase  credit risk
should   economic   conditions   change  over  the  course  of  a  loan's  life.
Interest-only loans,  adjustable rate loans, and loans with amortization periods
that differ from the maturity date (i.e., balloon payment loans) are examples of
products that could  subject the Company to increased  credit risk in periods of
changing  economic  conditions.  The Company  evaluates each  customer's  credit
worthiness based on current and expected economic conditions and underwrites and
monitors each loan for associated risks. Therefore,  Management does not believe
that these particular products subject the Company to unusual credit risk. As of
December 31, 2006, the Bank does not portfolio  residential  mortgage loans with
negative  amortization  features,  long term principal only payment features, or
loan to value ratios in excess of 100%.

         The Bank has a mortgage loan brokerage department that accepts mortgage
applications  for  terms  greater  than  15  years.  Mortgage  applications  are
processed and sent to third parties for underwriting.  Approved loans are funded
by,  and  closed  in the  name  of,  third  parties  and the  Bank  receives  an
origination fee.

         The amount of loans outstanding at December 31, 2006 and 2005 are shown
in the following table according to type of loan:

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                         ------------
                                                                              2006                            2005
                                                                              ----                            ----
                                                                                    (Dollars in thousands)
                                                                                      % of                          % of
                                                                        Amount        Loans            Amount       Loans
                                                                        ------        -----            ------       -----
<S>                                                                     <C>           <C>             <C>           <C>
        Commercial and industrial ...................................   $17,009       17.4%           $19,092       21.9%
        Real Estate - construction ..................................    27,130       27.8             21,267       24.4
        Real Estate - mortgage
               1-4 family residential ...............................    19,444       19.9             17,754       20.3
               Nonfarm, nonresidential ..............................    29,314       30.1             25,583       29.3
               Multifamily residential ..............................     1,554        1.6              2,042        2.3
        Consumer installment ........................................     3,105        3.2              1,594        1.8
                                                                        -------      -----            -------      -----
               Total Loans ..........................................    97,556      100.0%            87,332      100.0%
                Less allowance for loan losses ......................    (1,200)                       (1,058)
                                                                        -------                       -------
                   Net Loans ........................................   $96,356                       $86,274
                                                                        =======                       =======
</TABLE>

Maturity Distribution of Loans

         The Bank's loan  portfolio  has a large  component of  adjustable  rate
loans.  As of December 31,  2006,  approximately  $53.4  million or 54.8% of the
Bank's loan portfolio was variable.


                                       13
<PAGE>

         The following table sets forth the maturity  distribution of the Bank's
loans,  by type,  as of  December  31,  2006,  as well as the  type of  interest
requirement on such loans.  For purposes of this table,  variable rate loans are
included in the period of their final  maturity,  as opposed to their  repricing
date.

                         Maturity Distribution on Loans

<TABLE>
<CAPTION>
                                                                            December 31, 2006
                                                                            -----------------
                                                                             (Dollars in Thousands)
                                                                1 Year       1-5       5 Years
                                                               or Less      Years      or More       Total
                                                               -------      -----      -------       -----

<S>                                                             <C>         <C>          <C>        <C>
Commercial and industrial ................................      $11,867     $ 4,123      $1,019     $17,009
Real Estate-construction .................................       21,518       5,210         402      27,130
Real Estate-mortgage .....................................       12,068      33,203       5,041      50,312
Consumer .................................................        2,133         932          40       3,105
                                                                -------     -------      ------     -------
      Total ..............................................      $47,586     $43,468      $6,502     $97,556
                                                                =======     =======      ======     =======

Predetermined rate, maturity greater than one year .......                  $33,292      $1,878     $35,170

Variable rate, maturity greater than one year ............                  $10,176      $4,624     $14,800
</TABLE>

         For  purposes of the table above,  variable  rate loans are included in
the period of maturity, rather than in the period in which they can reprice.

Impaired Loans

         A loan will be considered to be impaired when, in management's judgment
based on  current  information  and  events,  it is  probable  that  the  loan's
principal or interest will not be  collectible  in accordance  with the terms of
the original loan agreement.  Impaired loans, when not material, will be carried
in the balance sheet at a value not to exceed their  observable  market price or
the fair value of the  collateral if the repayment of the loan is expected to be
provided  solely  by the  underlying  collateral.  The  carrying  values  of any
material  impaired loans will be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, which is the
contractual  interest rate adjusted for any deferred loan fees or costs, premium
or discount existing at the inception or acquisition of the loan.

         Loans  which  management  identifies  as  impaired  generally  will  be
nonperforming loans. Nonperforming loans include nonaccrual loans or loans which
are 90 days or more delinquent as to principal or interest payments. At December
31,  2006 and 2005,  the Bank had no  nonaccrual  loans or loans 90 days or more
past due and no restructured loans.

         Generally,  the accrual of interest  will be  discontinued  on impaired
loans when  principal  or interest  becomes 90 days past due, or when payment in
full is not anticipated,  and any previously accrued interest on such loans will
be reversed  against  current  income.  Any subsequent  interest  income will be
recognized on a cash basis when received unless  collectibility of a significant
amount of principal is in serious doubt. In such cases, collections are credited
first to the remaining  principal  balance on a cost recovery basis. An impaired
loan will not be returned to accrual  status  unless  principal and interest are
current  and the  borrower  has  demonstrated  the  ability to  continue  making
payments as agreed.

Potential Problem Loans

         Management  identifies and maintains a list of potential problem loans.
These are loans that are not included in  nonaccrual  status,  or loans that are
past due 90 days or more and  still  accruing  interest.  A loan is added to the
potential  problem  list when  management  becomes  aware of  information  about
possible  credit  problems of  borrowers  that causes  serious  doubts as to the
ability of such borrowers to comply with the current loan repayment terms. These
loans are  designated  as such in order to be monitored  more closely than other
credits in the Bank's portfolio. There were loans in the amount of $403,000 that
have been determined by management to be potential problem loans at December 31,


                                       14
<PAGE>

2006.  The loans are secured by real estate.  Management is currently  assessing
the  potential  impact on the Bank and the  Company,  but it is not  possible to
determine an estimate of the impact at this time.

Allowance for Loan Losses

         The  allowance  for loan  losses  is  increased  by direct  charges  to
operating expense.  Losses on loans will be charged against the allowance in the
period in which  management  determines  that it is likely  that such loans have
become  uncollectible.  Recoveries  of  previously  charged  off  loans  will be
credited to the  allowance.  In reviewing the adequacy of the allowance for loan
losses at each year end,  management will take into consideration the historical
loan losses experienced by the bank, current economic  conditions  affecting the
borrowers'  ability to repay, the volume of loans, and the trends in delinquent,
nonaccruing,  and any  potential  problem  loans,  and the quality of collateral
securing nonperforming and problem loans. Management considers the allowance for
loan losses to be adequate to cover its estimate of loan losses  inherent in the
loan portfolio as of December 31, 2006.

         In  calculating  the amount  required in the allowance for loan losses,
management  applies a  consistent  methodology  that is updated  quarterly.  The
methodology  utilizes a loan risk grading  system and  detailed  loan reviews to
assess credit risks and the overall  quality of the loan  portfolio.  Also,  the
calculation provides for management's assessment of trends in national and local
economic conditions that might affect the general quality of the loan portfolio.



                                       15
<PAGE>


                                      Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                                        Year ended December 31,
                                                                                                        -----------------------
                                                                                                     2006                   2005
                                                                                                     ----                   ----
                                                                                                        (Dollars in thousands)

<S>                                                                                                 <C>                   <C>
Total loans outstanding at end of period ...............................................            $ 97,556              $ 87,332
Average amount of loans outstanding ....................................................            $ 90,018              $ 77,654

Balance of allowance for loan losses-beginning .........................................            $  1,058              $    919
Loans charged-off
      Commercial .......................................................................                 275                     -
      Commercial real estate ...........................................................                  26                     -
      Consumer installment .............................................................                   3                     1
                                                                                                    --------              --------
         Total charge-offs .............................................................                 304                     1
Recoveries of loans previously charged-off .............................................                   -                     -
                                                                                                    --------              --------
Net (charge-offs) recoveries ...........................................................                (304)                   (1)

Additions to allowance charged to expense ..............................................                 446                   140
                                                                                                    --------              --------

Additions to allowance charged to expense
Balance of allowance for loan losses-ending ............................................            $  1,200              $  1,058
                                                                                                    ========              ========

Ratios
      Net (charge-offs) recoveries to average loans outstanding ........................                (.34%)             <(.01%)
      Net (charge-offs) recoveries to loans at end of period ...........................                (.31%)             <(.01%)
      Allowance for loan losses to average loans .......................................                1.33%               1.36%
      Allowance for loan losses to loans at end of period ..............................                1.23%               1.21%
      Net (charge-offs) recoveries to allowance for loan losses ........................               (25.3%)              (.10%)
      Net (charge-offs) recoveries to provision for loan losses ........................               (68.2%)             (1.02%)
</TABLE>

         The allowance for loan losses is not restricted to specific  categories
of loans and is available to absorb losses in all  categories.  Each category of
loans is reviewed for  characteristics  that  increase or decrease risk of loss,
such  as  the   availability  and   marketability   of  collateral,   degree  of
susceptibility  to  changes  in  economic  conditions,  etc.,  for  purposes  of



                                       16
<PAGE>

estimating  the  allowance  for loan losses.  (See  "Services of the Bank" for a
discussion of risk characteristics for each loan category.) Individual loans are
graded using an internal grading system that considers  information  specific to
the loan. If warranted,  a specific  allocation may be associated with that loan
for purposes of estimating the adequacy of the allowance for loan losses. During
2006,  the  Company  charged  off  loans  totaling  $304,000.  Of  that  amount,
approximately $275,000 of loans were considered to be potential problem loans as
of December  31,  2005.  Those loans were  ultimately  charged  off.  Management
continues to pursue recovery of some or all of these amounts. However, it is not
possible to determine the amount, if any, that can be recovered at this time.

Real Estate Owned

         The  Bank  had  no  real  estate  owned   pursuant  to  foreclosure  or
in-substance  foreclosure  at December 31, 2006.  Real estate owned is initially
recorded at the lower of net loan principal balance or its estimated fair market
value less estimated  selling  costs.  The estimated fair value is determined by
appraisal at the time of acquisition.

Deposits

         The amounts and percentage  composition of deposits held by the Bank as
of December 31, 2006 and 2005 are summarized below:

                               Deposit Composition

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                       ------------
                                                          2006                            2005
                                                          ----                            ----
                                                                   (Dollars in thousands)
                                                               % of                            % of
                                                Amount         Deposits         Amount         Deposits
                                                ------         --------         ------         --------

<S>                                              <C>            <C>            <C>              <C>
Noninterest bearing demand .................     $12,368        12.2%          $10,452          11.4%
Interest bearing transaction accounts ......      15,166        14.9            15,966          17.4
Savings ....................................       3,744         3.7             3,545           3.9
Money market ...............................       6,349         6.2             6,244           6.8
Time deposits $100,000 and over ............      28,113        27.7            26,006          28.4
Other time deposits ........................      35,926        35.3            29,439          32.1
                                                --------       -----           -------         -----
    Total deposits .........................    $101,666       100.0%          $91,652         100.0%
                                                ========       =====           =======         =====
</TABLE>

         The average  amounts of and average  rate paid on deposits  held by the
Bank for the years ended December 31, 2006 and 2005, are summarized below:

                                Average Deposits

<TABLE>
<CAPTION>
                                                                                  Year ended December 31,
                                                                                  -----------------------
                                                                             2006                        2005
                                                                             ----                        ----
                                                                     Amount         Rate         Amount         Rate
                                                                     ------         ----         ------         ----
                                                                                 (Dollars in thousands)
<S>                                                                  <C>                         <C>
Noninterest bearing demand ......................................    $11,181          -%         $9,241           -%
Interest bearing transaction accounts ...........................     14,112       1.10%         13,510        1.04%
Savings and money market ........................................     10,074       1.63%         11,689        1.17%
Time deposits ...................................................     60,252       4.28%         49,939        3.34%
                                                                     -------                    -------
      Total average deposits ....................................    $95,619                    $84,379
                                                                     =======                    =======
</TABLE>

         As of December 31, 2006,  the Bank held $28.1  million of time deposits
with  balances of $100,000 or more. Of that amount,  $6.7 million  mature within
three months,  $7.6 million  mature over three through six months,  $7.5 million
mature over six  through  twelve  months,  and $6.3  million  mature over twelve
months.  $2.6  million of time  deposits  over  $100,000 or more are at floating
rates of interest at December 31, 2006.  The majority of time deposits  $100,000
and over are  acquired  from  customers  within the Bank's  service  area in the
ordinary course of business.



                                       17
<PAGE>

         While most of the large time deposits are acquired from  customers with
standing  relationships  with the Bank, it is a common industry  practice not to
consider these types of deposits as core deposits because their retention can be
expected to be heavily influenced by rates offered,  and therefore such deposits
may have the  characteristics  of shorter-term  purchased  funds.  Time deposits
$100,000 and over involve the maintenance of an appropriate matching of maturity
distribution and a diversification of sources to achieve an appropriate level of
liquidity.

Customer Repurchase Agreements

         Customer  repurchase  agreements  consist of sweep  accounts and retail
repurchase agreements, and totaled $5.1 million and $3.1 million at December 31,
2006  and  2005,   respectively.   Securities  issued  by  government  sponsored
enterprises  with an amortized cost of $6.7 million and $5.3 million (fair value
of $6.7 million and $5.2 million) were used as collateral for the sweep accounts
and retail repurchase agreements,  at December 31, 2006 and 2005,  respectively.
All of the sweep  accounts pay interest on a floating  rate basis.  The customer
repurchase  agreements pay interest on a fixed rate basis and have maturities of
varying lengths.  As of December 31, 2006, the Bank had five customer repurchase
agreements  that  mature in 2007 and one that  matures in 2008.  During 2006 the
average amount of customer repurchase agreements and sweep accounts totaled $4.8
million. The Bank paid an average interest rate of 2.43% on these funds in 2006.

Liquidity

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner.  Some liquidity is ensured by maintaining assets that may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less time deposits  greater than $100,000)  provide a relatively  stable funding
base, and were equal to 57.6% of total assets at December 31, 2006.

         Asset liquidity is provided from several sources, including amounts due
from banks and federal funds sold,  and funds from maturing  loans.  The Company
had over $5.9 million in cash and cash  equivalents  at December  31, 2006.  The
Bank has $4.8 million  available  through lines of credit with other banks and a
line with the Federal Home Loan Bank of Atlanta  ("FHLB") as additional  sources
of liquidity funding.  The line with the FHLB is equal to 10% of assets provided
that adequate  collateral  is available  for pledging.  The line may be used for
short or long term  funding  needs  and may be used on a fixed or  variable-rate
basis.  The lines  with the  other  banks  are for  short-term  use only and are
unsecured.  As of December 31, 2006,  the Bank had $2.7 million at various fixed
rates of interest,  maturing at various dates  through  2015,  borrowed from the
FHLB. The highest balance at any month end was $4.3 million. The average balance
for 2006 was $4.0 million.  The average rate paid on the borrowings for 2006 was
3.75%.  The weighted average interest rate as of December 31, 2006 was 4.10%. At
December 31, 2005, the Bank had $4.3 million at various fixed rates of interest,
maturing at various dates through 2015, borrowed from the FHLB. During 2005, the
highest  balance  as of any  month  end for  borrowings  from  the FHLB was $6.7
million.  The  average  rate paid on the  advances  during  2005 was 3.56%.  The
average balance of FHLB advances for 2005 was $3.9 million. At December 31, 2006
approximately  $10.0 million of additional  funds were available  under the FHLB
line provided that eligible  collateral is available.  Management  believes that
the Bank's overall liquidity sources are adequate to meet its operating needs in
the ordinary course of its business.

Off-Balance Sheet Risk

         The Company,  through the  operations  of the Bank,  makes  contractual
commitments to extend credit in the ordinary course of its business  activities.
These  commitments are legally binding  agreements to lend money to customers of
the Bank at  predetermined  interest  rates for a specified  period of time.  At
December 31, 2006,  the Bank had issued  commitments  to extend  credit of $20.6
million through  various types of lending  arrangements.  Of these  commitments,
$18.5 million are at variable rates and $14.1 million of the total expire within
one year.  Past  experience  indicates that many of these  commitments to extend
credit will expire  unused and it is unlikely that a large portion would be used
in a short period of time.



                                       18
<PAGE>

         In  addition  to  commitments  to extend  credit,  the Bank also issues
standby  letters of credit which are  assurances to a third party that they will
not  suffer  a loss  if the  Bank's  customer  fails  to  meet  its  contractual
obligation to the third party.  Standby letters of credit totaled  approximately
$659,000 at December  31, 2006.  Past  experience  indicates  that many of these
standby  letters of credit  will  expire  unused.  However,  through its various
sources of liquidity  discussed  above,  the Bank believes that it will have the
necessary resources to meet these obligations should the need arise.

         The  Bank   offers   an   automatic   overdraft   protection   product.
Approximately  $1.2 million of  overdraft  protection  is  available  under this
product as of December 31, 2006.  The Bank expects the majority of this capacity
will not be  utilized.  During  2006  the  average  balance  of  demand  deposit
overdrafts was approximately $24,000.

         Neither the Company nor the Bank is involved in other off-balance sheet
contractual relationships, unconsolidated related entities that have off-balance
sheet arrangements or transactions that could result in liquidity needs or other
commitments or significantly  impact earnings.  The Company has signed contracts
for  construction  of an  operations  center next to the  Company's  main office
building.  Total costs of  construction  and  furnishings  are estimated at $1.6
million.  Construction is expected to be completed in the third quarter of 2007.
The Company did not  maintain any  obligations  under  non-cancelable  operating
lease agreements at December 31, 2006. The Company has approximately three years
remaining on a five-year  contract with a company which provides data,  item and
ATM processing services. The annual costs are approximately  $204,000.  Refer to
notes  10  and  14  to  the  Company's  consolidated  financial  statements  for
additional discussion on commitments and contingencies and financial instruments
with off-balance sheet risk.

Capital Resources

         At  December  31,  2006,  total   shareholders'   equity  increased  by
approximately  $3.7  million  from $13.8  million at December  31, 2005 to $17.5
million  at  December  31,  2006.  A portion of the  increase  was a result of a
secondary  offering of common stock by the Company  completed  in January  2006,
which  increased  common  stock by $1.9  million as of December  31,  2006.  The
remainder  of the  increase  was  due to  net  income  of  $1.7  million  and an
unrealized gain on investment  securities of $147,734,  partially offset by cash
paid in lieu of fractional shares of $3,036 as a result of a stock dividend paid
in 2006. The Company does not anticipate it will be required to raise additional
capital in 2007 if growth occurs in line with current expectations.

         The Company made capital  expenditures  for bank premises and furniture
and equipment in 2006 totaling  approximately  $137,000.  The Company has signed
contracts for  construction  of an operations  center next to the Company's main
office  building.  Total costs of construction  and furnishings are estimated at
$1.6 million. Such expenditures were made, or are expected to be made, from cash
on hand.

         The  Company and the Bank are subject to  regulatory  capital  adequacy
standards.  Under  these  standards,  financial  institutions  are  required  to
maintain certain minimum ratios of capital to  risk-weighted  assets and average
total assets. Under the provisions of the Federal Deposit Insurance  Corporation
Improvements Act of 1991, federal financial institution  regulatory  authorities
are  required  to  implement  prescribed  "prompt  corrective  action"  upon the
deterioration  of the capital  position of a bank. If the capital position of an
affected institution were to fall below certain levels,  increasingly  stringent
regulatory  corrective  actions  are  mandated.  The  Company's  and the  Bank's
regulatory  capital  requirements and positions are summarized in note 18 to the
consolidated financial statements.




                                       19
<PAGE>


Return on Equity and Assets

         The following  table shows the return on assets (net income  divided by
average total assets),  return on equity (net income divided by average equity),
dividend payout ratio (cash  dividends  declared per share divided by net income
per share),  and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2006 and 2005.

                                                 2006                    2005
                                                 ----                    ----
Return on assets ............................    1.36%                   1.02%
Return on equity ............................   10.30%                  10.56%
Dividend payout ratio .......................       -%                      -%
Equity to assets ratio (average) ............   13.20%                   9.66%

         The  return on assets  improved  in 2006 due  largely  to growth in the
Bank. The slight decline in return on equity was the result of a public offering
of the Company's  common stock.  The Company  offered  445,000  shares of common
stock in late 2005 and early  2006.  The shares were only  slightly  dilutive to
2005, due to the date of the offering.  However, the additional shares were more
dilutive to 2006 results.

         During 2007, the Bank's plan of operation is to attract new deposit and
loan  customers,  especially in the market areas around our branch  offices,  to
increase   the  ratio  of  services   per  customer  and  increase  the  account
profitability of the Bank's current  customers.  Deposit accounts will be sought
from  individuals  and  businesses  in  the  Easley,  Berea,   Powdersville  and
surrounding  markets.  The Bank  intends  to offer  competitive  rates  for such
accounts  and may seek new  accounts  by  offering  rates  slightly  above those
prevailing  in the  market.  Management  will  continue  to  emphasize  personal
service, accessibility,  and flexibility as reasons for customers to do business
with the Bank.  Personal  contacts by management,  advertising,  and competitive
prices and services will be the Bank's principal marketing tools.

Inflation

         Since the assets and  liabilities  of a bank are primarily  monetary in
nature (payable in fixed,  determinable  amounts),  the performance of a bank is
affected  more by changes in interest  rates than by inflation.  Interest  rates
generally increase as the rate of inflation increases,  but the magnitude of the
change in rates may not be the same.

         While the effect of inflation  on banks is normally not as  significant
as is its influence on those businesses that have large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally  corresponding  increases in the money supply,  and banks will normally
experience  above-average  growth in assets,  loans and  deposits.  Also general
increases  in the  prices  of goods and  services  usually  result in  increased
operating expenses.

Market for Common Equity and Related Stockholder Matters

         Although  the common  stock of the  Company  may be traded from time to
time on an individual basis, no active trading market has developed and none may
develop  in the  foreseeable  future.  The  common  stock is not  listed  on any
exchange.  The stock is quoted on the Over-the-Counter  Bulletin Board under the
symbol  "CTOT.OB".  During the fourth quarter of 2005 and the first two weeks of
2006, the Company sold 445,000  shares of its common stock in a public  offering
for $13.50 per share.


                                       20
<PAGE>

         The  following  table  shows the high and low bid  prices of our common
stock  reported by the OTC  Bulletin  Board since the  completion  of our public
offering for the periods shown. The prices reflect inter-dealer prices,  without
retail  mark-up,   mark-down,   or  commission  and  may  not  represent  actual
transactions.  The prices  have been  adjusted  to reflect a 10% stock  dividend
declared in April 2006. "N/A" indicates periods where no data was available.

                                                           Year ended
                                                       December 31, 2006
                                                       -----------------
                                                       Low            High
                                                       ---            ----
         First Quarter .........................       N/A             N/A
         Second Quarter ........................       N/A             N/A
         Third Quarter .........................       N/A          $14.10
         Fourth Quarter ........................    $15.00          $16.50


         As of February 14, 2007, there were approximately 621 holders of record
of the Company's  common stock,  excluding  individual  participants in security
position listings.

         To date the  Company has not paid any cash  dividends,  and to maintain
its  capital,  does not expect to pay cash  dividends  in the near  future.  The
dividend  policy of the  Company is subject  to the  discretion  of the Board of
Directors and depends upon a number of factors,  including  earnings,  financial
conditions,  cash needs and general business  conditions,  as well as applicable
regulatory  considerations.  Because the Company  has no  operations  other than
those of the Bank and only has limited income of its own, the Company would rely
on  dividends  from  the  Bank as its  principal  source  of  cash  to pay  cash
dividends.

         Each national banking  association is required by federal law to obtain
the prior  approval of the OCC for the payment of  dividends if the total of all
dividends  declared  by the  board of  directors  of such  bank in any year will
exceed the total of (i) such bank's net profits (as defined and  interpreted  by
regulation)  for that year plus (ii) the  retained  net  profits (as defined and
interpreted  by  regulation)  for the  preceding  two years,  less any  required
transfers to surplus. In addition,  national banks can only pay dividends to the
extent that retained net profits (including the portion  transferred to surplus)
exceed bad debts (as defined by regulation).

         The  payment  of  dividends  by the  Company  and the  Bank may also be
affected  or limited by other  factors,  such as the  requirements  to  maintain
adequate capital above regulatory guidelines. In addition, if, in the opinion of
the applicable regulatory authority, a bank under its jurisdiction is engaged in
or is about to engage in an unsafe or unsound practice (which,  depending on the
financial  condition of the Bank, could include the payment of dividends),  such
authority may require, after notice and hearing, that such bank cease and desist
from such practice.  The OCC has indicated that paying  dividends that deplete a
national  bank's  capital  base to an  inadequate  level  would be an unsafe and
unsound banking practice.  The Federal Reserve, the OCC and the FDIC have issued
policy  statements,  which provide that bank holding companies and insured banks
should generally only pay cash dividends out of current operating earnings.


                                       21
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
Cornerstone Bancorp and Subsidiary
Easley, South Carolina


           We have  audited  the  accompanying  consolidated  balance  sheets of
Cornerstone  Bancorp and Subsidiary  (the "Company") as of December 31, 2006 and
2005,   and  the  related   consolidated   statements  of  income,   changes  in
shareholders' equity and comprehensive income (loss), and cash flows for each of
the years in the three year period ended December 31, 2006.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

           In our opinion,  the consolidated  financial  statements  referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position of Cornerstone Bancorp and Subsidiary at December 31, 2006 and 2005 and
the  results of their  operations  and their cash flows for each of the years in
the three year period ended December 31, 2006, in conformity  with United States
generally accepted accounting principles.




                                                          /s/ Elliott Davis, LLC


Greenville, South Carolina
March 19, 2007



                                       22
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                             December31,
                                                                                                             -----------
                                                                                                      2006                  2005
                                                                                                      ----                  ----
Assets

<S>                                                                                               <C>                 <C>
Cash and due from banks ...................................................................       $   2,696,623       $   2,716,965
Federal funds sold ........................................................................           3,215,000           3,183,000
                                                                                                  -------------       -------------
       Cash and cash equivalents ..........................................................           5,911,623           5,899,965

Investment securities
     Available-for-sale ...................................................................          16,175,621           9,689,665
     Held-to-maturity (Fair value $999,729  in 2006 and $3,707,125 in 2005) ...............           1,000,252           3,704,861
     Other investments ....................................................................             813,600             609,800

Loans, net ................................................................................          96,356,387          86,273,605
Property and equipment, net ...............................................................           4,414,995           4,577,858
Cash surrender value of life insurance policies ...........................................           1,628,967           1,573,038
Other assets ..............................................................................           1,324,434             972,872
                                                                                                  -------------       -------------
              Total assets ................................................................       $ 127,625,879       $ 113,301,664
                                                                                                  =============       =============


Liabilities And Shareholders' Equity

Liabilities
     Deposits
         Noninterest bearing ..............................................................       $  12,367,950       $  10,451,922
         Interest bearing .................................................................          89,298,246          81,200,119
                                                                                                  -------------       -------------
         Total deposits ...................................................................         101,666,196          91,652,041
     Customer repurchase agreements .......................................................           5,064,140           3,083,884
     Borrowings from Federal Home Loan Bank of Atlanta ....................................           2,695,671           4,346,505
     Other liabilities ....................................................................             661,145             391,249
                                                                                                  -------------       -------------

         Total liabilities ................................................................         110,087,152          99,473,679

Commitments and contingencies - Notes 10 and 14

Shareholders' equity
     Preferred stock, 10,000 shares authorized, no shares issued ..........................                   -                   -
     Common stock, no par value, 20,000,000 shares authorized, 1,777,313 and
       1,475,743 shares issued at December 31, 2006 and 2005, respectively ................          15,972,666          13,071,896
     Retained earnings ....................................................................           1,499,803             837,565
       Accumulated other comprehensive income (loss) ......................................              66,258             (81,476)
                                                                                                  -------------       -------------

         Total shareholders' equity .......................................................          17,538,727          13,827,985
                                                                                                  -------------       -------------

         Total liabilities and shareholders' equity .......................................       $ 127,625,879       $ 113,301,664
                                                                                                  =============       =============
</TABLE>

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



                                       23
<PAGE>


                       CORNERSTONE BANCORP AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                                Year ended December 31,
                                                                                                -----------------------
                                                                                       2006              2005              2004
                                                                                       ----              ----              ----
Interest Income
<S>                                                                                 <C>                <C>                <C>
     Loans and fees on loans ..............................................         $7,538,140         $5,631,109         $3,990,474
     Investment securities ................................................            791,730            463,770            493,578
     Federal funds sold and other .........................................            294,579            148,694             47,618
                                                                                    ----------         ----------         ----------

         Total interest income ............................................          8,624,449          6,243,573          4,531,670

Interest Expense
     Deposits .............................................................          2,896,671          1,944,612          1,176,198
       Federal funds sold and customer repurchase agreements ..............            116,409             53,873             67,348
     Federal Home Loan Bank advances ......................................            149,016            140,456             47,097
                                                                                    ----------         ----------         ----------

         Total interest expense ...........................................          3,162,096          2,138,941          1,290,643
                                                                                    ----------         ----------         ----------

         Net interest income ..............................................          5,462,353          4,104,632          3,241,027

     Provision for loan losses ............................................            445,896            140,347            197,010
                                                                                    ----------         ----------         ----------

         Net interest income after provision for loan losses ..............          5,016,457          3,964,285          3,044,017

Noninterest Income
     Mortgage loan origination fees .......................................            582,290            501,352            289,962
     Service fees on deposit accounts .....................................            472,420            408,561            383,125
     Gain on sale of security .............................................                  -                  -              5,230
     Gain on sale of land .................................................            241,696                  -                  -
     Other ................................................................             89,971            100,577             40,958
                                                                                    ----------         ----------         ----------

         Total noninterest income .........................................          1,386,377          1,010,490            719,275
                                                                                    ----------         ----------         ----------

Noninterest Expenses
     Salaries and benefits ................................................          2,305,982          1,953,315          1,520,890
     Occupancy and equipment ..............................................            567,355            512,011            438,848
     Data processing ......................................................            203,814            150,336            142,523
     Advertising ..........................................................             90,423             74,517             54,332
     Supplies .............................................................             94,157             99,805             65,402
     Professional fees ....................................................            166,006            110,645             95,790
     Directors fees .......................................................            105,850             69,175             58,100
     Deposit charge-offs ..................................................             51,516             24,383             65,999
     Other operating ......................................................            362,997            298,665            268,453
                                                                                    ----------         ----------         ----------

         Total noninterest expenses .......................................          3,948,100          3,292,852          2,710,337
                                                                                    ----------         ----------         ----------

         Income before income taxes .......................................          2,454,734          1,681,923          1,052,955

     Income tax provision .................................................            794,998            620,658            388,898
                                                                                    ----------         ----------         ----------

         Net income .......................................................         $1,659,736         $1,061,265         $  664,057
                                                                                    ==========         ==========         ==========

Earnings Per Common Share
     Basic ................................................................         $      .94         $      .81         $      .52
     Diluted ..............................................................         $      .91         $      .78         $      .51

Weighted Average Common Shares Outstanding
     Basic ................................................................          1,773,071          1,315,875          1,288,032
     Diluted ..............................................................          1,820,476          1,360,414          1,314,367

</TABLE>

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


                                       24
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                         AND COMPREHENSIVE INCOME (LOSS)

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                   Common stock                          other           Total
                                                                   ------------           Retained    comprehensive    shareholders'
                                                              Shares        Amount        earnings    income (loss)       equity
                                                              ------        ------        --------    -------------       ------

<S>                                                           <C>       <C>            <C>             <C>             <C>
Balance, December 31, 2003 ...........................        967,968   $  7,984,608   $    150,314    $     31,730    $  8,166,652
                                                                                                                       ------------
Net income ...........................................              -              -        664,057               -         664,057
   Other comprehensive income, net of income taxes:
   Unrealized loss on investment
        securities ...................................              -              -              -         (51,889)        (51,889)
                                                                                                                       ------------
   Comprehensive income ..............................                                                                      612,168
   Stock dividend (10%), net of
     cash in lieu of fractional
     shares ..........................................         96,688        269,204       (270,564)              -          (1,360)
                                                            ---------   ------------   ------------    ------------    ------------

 Balance, December 31, 2004 ..........................      1,064,656      8,253,812        543,807         (20,159)      8,777,460
                                                                                                                       ------------
Net income ...........................................              -              -      1,061,265               -       1,061,265
   Other comprehensive income, net of income taxes:
   Unrealized loss on investment
        securities ...................................              -              -              -         (61,317)        (61,317)
                                                                                                                       ------------
   Comprehensive income ..............................                                                                      999,948
   Stock dividend (10%), net of
     cash in lieu of fractional
     shares ..........................................        106,282        764,937       (767,507)              -          (2,570)
   Issuance of shares in secondary
       offering, net of offering
       expenses of $61,721 ...........................        304,805      4,053,147              -               -       4,053,147
                                                            ---------   ------------   ------------    ------------    ------------

Balance, December 31, 2005 ...........................      1,475,743     13,071,896        837,565         (81,476)     13,827,985
                                                                                                                       ------------

Net income ...........................................              -              -      1,659,736               -       1,659,736
   Other comprehensive income, net
     of income taxes:
   Unrealized gain on investment
       securities ....................................              -              -              -         147,734         147,734
                                                                                                                       ------------
   Comprehensive income ..............................                                                                    1,807,470
  Stock based compensation ...........................              -         19,784              -               -          19,784
   Stock dividend (10%), net of
       cash in lieu of fractional
       shares ........................................        161,375        994,462       (997,498)              -          (3,036)
   Issuance of shares in secondary
      offering, net of offering
       expenses ......................................        140,195      1,886,524              -               -       1,886,524
                                                            ---------   ------------   ------------    ------------    ------------

Balance, December 31, 2006 ...........................      1,777,313   $ 15,972,666   $  1,499,803    $     66,258    $ 17,538,727
                                                            =========   ============   ============    ============    ============
</TABLE>


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


                                       25
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              Year ended December 31,
                                                                                              -----------------------
                                                                                      2006               2005               2004
                                                                                      ----               ----               ----
Operating Activities
<S>                                                                              <C>                <C>                <C>
     Net income ...........................................................      $  1,659,736       $  1,061,265       $    664,057
     Adjustments to reconcile net income to net cash provided by
        operating activities
         Depreciation and net amortization ................................           276,521            258,796            233,714
         Deferred income tax benefit ......................................           (95,733)            (9,743)           (72,500)
         Provision for loan losses ........................................           445,896            140,347            197,010
         Gain on sale of land .............................................          (241,696)                 -             (1,255)
         Gain on sale of security .........................................                 -                  -             (5,230)
         Non-cash option expense ..........................................            19,784                  -                  -
         Increase in other assets .........................................          (311,758)          (282,515)           (34,709)
         Increase (decrease) in other liabilities .........................           193,791            (66,593)            36,302
                                                                                 ------------       ------------       ------------

             Net cash provided by operating activities ....................         1,946,541          1,101,557          1,017,389
                                                                                 ------------       ------------       ------------

Investing Activities
     Proceeds from maturities and principal paydowns of
        investment securities .............................................         8,077,893          1,644,197          6,972,660
     Proceeds from sales of securities ....................................                 -                  -            708,422
     Purchase of investment securities ....................................       (11,643,855)        (2,458,873)        (5,872,451)
     Purchase of FHLB and Federal Reserve stock, net ......................          (203,800)           (77,700)           (72,100)
     Purchase of life insurance policies ..................................                 -                  -           (421,183)
     Increase in loans, net ...............................................       (10,528,678)       (12,175,183)       (15,754,645)
     Proceeds from sale of property and equipment .........................           273,493                  -              8,299
     Purchase of property and equipment ...................................          (137,001)        (1,041,253)          (523,780)
                                                                                 ------------       ------------       ------------

             Net cash used for investing activities .......................       (14,161,948)       (14,108,812)       (14,954,778)
                                                                                 ------------       ------------       ------------

Financing Activities
     Net increase in deposits .............................................        10,014,155          9,133,097         17,232,725
     Net increase (decrease) in customer repurchase agreements ............         1,980,256         (2,400,109)          (288,199)
     Borrowings from Federal Home Loan Bank of Atlanta ....................                 -          4,045,000          3,400,000
     Repayments to Federal Home Loan Bank of Atlanta ......................        (1,650,834)        (3,060,787)        (5,000,000)
     Proceeds from sale of common stock, net ..............................         1,886,524          4,053,147                  -
     Cash paid in lieu of fractional shares ...............................            (3,036)            (2,570)            (1,360)
                                                                                 ------------       ------------       ------------

             Net cash provided by financing activities ....................        12,227,065         11,767,778         15,343,166
                                                                                 ------------       ------------       ------------

              Net increase (decrease) in cash and cash
                equivalents ...............................................            11,658         (1,239,477)         1,405,777

Cash and cash equivalents, beginning of year ..............................         5,899,965          7,139,442          5,733,665
                                                                                 ------------       ------------       ------------

Cash and cash equivalents, end of year ....................................      $  5,911,623       $  5,899,965       $  7,139,442
                                                                                 ============       ============       ============

Cash paid for:
     Interest .............................................................      $  3,118,302       $  2,128,897       $  1,246,900
                                                                                 ============       ============       ============
     Income taxes .........................................................      $    822,000       $    835,000       $    388,991
                                                                                 ============       ============       ============
</TABLE>


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


                                       26
<PAGE>


                       CORNERSTONE BANCORP AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

         Cornerstone Bancorp, (the "Company") was incorporated under the laws of
the State of South  Carolina  for the  purpose of  operating  as a bank  holding
company  for  Cornerstone  National  Bank (the  "Bank").  The  Company  obtained
regulatory approval to acquire the Bank and opened the Bank for business in 1999
with a total  capitalization of $6.0 million.  To increase capital available for
growth,  the Company  offered  445,000  shares of its common stock pursuant to a
prospectus  dated October 4, 2005. As of December 31, 2005,  304,805  shares had
been sold.  Subsequent  to December 31, 2005, by extension  through  January 15,
2006, the remaining  140,195  shares were sold.  Upon  completion,  the offering
added approximately $6.0 million to the Company's total capitalization.

         The Bank provides full commercial  banking services to customers and is
subject to  regulation by the Office of the  Controller of the Currency  ("OCC")
and the  Federal  Deposit  Insurance  Corporation.  The  Company  is  subject to
regulation by Federal  Reserve and to limited  regulation by the South  Carolina
State Board of Financial  Institutions.  The Bank maintains  branch locations in
Greenville  and  Piedmont,  South  Carolina in addition to its  headquarters  in
Easley, South Carolina. In 2004, the Bank established a wholly owned subsidiary,
Crescent Financial Services, Inc. ("Crescent"), which is an insurance agency. In
2006, 2005 and 2004, Crescent's transactions were immaterial to the consolidated
financial statements.

   Basis of presentation

     The consolidated  financial  statements include the accounts of the Company
     and its  wholly-owned  subsidiary,  the Bank.  The Company  operates as one
     business segment.  All significant  intercompany  balances and transactions
     have been  eliminated.  The  accounting and reporting  policies  conform to
     accounting  principles  generally  accepted in the United States of America
     and to general  practices  in the banking  industry.  The Company  uses the
     accrual basis of accounting.

   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 as of the date of the financial  statements and the
     reported amount of income and expenses during the reporting periods. Actual
     results could differ from those  estimates.  The Company's most significant
     estimates relate to the allowance for loan losses and income taxes.

   Concentrations of credit risk

     The Company makes loans to individuals and businesses in and around Upstate
     South Carolina for various personal and commercial purposes. The Bank has a
     diversified loan portfolio and the borrowers'  ability to repay their loans
     is not  dependent  upon any specific  economic  sector.  The Bank  monitors
     concentrations in its customer base using the North American Industry Codes
     ("NAIC"). As of December 31, 2006, the Bank has concentrations of credit in
     real estate rental and leasing, construction, retail trade, health care and
     social assistance, and other services, which by NAIC category comprise over
     25% of Tier 1 Capital adjusted for the allowance for loan losses.

   Investment securities

     The Company accounts for investment securities in accordance with Statement
     of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
     Investments  in  Debt  and  Equity  Securities".   The  statement  requires
     investments  in equity  and debt  securities  to be  classified  into three
     categories:

     1.   Available-for-sale  securities:  These  are  securities  that  are not
          classified as either held to maturity or as trading securities.  These
          securities  are reported at fair market  value.  Unrealized  gains and
          losses are reported,  net of income taxes,  as separate  components of
          shareholders'   equity  (accumulated  other   comprehensive   income).
          (Continued)

                                       27
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

     2.   Held-to-maturity  securities: These are investment securities that the
          Company  has the  ability  and  intent to hold until  maturity.  These
          securities are stated at cost,  adjusted for  amortization of premiums
          and the accretion of discounts.

     3.   Trading  securities:  These are  securities  that are  bought and held
          principally  for the  purpose of selling in the near  future.  Trading
          securities are reported at fair market value,  and related  unrealized
          gains and losses are recognized in the income  statement.  The Company
          has no trading securities.

     The  Company  reviews  all  investments  with  unrealized  losses as of the
     balance  sheet date for  possible  impairment.  Our review  consists  of an
     examination of each security with regard to its issuer, credit rating, time
     to maturity and likelihood of sale prior to maturity. Any losses determined
     to be other than temporary are recognized through the income statement.

     Other  investments  include  the Bank's  stock  investments  in the Federal
     Reserve Bank of Richmond ("Reserve Bank") and the Federal Home Loan Bank of
     Atlanta  ("FHLB").  The Bank, as a member  institution,  is required to own
     certain  stock  investments  in the  Reserve  Bank and  FHLB.  The stock is
     generally pledged against any borrowings from the Reserve Bank and FHLB. No
     ready  market  exists  for the  stock and it has no  quoted  market  value.
     However, redemption of these stock investments has historically been at par
     value.

     Gains or losses on dispositions  of investment  securities are based on the
     differences  between the net proceeds and the adjusted  carrying  amount of
     the securities sold, using the specific identification method.

   Loans, interest and fee income on loans

     Loans are stated at the principal  balance  outstanding.  Unearned discount
     and the allowance for possible loan losses are deducted from total loans in
     the balance sheet.  Interest income is recognized over the term of the loan
     based on the principal amount outstanding.

     Generally,  the accrual of interest will be  discontinued on impaired loans
     when  principal  or interest  becomes 90 days past due, or when  payment in
     full is not anticipated,  and any previously accrued interest on such loans
     will be reversed  against  current income.  Any subsequent  interest income
     will be recognized on a cash basis when received unless collectibility of a
     significant  amount  of  principal  is in  serious  doubt.  In such  cases,
     collections are credited first to the remaining principal balance on a cost
     recovery  basis.  An impaired  loan will not be returned to accrual  status
     unless principal and interest are current and the borrower has demonstrated
     the ability to continue  making payments as agreed.  Non-performing  assets
     include real estate acquired  through  foreclosure or deed taken in lieu of
     foreclosure, and loans on non-accrual status.

     Fee  income  on  loans is  recognized  as  income  at the  time  loans  are
     originated.  Due to the  short-term  nature of the  majority  of the Bank's
     loans  and  the  immateriality  of the net  deferred  amount,  this  method
     approximates  the income that would be earned if the Company  deferred loan
     fees and costs under SFAS 91.

   Allowance for loan losses

     The Company provides for loan losses using the allowance method. Loans that
     are  determined  to be  uncollectible  are charged  against the  allowance.
     Provisions for loan losses and recoveries on loans  previously  charged off
     are added to the  allowance.  The  provision  for loan  losses  charged  to
     operating  expenses reflects the amount deemed appropriate by management to
     establish an adequate  reserve to meet the probable loan losses incurred in
     the current loan portfolio.  Management's judgment is based on periodic and
     regular evaluation of individual loans, the overall risk characteristics of
     the various portfolio  segments,  past experience with losses,  delinquency
     trends, and prevailing economic conditions.  While management uses the best
     information  available  to  make  evaluations,  future  adjustments  to the
     allowance may be necessary if economic conditions differ substantially from
     the  assumptions  used in making the  evaluations.  The  allowance for loan
     losses  is also  subject  to  periodic  evaluation  by  various  regulatory
     authorities and may be subject to adjustment upon their examination.
                                                                     (Continued)


                                       28
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

     The Bank  accounts  for  impaired  loans in  accordance  with SFAS No. 114,
     "Accounting by Creditors for Impairment of a Loan." This standard  requires
     that all  lenders  value a loan at the loan's  fair value if it is probable
     that the lender will be unable to collect all amounts due  according to the
     terms  of  the  loan  agreement.   Factors   considered  by  management  in
     determining  impairment  include payment status,  collateral value, and the
     probability of collecting  scheduled  principal and interest  payments when
     due.  Loans  that  experience  insignificant  payment  delays  and  payment
     shortfalls generally are not classified as impaired.  Management determines
     the significance of payment delays and payment shortfalls on a case-by-case
     basis taking into  consideration  all the circumstances of the loan and the
     borrower,  including  the length of the delay,  reasons for the delay,  the
     borrower's  payment  record and the amount of the  shortfall in relation to
     the principal and interest owed. Impairment is determined on a case-by-case
     basis.  The fair value of an impaired loan may be determined based upon the
     present  value  of  expected  cash  flows,  market  price of the  loan,  if
     available,  or value of the underlying collateral.  Expected cash flows are
     required to be discounted at the loan's effective interest rate.

     Under SFAS No. 114, when the ultimate  collectibility of an impaired loan's
     principal is in doubt,  wholly or partially,  all cash receipts are applied
     to principal. Once the reported principal balance has been reduced to zero,
     future cash receipts are applied to interest income, to the extent that any
     interest  has  been  foregone.   Further  cash  receipts  are  recorded  as
     recoveries of any amounts previously charged off.

     A loan is also considered  impaired if its terms are modified in a troubled
     debt  restructuring.  For these accruing  impaired loans, cash receipts are
     typically  applied to principal and interest  receivable in accordance with
     the terms of the restructured loan agreement. Interest income is recognized
     on these loans using the accrual method of accounting.

   Property and equipment

     Property and equipment are stated at cost, net of accumulated depreciation.
     Depreciation is computed using the straight-line  method over the estimated
     useful lives of the related assets.  Maintenance and repairs are charged to
     operations, while major improvements are capitalized. Upon retirement, sale
     or other  disposition of property and equipment,  the cost and  accumulated
     depreciation are eliminated from the accounts, and gain or loss is included
     in income from operations.

   Income taxes

     The Company  accounts  for income  taxes in  accordance  with SFAS No. 109,
     "Accounting for Income Taxes." Under SFAS No. 109,  deferred tax assets and
     liabilities  are recognized  for the expected  future tax  consequences  of
     events that have been recognized in the consolidated  financial  statements
     or tax return.  Deferred tax assets and  liabilities are measured using the
     enacted tax rates expected to apply to taxable income in the years in which
     those temporary differences are expected to be realized or settled.

   Advertising and public relations expense

     Advertising, promotional and other business development 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 expensed in the period
     in which the direct mailings are sent.

   Earnings per common share

     Basic  earnings  per common  share is computed on the basis of the weighted
     average  number of common shares  outstanding  in accordance  with SFAS No.
     128, "Earnings per Share." The treasury stock method is used to compute the
     effect of stock  options on the weighted  average  number of common  shares
     outstanding for diluted  earnings per common share. As of December 31, 2006
     there were 47,405  common stock  equivalents,  all of which were related to
     options issued by the Company.  Options to purchase 19,800 shares of common
     stock were  antidilutive  as of December 31, 2006 and were omitted from the
     diluted share calculation.  The Company declared 10 percent stock dividends
     to  shareholders  of record as of May 9, 2006,  May 10, 2005, May 11, 2004,
     March 17,

                                                                     (Continued)


                                       29
<PAGE>


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

     2003  and  April  30,  2002.  All  share  and  per  share  amounts  on  the
     Consolidated  Statements  of Income  have been  restated  to reflect  these
     transactions.

Cash surrender value of life insurance policies

     Cash surrender value of life insurance  policies  represents the cash value
     of policies on certain officers of the Bank.

Statement of cash flows

     For purposes of reporting cash flows,  cash and cash  equivalents are those
     amounts which have an original maturity of three months or less.

Fair values of financial instruments

     SFAS No. 107,  "Disclosures About Fair Value of Financial  Instruments," as
     amended by SFAS No. 119, requires  disclosure of fair value information for
     financial instruments, whether or not recognized in the balance sheet, when
     it is  practicable  to  estimate  the fair  value.  SFAS No. 107  defines a
     financial  instrument  as cash,  evidence  of an  ownership  interest in an
     entity or  contractual  obligations  that  require the  exchange of cash or
     other financial  instruments.  Certain items are specifically excluded from
     the  disclosure  requirements,  including  the Company's  common stock.  In
     addition, other nonfinancial instruments such as premises and equipment and
     other   assets  and   liabilities   are  not  subject  to  the   disclosure
     requirements.

      The  following  methods  and  assumptions  were  used  by the  Company  in
      estimating fair values of financial instruments as disclosed herein:

          Cash and due from  banks - The  carrying  amounts of cash and due from
          banks approximate their fair value.

          Federal  funds  sold - The  carrying  amounts  of  federal  funds sold
          approximate their fair value.

          Investment  securities  - Fair values for  investment  securities  are
          based on quoted market  prices.  The carrying  amounts of Reserve Bank
          and FHLB stocks approximate their fair values.

          Cash surrender  value of life insurance  policies - The cash surrender
          value of life insurance  policies held by the Bank  approximates  fair
          values of the policies.

          Loans - For variable rate loans that reprice  frequently and for loans
          that mature within one year, fair values are based on carrying values.
          Fair values for all other loans are estimated  using  discounted  cash
          flow analyses,  with interest rates  currently being offered for loans
          with similar terms to borrowers of similar credit quality. Fair values
          for impaired loans are estimated  using  discounted cash flow analyses
          or underlying collateral values, where applicable.

          Deposits - Fair values for deposits are  estimated  using a discounted
          cash flow  calculation  that applies  interest rates  currently  being
          offered  on similar  accounts  to a schedule  of  aggregated  expected
          monthly  maturities.  Repricing time frames for non-maturing  deposits
          are estimated using FDICIA 305 guidelines.

          Customer repurchase  agreements - Fair values of repurchase agreements
          are  estimated  using a  discounted  cash flow  analysis  that applies
          interest  rates  currently  being  offered  on similar  accounts  to a
          schedule of aggregated expected monthly maturities.

          Borrowings  from Federal  Home Loan Bank of Atlanta - Borrowings  from
          the FHLB  which  have  variable  rates of  interest  are  deemed to be
          carried  at fair  value.  Fair  values  of  fixed  rate  advances  are
          estimated  using a  discounted  cash  flow  calculation  that  applies
          interest  rates  currently  being offered on advances to a schedule of
          aggregated expected maturities.

                                                                     (Continued)



                                       30
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

Stock Based Compensation

     The  Company  has  issued  stock  options  to  certain  directors  who were
     organizers of the Company and the Bank, and also has a stock-based director
     and employee  compensation  plan (the "2003 Plan") as further  described in
     Note 16. Under the 2003 Plan,  18,000  options were granted  during each of
     2004,  2005, and 2006.  Subsequent to the grant dates,  10% stock dividends
     were  declared,  which  converted  the  number of options  outstanding  and
     decreased  the  exercise   price  as  well.  See  Note  16  for  additional
     information.

     In 2006 the Company  adopted the provisions of SFAS No. 123(R) "Share Based
     Payment."  SFAS No.  123(R)  requires  companies  to measure  all  employee
     stock-based  compensation  awards using a fair value method and record such
     expense in their financial  statements.  In preparation for adoption of the
     standard,  the Company elected to accelerate the vesting of options granted
     in 2004 and 2005 under the 2003 Plan.

     The following  table  illustrates the effect on net income and earnings per
     share if the Company had applied the fair value  recognition  provisions of
     SFAS No. 123 (R), "Accounting for Stock-Based Compensation," to stock-based
     compensation. It includes the effect of accelerating the vesting of options
     granted under the 2003 plan in 2005.

<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                               -----------------------
                                                                                      2006              2005                2004
                                                                                      ----              ----                ----
Net income:
<S>                                                                             <C>                 <C>                 <C>
As reported ..............................................................      $   1,629,736       $   1,061,265       $   664,057
Add:  Stock-based employee compensation expense included in
     reported net income, net of related tax effects .....................             13,057                   -                 -
Deduct:  Total stock-based compensation expense determined
       under fair value  based  method  for all  awards,  net of
     related tax effects .................................................            (13,057)           (105,581)           (5,844)
                                                                                -------------       -------------       -----------
Pro forma ................................................................      $   1,629,736       $     955,684       $   658,213
                                                                                =============       =============       ===========

Basic earnings per common share
As reported ..............................................................      $            .94    $            .81    $        .52
Pro forma ................................................................      $            .94    $            .73    $        .51

Diluted earnings per common share
As reported ..............................................................      $            .91    $            .78    $        .51
Pro forma ................................................................      $            .91    $            .70    $        .50
</TABLE>

     The fair value of an option  grant is  estimated on the date of grant using
     the  Black-Scholes  option pricing model.  The risk free interest rate used
     for  the  2006,  2005  and  2004  grants  was  4.36%,   4.01%,  and  4.15%,
     respectively,  which was the 10 Year Constant  Maturity Rate on US Treasury
     Securities during the months in which the options were granted. The assumed
     dividend rate was zero and the expected  option life was 10 years for 2006,
     2005 and 2004 grants.  Volatility is difficult to measure accurately due to
     the low volume of trading of the Company's  stock.  The common stock is not
     listed on any exchange and has no active trading market. Beginning in 2006,
     the stock is quoted on the Over-the-Counter  Bulletin Board. The volatility
     assumption used for 2006 option grants was 18% and for 2005 and 2004 option
     grants was 6% based on information available at the date of the grants.

   Recently issued accounting standards

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

     In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
     Interpretation  No. 48 ("FIN 48"),  "Accounting  for  Uncertainty in Income
     Taxes." FIN 48 clarifies the accounting for uncertainty in income

                                                                     (Continued)


                                       31
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

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

     In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
     SFAS 157 defines fair value,  establishes a framework  for  measuring  fair
     value in generally accepted accounting principles,  and expands disclosures
     about fair value measurements.  This standard does not require any new fair
     value measurements,  but rather eliminates inconsistencies found in various
     prior  pronouncements.  SFAS 157 is effective for the Company on January 1,
     2008 and is not  expected  to have a  significant  impact on the  Company's
     financial position, results of operations, or cash flows.

     In September, 2006, The FASB ratified the consensuses reached by the FASB's
     Emerging Issues Task Force ("EITF")  relating to EITF 06-4  "Accounting for
     the Deferred Compensation and Postretirement Benefit Aspects of Endorsement
     Split-Dollar  Life Insurance  Arrangements."  EITF 06-4 addresses  employer
     accounting for endorsement  split-dollar  life insurance  arrangements that
     provide a benefit to an employee  that extends to  postretirement  periods.
     Employers  should  recognize a liability for future  benefits in accordance
     with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
     Than  Pensions",  or Accounting  Principles  Board ("APB")  Opinion No. 12,
     "Omnibus  Opinion--1967." EITF 06-4 is effective for fiscal years beginning
     after December 15, 2006.  Entities should recognize the effects of applying
     this Issue through  either (a) a change in accounting  principle  through a
     cumulative-effect adjustment to retained earnings or to other components of
     equity or net  assets in the  statement  of  financial  position  as of the
     beginning of the year of adoption or (b) a change in  accounting  principle
     through  retrospective  application  to all prior  periods.  The Company is
     currently  analyzing  the effect of adoption of EITF 06-4 on its  financial
     position, results of operations and cash flows.

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

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



                                       32
<PAGE>

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

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

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  times, or on different  bases,
     than its interest-earning assets. Credit risk is the risk of default on the
     Company's  loan and  investment  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.

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

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

NOTE 3 - FEDERAL FUNDS SOLD

         When the Bank's cash  reserves  (Note 2) are in excess of the  required
amount,  it may lend any excess to other banks on a daily basis.  As of December
31, 2006 and 2005 federal  funds sold  amounted to  $3,215,000  and  $3,183,000,
respectively.

NOTE 4 - INVESTMENT SECURITIES

         The   amortized   cost  and  fair   value  of   investment   securities
available-for-sale are as follows:

<TABLE>
<CAPTION>
                                                                                            December 31, 2006
                                                                                            -----------------
                                                                                             Gross unrealized
                                                                     Amortized               ----------------                Fair
                                                                       cost               Gains           Losses             value
                                                                       ----               -----           ------             -----
<S>                                                                <C>               <C>               <C>               <C>
Government sponsored enterprises ...........................       $ 9,120,619       $    98,216       $    28,076       $ 9,190,759
Mortgage-backed securities .................................         3,992,287            47,763            21,728         4,018,322
Municipal bonds ............................................         2,962,324            11,908             7,692         2,966,540
                                                                   -----------       -----------       -----------       -----------
        Total investment securities available-
        for-sale ...........................................       $16,075,230       $   157,887       $    57,496       $16,175,621
                                                                   ===========       ===========       ===========       ===========
<CAPTION>

                                                                                            December 31, 2005
                                                                                            -----------------
                                                                                             Gross unrealized
                                                                     Amortized               ----------------                Fair
                                                                       cost               Gains           Losses             value
                                                                       ----               -----           ------             -----
<S>                                                                    <C>              <C>              <C>              <C>
Government sponsored enterprises ...............................       $7,762,658       $        -       $   87,089       $7,675,569
Mortgage-backed securities .....................................          689,226                -           26,147          663,079
Municipal bonds ................................................        1,361,229              116           10,328        1,351,017
                                                                       ----------       ----------       ----------       ----------
        Total investment securities available-
        for-sale ...............................................       $9,813,113       $      116       $  123,564       $9,689,665
                                                                       ==========       ==========       ==========       ==========
</TABLE>

                                                                     (Continued)


                                       33
<PAGE>
NOTE 4 - INVESTMENT SECURITIES, Continued

         While thirteen of the Company's  Government sponsored enterprise bonds,
municipal  bonds and  mortgage-backed  securities  available  for sale are in an
unrealized  loss position as of December 31, 2006,  none of these  securities is
expected  to have a loss of  principal  at final  maturity.  The Company has the
intent  and  ability  to hold  these  securities  until  such  time as the value
recovers  or the  securities  mature.  The Company  believes,  based on industry
analyst  reports  and  credit  ratings,  that  the  deterioration  in  value  is
attributable  to changes in market  interest rates and not in the credit quality
of   the   issuers   and   therefore,    these   losses   are   not   considered
other-than-temporary.  The table below summarizes,  by investment category,  the
length  of time  that  individual  securities  have  been in a  continuous  loss
position as of December 31, 2006.
<TABLE>
<CAPTION>
                                                       Less than Twelve Months                Over Twelve Months
                                                       -----------------------                ------------------
                                                                                          Gross                             Total
                                                   Gross Unrealized                     Unrealized                        Unrealized
                                                        Losses         Fair Value        Losses          Fair Value        Losses
                                                        ------         ----------        ------          ----------        ------
<S>                                                   <C>              <C>              <C>              <C>              <C>
Government sponsored enterprises ..............       $    1,362       $  498,239       $   26,714       $2,236,444       $   28,076
Mortgage-backed securities ....................           16,855          262,213            4,873          244,966           21,728
Municipal bonds ...............................              289          250,570            7,403          891,313            7,692
                                                      ----------       ----------       ----------       ----------       ----------
           Total ..............................       $   18,506       $1,011,022       $   38,990       $3,372,723       $   57,496
                                                      ==========       ==========       ==========       ==========       ==========
</TABLE>

         The   amortized   cost  and  fair   value  of   investment   securities
held-to-maturity  as of December 31, 2006 and 2005 are  summarized  in the table
below.  The  security  held to maturity  as of  December  31, 2006 has been in a
continuous unrealized loss position for less than twelve months. The Company has
the intent and ability to hold this security until it matures in February, 2007.
<TABLE>
<CAPTION>
                                                                          Held-to-Maturity

                                                                           December 31, 2006
                                                                           -----------------
                                                                            Gross unrealized
                                                 Amortized                  ----------------                    Fair
                                                   cost                    Gains            Losses              value
                                                   ----                    -----            ------              -----
<S>                                             <C>                        <C>               <C>              <C>
Government sponsored enterprises ...........    $1,000,252                 $   -             $523             $999,729
                                                 =========                 =====             ====              =======
<CAPTION>
                                                                           December 31, 2005
                                                                           -----------------
                                                                            Gross unrealized
                                                 Amortized                  ----------------                    Fair
                                                   cost                    Gains            Losses              value
                                                   ----                    -----            ------              -----
<S>                                             <C>                       <C>               <C>             <C>
Government sponsored enterprises ............   $3,704,861                $5,079            $2,815          $3,707,125
                                                 =========                ======            ======           =========
</TABLE>

         The Bank,  as a member  institution,  is  required  to own stock in the
Reserve  Bank and the  FHLB.  These  stocks  are  included  in the  accompanying
Consolidated  Balance  Sheets under the caption  "Other  investments".  No ready
market exists for these stock  investments and they have no quoted market value.
However, redemption of these stocks has historically been at par value.

         The  amortized  cost and fair value of securities at December 31, 2006,
by contractual  maturity,  are shown in the following chart. Expected maturities
may differ from contractual  maturities  because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

                                                           December 31, 2006
                                                     Amortized          Fair
                                                        Cost            Value
                                                        ----            -----
Within one year ............................       $ 2,763,410       $ 2,746,174
Due after one through five years ...........         1,999,600         1,991,225
Due after five through ten years ...........         7,344,315         7,413,546
After ten years or no maturity .............         5,781,757         5,838,005
                                                   -----------       -----------
    Total investment securities ............       $17,889,082       $17,988,950
                                                   ===========       ===========

                                                                     (Continued)
                                       34
<PAGE>

NOTE 4 - INVESTMENT SECURITIES, Continued

         At  December  31,  2006  and  2005,  securities  with a fair  value  of
$8,669,970 and $7,467,531,  respectively,  were pledged to collateralize  public
deposits,  sweep  accounts,  and repurchase  agreements.  There were no realized
gains or losses for the years ended  December 31, 2006 or 2005. The Company sold
one security in 2004 at a gain of $5,230.

NOTE 5 - LOANS
         The composition of net loans by major loan category is presented below.

                                                         December 31,
                                                         ------------
                                                  2006                  2005
                                                  ----                  ----

Commercial .............................       $ 17,009,520        $ 19,092,140
Real estate - construction .............         27,129,952          21,267,137
Real estate - mortgage .................         50,312,320          45,379,096
Consumer ...............................          3,104,594           1,593,527
                                               ------------        ------------

Loans, gross ...........................         97,556,386          87,331,900

Less allowance for loan losses .........         (1,199,999)         (1,058,295)
                                               ------------        ------------

Loans, net .............................       $ 96,356,387        $ 86,273,605
                                               ============        ============


         At  December  31, 2006 and 2005 there were no  nonaccruing  or impaired
loans.  Activity in the allowance  for loan losses for the years ended  December
31, 2006, 2005, and 2004 is summarized in the table below.

<TABLE>
<CAPTION>
                                                                                            Year ended December 31,
                                                                                            -----------------------
                                                                                2006                  2005                    2004
                                                                                ----                  ----                    ----

<S>                                                                         <C>                   <C>                   <C>
Allowance for loan losses, beginning of year .....................          $ 1,058,295           $   919,384           $   727,971
Provision for loan losses ........................................              445,896               140,347               197,010
Charge-offs ......................................................             (304,192)               (1,436)               (5,597)
Recoveries .......................................................                    -                     -                     -
                                                                            -----------           -----------           -----------

Allowance for loan losses, end of year ...........................          $ 1,199,999           $ 1,058,295           $   919,384
                                                                            ===========           ===========           ===========
</TABLE>


         As of December 31, 2006,  approximately $53.4 million or 54.8% of total
gross loans were variable rate loans.  As of December 31, 2006,  the FHLB held a
blanket lien on single  family real estate loans  identified  by the Bank to the
FHLB as eligible collateral for borrowings.

NOTE 6 - PROPERTY AND EQUIPMENT

         Components of property and equipment  included in the balance sheet are
as follows:

                                                            December 31,
                                                            ------------
                                                      2006               2005
                                                      ----               ----

Land and improvements ......................      $ 1,445,531       $ 1,477,328
Bank premises ..............................        2,801,162         2,801,162
Furniture, equipment and software ..........        1,310,318         1,252,628
Vehicles ...................................           66,065            66,065
Construction in progress ...................           64,209                 -
                                                  -----------       -----------
        Property and equipment .............        5,687,285         5,597,183
Accumulated depreciation ...................       (1,272,290)       (1,019,325)
                                                  -----------       -----------
    Property and equipment, net ............      $ 4,414,995       $ 4,577,858
                                                  ===========       ===========

                                                                     (Continued)


                                       35
<PAGE>

NOTE 6 - PROPERTY AND EQUIPMENT, Continued

         Construction  in  progress  relates to costs  incurred  to date for the
Company's  operations center. The cost of building and furnishing the operations
center is expected to be approximately $1.6 million. Construction is expected to
be completed in the third quarter of 2007.

         Depreciation  expense for the years ended December 31, 2006,  2005, and
2004, amounted to $268,067, $242,378, and $212,605,  respectively.  Depreciation
is charged to  operations  over the  estimated  useful lives of the assets.  The
estimated  useful  lives and methods of  depreciation  for the  principal  items
follow:

<TABLE>
<CAPTION>
          Type of Asset                                Life in Years                     Depreciation Method
-------------------------------------        ------------------------------------       ----------------------------
<S>                                                         <C>                               <C>
Furniture, equipment and software                           3 to 7                            Straight-line
Improvements                                                5 to 40                           Straight-line
Vehicles                                                    5                                 Straight-line
</TABLE>


NOTE 7 - DEPOSITS

         The following is a detail of the deposit accounts as of:

                                                           December 31,
                                                           ------------
                                                     2006                2005
                                                     ----                ----

Noninterest bearing ......................       $ 12,367,950       $ 10,451,922
Interest bearing:
     NOW accounts ........................         15,166,095         15,965,816
     Money market accounts ...............          6,349,116          6,244,480
     Savings .............................          3,743,368          3,545,435
     Time, less than $100,000 ............         35,926,319         29,438,852
     Time, $100,000 and over .............         28,113,348         26,005,536
                                                 ------------       ------------

     Total deposits ......................       $101,666,196       $ 91,652,041
                                                 ============       ============

         Interest  expense on time deposits greater than $100,000 was $1,058,667
in 2006, $699,928 in 2005, and $374,435 in 2004. Securities issued by government
sponsored  enterprises with an amortized cost of $1,933,158 and $2,233,158 (fair
value of $1,940,549 and $2,228,844) in 2006 and 2005, respectively, were pledged
as collateral for public funds.

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

                          2007 .....................    $49,072,273
                          2008 .....................      6,345,737
                          2009 .....................      5,745,423
                          2010 .....................      2,874,542
                          2011 .....................          1,692
                                                        -----------
                                                        $64,039,667
                                                        ===========


NOTE 8 - CUSTOMER REPURCHASE AGREEMENTS

         Customer repurchase agreements consist of the following:

                                                             December 31,
                                                             ------------
                                                       2006                2005
                                                       ----                ----
Sweep accounts .............................        $1,864,140        $1,783,884
Retail repurchase agreements ...............         3,200,000         1,300,000
                                                    ----------        ----------
                                                    $5,064,140        $3,083,884
                                                    ==========        ==========

                                                                     (Continued)


                                       36
<PAGE>

NOTE 8 - CUSTOMER REPURCHASE AGREEMENTS, Continued

         The Bank enters into sweep and retail  repurchase  agreements  with its
customers.  The sweep  agreements  generally mature  overnight.  At December 31,
2006, the Bank had five retail repurchase agreements that mature in 2007 and one
that matures in 2008. Securities issued by government sponsored enterprises with
an amortized  cost of $6,700,000  and  $5,300,000  (fair value of $6,729,421 and
$5,238,686)  were pledged as collateral  for the sweep  accounts and  repurchase
agreements, at December 31, 2006 and 2005, respectively.


NOTE 9 -BORROWINGS FROM FEDERAL HOME LOAN BANK OF ATLANTA

         At December 31, 2006 and 2005,  the Bank had a line of credit to borrow
funds from the FHLB in the amount of 10% of the Bank's  assets.  Funds  borrowed
from the FHLB are  collateralized  by a blanket lien on eligible  single  family
mortgage loans. At December 31, the Bank had advances outstanding as follows:

<TABLE>
<CAPTION>
                         December 31,
                         ------------
                    2006              2005       Interest Rate     Maturity Date              Terms
                    ----              ----       -------------     -------------              -----
<S>                <C>             <C>                <C>            <C>              <C>
                   $        -      $1,500,000         2.91%          10/20/2006             Fixed rate
                    1,500,000       1,500,000         3.60           10/20/2008             Fixed rate
                      311,111         355,556         4.49           12/01/2013       Fixed rate, amortizing
                      285,185         324,074         4.89           4/14/2014        Fixed rate, amortizing
                      599,375         666,875         4.78           7/27/2015        Fixed rate, amortizing
                   ----------      ----------
                   $2,695,671      $4,346,505
                   ==========      ==========
</TABLE>

         During 2006, the highest balance  outstanding at any month end was $4.3
million.  The average  balance of FHLB advances for 2006 was $4.0  million.  The
average  interest  rate paid on advances  in 2006 was 3.75%.  During  2005,  the
highest  balance  as of any  month  end for  borrowings  from  the FHLB was $6.7
million.  The  average  rate paid on the  advances  during  2005 was 3.56%.  The
average balance of FHLB advances for 2005 was $3.9 million.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

         The Bank may  become  party to  litigation  and  claims  arising in the
normal  course of business.  As of December 31,  2006,  there was no  litigation
pending.

         The Company has  approximately  three years  remaining  on its contract
with a data, item, and ATM processing service.  Monthly costs for these services
are currently approximately $17,000.

         The Company has signed  contracts  for  construction  of an  operations
center next to the Company's main office  building.  Total costs of construction
and  furnishings  are estimated at $1.6 million.  Construction is expected to be
completed in the third quarter of 2007.

         The Company has signed  change of control  agreements  with four of its
executive  officers.  These  agreements  provide  for  various  payments  to the
executives in certain  circumstances  in the event of a change in control of the
Company.

         From time to time the Bank may guarantee  merchant credit card accounts
on behalf of certain customers. At December 31, 2006 the total amount guaranteed
by the Bank related to merchant credit card accounts was immaterial.

         Refer to Note 14  concerning  financial  instruments  with off  balance
sheet risk.


NOTE 11 - UNUSED LINES OF CREDIT

         At December 31,  2006,  the Bank had unused lines of credit to purchase
federal funds totaling  $4,800,000 from unrelated  banks.  These lines of credit
are available on a one to fourteen-day  basis for general corporate  purposes of
the Bank.  The lenders  have  reserved  the right to withdraw the lines at their
option.

                                       37
<PAGE>
NOTE 12 - INCOME TAXES

         The  provision  for income taxes is  reconciled to the amount of income
tax  computed at the federal  statutory  rate on income  before  income taxes as
follows:
<TABLE>
<CAPTION>
                                                                                     Year ended December 31,
                                                                                     -----------------------
                                                                    2006                       2005                    2004
                                                                    ----                       ----                    ----
<S>                                                    <C>                 <C>    <C>                 <C>    <C>                 <C>
Tax expense at statutory rate ......................   $ 834,610           34%    $ 571,850           34%    $ 357,800           34%
Increase (decrease) in taxes resulting from:
     State income taxes, net of federal
          benefit ..................................      49,495            2        32,500            2        20,800            2
       Tax-exempt investments ......................     (25,462)          (1)       (4,986)           -          (861)           -
       Increase in cash value of life insurance ....     (19,016)          (1)      (19,674)          (1)       (4,023)           -
     Other .........................................     (44,629)          (2)       40,968            2        15,182            1
                                                       ---------           --     ---------           --     ---------           --
Income tax provision ...............................   $ 794,998           32%    $ 620,658           37%    $ 388,898           37%
                                                       =========           ==     =========           ==     =========           ==
</TABLE>

         The income tax effects of cumulative temporary  differences at December
31, 2006 and 2005 are as follows:
<TABLE>
<CAPTION>
                                                                                                         2006                 2005
                                                                                                         ----                 ----
Deferred tax assets:
<S>                                                                                                    <C>                  <C>
        Allowance for loan losses ........................................................             $379,915             $358,732
        Unrealized net loss on securities available for sale .............................                    -               41,972
        Other ............................................................................               63,539                9,121
                                                                                                       --------             --------
                                                                                                        443,454              409,825
                                                                                                       --------             --------
Deferred tax liabilities:
        Unrealized net gain on securities available for sale .............................               34,133                    -
        Depreciation .....................................................................              106,145              121,678
        Prepaid expenses .................................................................               27,833               32,432
                                                                                                       --------             --------
                                                                                                        168,111              154,110
                                                                                                       --------             --------
               Net deferred tax asset ....................................................             $275,343             $255,715
                                                                                                       ========             ========
</TABLE>

         The net deferred taxes are included in other assets in the consolidated
balance sheets.

         The following  summary of the  provision for income taxes  includes tax
deferrals  that arise from temporary  differences in the  recognition of certain
items of revenue and expense for tax and financial reporting purposes:
<TABLE>
<CAPTION>
                                                                                          Year ended December 31,
                                                                                          -----------------------
                                                                              2006                   2005                   2004
                                                                              ----                   ----                   ----
<S>                                                                       <C>                     <C>                     <C>
Income taxes currently payable .............................              $ 890,731               $ 630,401               $ 461,398

Deferred income tax benefit ................................                (95,733)                 (9,743)                (72,500)
                                                                          ---------               ---------               ---------
        Income tax provision ...............................              $ 794,998               $ 620,658               $ 388,898
                                                                          =========               =========               =========
</TABLE>

NOTE 13 - RELATED PARTY TRANSACTIONS

         Certain directors, executive officers and companies with which they are
affiliated,  are  customers of and have loan  transactions  with the Bank in the
ordinary  course of business.  These loans were made on  substantially  the same
terms, including interest rates and collateral,  as those prevailing at the time
for comparable arms-length transactions.

                                                                     (Continued)

                                       38
<PAGE>

NOTE 13 - RELATED PARTY TRANSACTIONS, Continued

         A  summary  of  loan  transactions  with  directors,   including  their
affiliates, and executive officers is as follows:

<TABLE>
<CAPTION>
                                                                                          Year ended December 31,
                                                                                          -----------------------
                                                                            2006                    2005                   2004
                                                                            ----                    ----                   ----
<S>                                                                     <C>                     <C>                     <C>
Balance, beginning of year .................................            $ 6,269,599             $ 4,476,992             $ 3,725,723
New loans or lines of credit ...............................              4,354,342               4,418,461               3,627,940
Payments on loans or lines of credit .......................             (4,787,944)             (2,625,854)             (2,876,671)
                                                                        -----------             -----------             -----------
Balance, end of year .......................................            $ 5,835,997             $ 6,269,599             $ 4,476,992
                                                                        ===========             ===========             ===========
</TABLE>


         Deposits by directors, executive officers, and their related interests,
at December 31, 2006 and 2005 were $2,843,416 and $2,829,561, respectively.


NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

         In the ordinary course of business,  and to meet the financing needs of
its customers,  the Bank is a party to various  financial  instruments  with off
balance sheet risk. These financial  instruments,  which include  commitments to
extend  credit  and  standby  letters of credit,  involve,  to varying  degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the balance sheet. The contract amounts of those instruments  reflect the extent
of involvement the Bank has in particular classes of financial instruments.

         The Bank's  exposure to credit loss in the event of  nonperformance  by
the other party to the financial instrument for commitments to extend credit and
standby  letters of credit is  represented by the  contractual  amounts of those
instruments.  The Bank uses the same credit  policies in making  commitments and
conditional obligations as it does for on balance sheet instruments.

         Commitments  to extend  credit are  agreements to lend to a customer as
long as there is no  violation  of any  material  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may  require  the  payment of a fee. At December  31, 2006 and 2005,
unfunded  commitments  to extend  credit were $20.6  million and $17.3  million,
respectively,  and  outstanding  letters of credit were  $658,971 and  $544,660,
respectively.  At December 31, 2006, the unfunded commitments consisted of $18.5
million at variable  rates and $2.0  million at fixed  rates with $14.1  million
expiring within one year. 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 management's credit evaluation
of  the  borrower.  Collateral  varies  but  may  include  accounts  receivable,
inventory,  property,  plant and equipment,  and commercial and residential real
estate.

         Fair values of off balance sheet lending  commitments are based on fees
currently  charged to enter into  similar  agreements,  taking into  account the
remaining terms of the agreements and the counterparties'  credit standing,  and
were immaterial in 2006 and 2005.

         The  Bank  also  offers  an  automatic  overdraft  protection  product.
Approximately  $1.2 million of  overdraft  protection  is  available  under this
product as of December  31, 2006.  The Bank  expects that much of this  capacity
will not be  utilized.  During  2006  the  average  balance  of  demand  deposit
overdrafts was $23,751.


NOTE 15 - EMPLOYEE BENEFIT PLAN

         The Company  sponsors a Simple IRA Plan for the benefit of all eligible
employees.   The  Bank  contributes  up  to  three  percent  of  the  employee's
compensation.  Employer  contributions made to the Plan in 2006, 2005, and 2004,
amounted to $40,499, $35,925, and $31,822, respectively.





                                       39
<PAGE>


NOTE 16 - STOCK OPTION PLANS

         In 1999,  the Board of  Directors  awarded  options  (the  "Organizers'
Options") to purchase 4,000 shares of the Company's  common stock to each of the
organizing  directors  of the  Company  and the Bank  (an  aggregate  of  40,000
shares).  These  options  had an  exercise  price of $10.00 per share and became
exercisable  in one-third  increments  each year beginning on December 14, 2000.
The  Organizers'  Options  expire ten years from the date of grant,  unless they
terminate sooner as a result of the holder's ceasing to be a director.  Pursuant
to the option  agreements as further  discussed  below, the total number of such
options outstanding has been adjusted to 57,978, and the exercise price has been
adjusted to $6.21 per share as a result of the stock dividends discussed in Note
17 below.

         In 2003, the Company's  shareholders  approved the Cornerstone  Bancorp
2003 Stock Option Plan (the "2003 Plan"),  which reserved  125,000 shares of the
Company's  common stock for issuance upon  exercise of options.  Pursuant to the
2003 Plan as further discussed below, the number of shares reserved for issuance
has been  increased  to  166,375  shares as a result of the 10% stock  dividends
declared in 2004, 2005, and 2006 which is discussed in Note 17 below.  Employees
and Directors are eligible to participate in the 2003 Plan,  which has a term of
10 years.  Awards  under the 2003 Plan must be made by the Board of Directors or
by a Committee of Directors  designated by the Board at an exercise  price equal
to the fair market value of the Company's  common stock on the date of grant.  A
summary of the activity in the plans is presented below:

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,
                                                                                 -----------------------
                                                                      2006                  2005                   2004
                                                                      ----                  ----                   ----
                                                            Weighted                            Weighted                Weighted
                                                             Average    Average                  Average                 Average
                                                            Exercise    Intrinsic               Exercise                Exercise
                                             Shares           Price     Value (1)     Shares      Price      Shares       Price
                                             ------           -----     ---------     ------      -----      ------       -----

<S>                                          <C>              <C>                     <C>         <C>        <C>            <C>
Outstanding at beginning
     of year ...........................     103,709          $7.90                   81,929      $7.14      57,974         $6.21
Granted ................................      19,800          12.27                   21,780      10.75      23,955          9.39
Exercised ..............................           -                                       -                      -
Forfeited or expired ...................           -                                       -                      -
                                             -------                                  ------                 ------

Outstanding at end of year .............     123,509          $8.60      $913,967    103,709      $7.90      81,929         $7.14
                                             =======                                 =======                 ======

Options exercisable at end
     of year ...........................     103,709          $7.90      $840,043    103,709      $7.90      57,974         $6.21

Shares available for grant .............     100,837                                 120,637                  142,420
</TABLE>

(1)      The  aggregate  intrinsic  value of a stock  option in the table  above
         represents the total pre-tax  intrinsic  value (the amount by which the
         current market value of the underlying stock exceeds the exercise price
         of the option) that would have been received by the option  holders had
         all option holders  exercised  their options on December 31, 2006. This
         amount  changes  based on changes in the market value of the  Company's
         common stock.

         As described in Note 1, vesting of options granted in 2004 and 2005 was
accelerated to December 31, 2005.  Options granted in 2006 vest over a five-year
period, according to the option agreements.

         As  described  in Note 17  below,  the  Company's  Board  of  Directors
declared 10 percent stock  dividends to  shareholders  of record on May 9, 2006,
May 10,  2005,  May 11,  2004,  March  17,  2003,  and on April  30,  2002.  The
agreements  relating  to  the  Organizers'  Options  provide  for  proportionate
adjustments in the number of shares subject to options and the exercise price of
options in the event of stock  dividends,  stock splits and other  similar stock
transactions. Similarly, the 2003 Plan provides for proportionate adjustments in
the number of shares  reserved for issuance  under the 2003 Plan,  the number of
shares  subject to  outstanding  options and the exercise  prices of outstanding
options in the event of such transactions.


                                       40
<PAGE>

NOTE 17 - DIVIDENDS

         The Company has never paid cash dividends. The Company's ability to pay
cash  dividends  is within  the  discretion  of its Board of  Directors,  and is
dependent on the  Company's  receiving  cash  dividends  from the Bank.  Federal
banking  regulations  restrict the amount of dividends  that the Bank can pay to
the Company.  Furthermore,  because of its current growth plans, the Company has
no current plans to pay cash dividends even if it would be able to do so. Future
dividend  policy will depend on the Company's  earnings,  capital  requirements,
financial condition and other factors considered relevant by the Company's Board
of  Directors.  The  Company's  Board of  Directors  declared  10 percent  stock
dividends to  shareholders of record on May 9, 2006, May 10, 2005, May 11, 2004,
March 17, 2003 and on April 30, 2002.

NOTE 18 - 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  possible   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect on the Bank's  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve quantitative  measures of the
Bank's assets,  liabilities,  and certain  off-balance-sheet items as calculated
under  regulatory   accounting   practices.   The  Bank's  capital  amounts  and
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 amounts and ratios (set forth in
the table  below) of total and Tier 1 capital to  risk-weighted  assets,  and of
Tier 1 capital to average assets.  Management believes, as of December 31, 2006,
that the Bank meets all capital adequacy requirements to which it is subject.

         As of December 31, 2006,  the most recent  notification  of the banking
regulators  categorized  the  Bank  as well  capitalized  under  the  regulatory
framework for prompt corrective action.  There are no conditions or events since
that  notification  that  management  believes  have  changed the  institution's
category.  The Bank's actual capital  amounts and ratios and minimum  regulatory
amounts and ratios are presented as follows:

<TABLE>
<CAPTION>
                                                                                                           To be well capitalized
                                                                                       For capital         under prompt corrective
                                                                                    adequacy purposes         action provisions
                                                                                    -----------------         -----------------
                                                                  Actual                 Minimum                   Minimum
                                                                  ------                 -------                   -------
                                                            Amount      Ratio       Amount       Ratio      Amount        Ratio
                                                            ------      -----       ------       -----      ------        -----

As of December 31, 2006                                                            (Dollars in thousands)
<S>                                                       <C>            <C>        <C>           <C>      <C>              <C>
Total Capital (to risk weighted assets) ...............   $17,847        16.9%      $8,463        8.0%     $10,579          10.0%
Tier 1 Capital  (to risk weighted assets) .............    16,647        15.7        4,232        4.0        6,347           6.0
Tier 1 Capital  (to average assets) ...................    16,647        13.2        5,052        4.0        6,315           5.0

As of December 31, 2005
Total Capital (to risk weighted assets) ...............   $12,082        12.8%      $7,557        8.0%      $9,447          10.0%
Tier 1 Capital (to risk weighted assets) ..............    11,024        11.7        3,779        4.0        5,668           6.0
Tier 1 Capital  (to average assets) ...................    11,024         9.9        4,433        4.0         5541           5.0
</TABLE>


The Company is also subject to capital  adequacy  guidelines  established by the
Reserve Bank,  which  establish the minimum ratios for capital  adequacy as they
apply to the Bank. For 2006 and 2005, the Company's  capital  amounts and ratios
were at least as great as shown above for the Bank.


                                       41
<PAGE>

NOTE 19 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         The estimated fair values of the Company's  financial  instruments were
as follows:

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                          ------------
                                                                              2006                                 2005
                                                                              ----                                 ----
                                                                  Carrying             Fair            Carrying             Fair
                                                                   Amount             Value             Amount              Value
                                                                   ------             -----             ------              -----
Financial Assets
<S>                                                            <C>                <C>                <C>                <C>
      Cash and due from banks ..........................       $  2,696,623       $  2,696,623       $  2,716,965       $  2,716,965
      Federal funds sold ...............................          3,215,000          3,215,000          3,183,000          3,183,000
      Investment securities ............................         17,989,473         17,988,950         14,004,326         14,006,590
      Loans, gross .....................................         97,556,386         97,210,365         87,331,900         86,975,740
      Cash surrender value of life insurance policies ..          1,628,967          1,628,967          1,573,038          1,573,038
Financial Liabilities
      Deposits .........................................        101,666,196         98,158,426         91,652,041         88,379,085
      Customer repurchase agreements ...................          5,064,140          5,050,715          3,083,884          3,051,367
      Borrowings from FHLB .............................          2,695,671          2,644,065          4,346,505          4,277,218
</TABLE>


NOTE 20 - PARENT COMPANY INFORMATION

         Following is condensed  financial  information of  Cornerstone  Bancorp
(parent company only):

Condensed Balance Sheets
                                                               December 31,
                                                               ------------
                                                         2006               2005
                                                         ----               ----
Assets
     Cash and interest bearing deposits ............   $   776,191   $ 2,860,340
     Investment in subsidiary ......................    16,712,757    10,942,761
     Other assets ..................................        71,483        40,000
                                                       -----------   -----------
          Total Assets .............................   $17,560,431   $13,843,101
                                                       ===========   ===========

Liabilities And Shareholders' Equity
     Accrued expenses ..............................   $    21,704   $    15,116
     Shareholders' equity ..........................    17,538,727    13,827,985
                                                       -----------   -----------
          Total Liabilities and Shareholders' Equity   $17,560,431   $13,843,101
                                                       ===========   ===========


Condensed Statements Of Income

<TABLE>
<CAPTION>
                                                                                            Year ended December 31,
                                                                                            -----------------------
                                                                                  2006                 2005                  2004
                                                                                  ----                 ----                  ----
Income
<S>                                                                           <C>                  <C>                  <C>
     Interest .......................................................         $    25,658          $    13,031          $     9,469

Expenses
     Sundry .........................................................              32,400               46,094               44,428
                                                                              -----------          -----------          -----------
          Loss before equity in undistributed net
               income of bank subsidiary ............................              (6,742)             (33,063)             (34,959)

          Equity in undistributed net income of
               subsidiary ...........................................           1,666,478            1,094,328              699,016
                                                                              -----------          -----------          -----------
         Net income .................................................         $ 1,659,736          $ 1,061,265          $   664,057
                                                                              ===========          ===========          ===========
</TABLE>


                                                                     (Continued)

                                       42
<PAGE>


NOTE 20 - PARENT COMPANY INFORMATION, Continued

Condensed Statements Of Cash Flows
<TABLE>
<CAPTION>

                                                                                              Year ended December 31,
                                                                                              -----------------------
                                                                                     2006               2005               2004
                                                                                     ----               ----               ----
Operating Activities
<S>                                                                             <C>                 <C>                 <C>
    Net income .........................................................        $ 1,659,736         $ 1,061,265         $   664,057
         Adjustments to reconcile net income to net cash
             provided by (used for) operating activities
         Equity in undistributed net income of subsidiary ..............         (1,666,478)         (1,094,328)           (699,016)
         Increase in other assets ......................................            (31,483)                  -                   -
         Increase in accrued expenses ..................................              6,588               6,789               2,337
                                                                                -----------         -----------         -----------
                   Net cash used for operating activities ..............            (31,637)            (26,274)            (32,622)
                                                                                -----------         -----------         -----------

Investing Activities
    Investment in bank subsidiary ......................................         (3,936,000)         (2,000,000)                  -
                                                                                -----------         -----------         -----------

Financing Activities
       Proceeds from sale of common stock, net .........................          1,886,524           4,053,147                   -
    Cash paid in lieu of fractional shares .............................             (3,036)             (2,570)             (1,360)
                                                                                -----------         -----------         -----------
                   Net cash provided by (used for)
                    financing activities ...............................          1,883,488           4,050,577              (1,360)
                                                                                -----------         -----------         -----------

                   Net increase (decrease) in cash .....................         (2,084,149)          2,024,303             (33,982)

Cash, beginning of year ................................................          2,860,340             836,037             870,019
                                                                                -----------         -----------         -----------

Cash, end of year ......................................................        $   776,191         $ 2,860,340         $   836,037
                                                                                ===========         ===========         ===========
</TABLE>

                                       43