EXHIBIT 13
















                        Portions of 2003 Annual Report to
             Shareholders Incorporated by Reference into Form 10-KSB








<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 two offices in Easley and
Greenville, South Carolina.

         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.

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
section "Provision and Allowance for Loan Losses" 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  $356,000 or $.37 per basic  common share ($.36 per
diluted  common  share) for the year ended  December 31, 2003.  This compares to
$247,000 or $.26 per basic common share ($.25 per diluted  common share) for the
year ended December 31, 2002. The Company had a net loss from operations for the
year ended  December  31, 2001 of $138,000 or $.14 per basic and diluted  common
share.  The Company's  earnings have improved as the Bank has grown. The Company
had net interest  income (the  difference  between  interest  earned on interest
earning  assets and  interest  paid on  interest  bearing  liabilities)  of $2.6
million, $2.1 million, and $1.5 million for 2003, 2002, and 2001,  respectively.
The  Company  also  had  other  operating  income  (principally   mortgage  loan
origination  fees and service  fees on  deposits)  of  $617,000,  $472,000,  and
$191,000 in 2003, 2002, and 2001,  respectively.  The Company provided $174,000,
$183,000, and $181,000 to its allowance for loan losses in 2003, 2002, and 2001,
respectively,  and  had  other  operating  expenses  (principally  salaries  and
benefits and  occupancy and  equipment  expenses) of $2.5 million in 2003,  $2.1
million in 2002,  and $1.7 million in 2001. The increase in earnings for 2003 is
the result of the growth in interest earning assets without corresponding growth
in operating  expenses.  Net interest income after the provision for loan losses
plus other income increased 28.6% over 2002, while noninterest expense increased
only  21.7% for the  year.  However,  the  Company's  income  tax  expense  also
increased  due to the use of all income tax  operating  loss  carry-forwards  in
previous periods.

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
sensitivity  of these assets and  liabilities  using  various  tools,  including
models which attempt to calculate  the impact on the Bank's net interest  margin


                                       2
<PAGE>

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 costs 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 can
not predict the timing and extent of changes in interest rates, they can attempt
to manage the Bank's  interest rate  sensitivity and enable the Company to react
to protect the  Company's  earnings  stream  throughout  various  interest  rate
cycles.

         For the years ended  December  31,  2003,  2002,  and 2001 net interest
income was $2.6  million,  $2.1  million and $1.5  million,  respectively.  This
increase was  primarily  attributable  to an increase in the volume of loans and
investments (see "Rate/Volume  Analysis of Net Interest Income" below).  Average
interest  earning assets  increased to  $68,660,000 in 2003 from  $56,718,000 in
2002 and  $40,973,000  in 2001. The Bank's  relatively  young age makes growth a
primary driver of net interest income.  However,  during the past several years,
interest rates have been at extremely low levels, and have also had an impact on
net interest income. The average yield on interest earning assets decreased from
5.81% in 2002 to 5.54% in 2003 and from 7.14% in 2001 to 5.81% in 2002 while the
average cost of interest  bearing  liabilities  decreased  from 2.59% in 2002 to
2.08% in 2003 and from 4.44% in 2001 to 2.59% in 2002.  The net yield on average
interest earning assets  increased in 2003 to 3.79%,  while it remained the same
in 2002 and 2001 at 3.67%.





                                       3
<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, 2003 and 2002.

                       Average Balances, Yields and Rates
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                            Year Ended December 31, 2003      Year Ended December 31, 2002
                                                            ----------------------------      ----------------------------
                                                                        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 .............................................   $ 14,986     $    586      3.91%    $ 14,020      $    588      4.20%
Federal Funds Sold .....................................      4,378           49      1.12%       5,728            92      1.61%
Loans (3), (7) .........................................     49,296        3,166      6.42%      36,970         2,613      7.07%
                                                           --------     --------               --------      --------
       Total interest earning assets ...................     68,660        3,801      5.54%      56,718         3,293      5.81%
Cash and due from banks ................................      1,578                               1,467
Allowance for loan losses ..............................       (626)                               (470)
Premises and equipment .................................      3,557                               3,239
Other assets ...........................................        614                                 509
                                                           --------                            --------
       Total assets ....................................   $ 73,783                            $ 61,463
                                                           ========                            ========


Liabilities and shareholders' equity
Interest bearing liabilities
     Interest bearing transaction accounts .............   $  8,488     $     91      1.07%    $  6,945      $    100      1.44%
     Savings and money market ..........................     13,320          161      1.21%      11,394           217      1.90%
     Time deposits $100,000 and over ...................     11,750          346      2.94%       9,478           324      3.42%
     Other time deposits ...............................     18,851          533      2.83%      13,693           474      3.46%
                                                           --------     --------               --------      --------
       Total interest bearing deposits .................     52,409        1,131      2.16%      41,510         1,115      2.69%
Federal Funds purchased and
    customer repurchase agreements .....................      5,094           64      1.25%       5,367            98      1.83%
FHLB advances ..........................................        137            2      1.46%           -             -      -
                                                           --------     --------               --------      --------
       Total interest bearing liabilities ..............     57,640        1,197      2.08%      46,877         1,213      2.59%
Noninterest bearing demand deposits ....................      7,847                               6,707
Other liabilities ......................................        288                                 151
Shareholders' equity ...................................      8,008                               7,728
                                                           --------                            --------
       Total liabilities and shareholders' equity ......     73,783                            $ 61,463
                                                           ========                            ========
Interest rate spread (4) ...............................                              3.46%                                 3.22%
Net interest income and net yield on earning assets(5) .                $  2,604      3.79%                  $  2,080       3.67%
Interest free funds supporting earning assets (6) ......   $ 11,020                            $  9,841
</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.
(3)  Nonaccruing  loans are included in the average loan  balances and income on
     such loans is recognized on a cash basis.
(4)  Total  interest  bearing  assets  yield  less the  total  interest  bearing
     liabilities rate.
(5)  Net interest income divided by total interest earning assets.
(6)  Total interest earning assets less total interest bearing liabilities.
(7)  Interest  income on loans  includes  loan fee  income  as well as  interest
     income. The amount of loan fees included is not considered material.




                                       4
<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.  Because the Bank is in a high-growth  stage
(typical of young institutions), average balance increases (volume) have had the
greatest magnitude of impact through each of the two comparison periods.

                  Year Ended December 31, 2003 compared to 2002

<TABLE>
<CAPTION>
                                                                                        Increase (Decrease) Due to
                                                                                        --------------------------
                                                                                           (Dollars in Thousands)

                                                                                                             Volume/
                                                                              Volume           Rate            Rate           Change
                                                                              ------           ----            ----           ------
Interest earned on:
<S>                                                                           <C>             <C>             <C>             <C>
     Securities ....................................................          $  41           $ (41)          $  (3)          $  (3)
     Federal Funds sold ............................................            (22)            (28)              7             (43)
     Loans .........................................................            871            (238)            (79)            554
                                                                              -----           -----           -----           -----
          Total interest income ....................................            890            (307)            (75)            508

Interest paid on:
     Deposits ......................................................            293            (219)            (58)             16
     Federal Funds purchased & customer repurchase
         agreements ................................................             (5)            (31)              2             (34)
FHLB advances ......................................................              -               -               2               2
                                                                              -----           -----           -----           -----
          Total interest expense ...................................            288            (250)            (54)            (16)
                                                                              -----           -----           -----           -----

Change in Net Interest Income ......................................          $ 602           $ (57)          $ (21)          $ 524
                                                                              =====           =====           =====           =====
</TABLE>

                  Year Ended December 31, 2002 compared to 2001

<TABLE>
<CAPTION>
                                                                                          Increase (Decrease) Due to
                                                                                          --------------------------
                                                                                            (Dollars in Thousands)
                                                                                                            Volume/
                                                                             Volume           Rate            Rate           Change
                                                                             ------           ----            ----           ------

Interest earned on:
<S>                                                                         <C>             <C>             <C>             <C>
     Securities ....................................................        $   217         $  (207)        $   (69)        $   (59)
     Federal Funds sold ............................................            (42)           (156)             24            (174)
     Loans .........................................................          1,136            (340)           (192)            604
     Interest bearing balances .....................................             (5)             (5)              5              (5)
                                                                            -------         -------         -------         -------
          Total interest income ....................................          1,306            (708)           (232)            366

Interest paid on:
     Deposits ......................................................            597            (512)           (240)           (155)
     Federal Funds purchased & customer repurchase
         agreements
                                                                                 63             (83)            (34)            (54)
                                                                            -------         -------         -------         -------
          Total interest expense ...................................            660            (595)           (274)           (209)
                                                                            -------         -------         -------         -------

Change in Net Interest Income ......................................        $   646         $  (113)        $    42         $   575
                                                                            =======         =======         =======         =======
</TABLE>

                                       5
<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  assets exceeded rate sensitive
liabilities, resulting in an asset sensitive position at the end of 2003 of $2.4
million,  for a cumulative  gap ratio of 1.05  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.
The gap is positive when interest  sensitive  assets exceed  interest  sensitive
liabilities,  as was the case at the end of 2003 with  respect  to the  one-year
time horizon.  For a bank with a positive gap,  rising  interest  rates would be
expected to have a positive  effect on net  interest  income and  falling  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  is  presented  in  the
immediate  repricing  interval  because the  interest  rate paid  adjusts at the
beginning of each month.

                          Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                            December 31, 2003
                                                                            -----------------
                                                           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) ........................   $      -   $  4,431   $  4,759    $  2,944   $  1,006   $  1,452   $    460   $ 15,052
    Federal funds sold ....................      3,159          -          -           -          -          -          -      3,159
    Loans (2) .............................     34,037      4,049      4,896       6,615      8,831        981          -     59,409
                                              --------   --------   --------    --------   --------   --------   --------   --------
        Total interest earning assets .....     37,196      8,480      9,655       9,559      9,837      2,433        460     77,620
                                              --------   --------   --------    --------   --------   --------   --------   --------

Interest bearing deposits
    Interest bearing transaction accounts .      9,999          -          -           -          -          -          -      9,999
    MMDA's & Savings ......................     15,189          -          -           -          -          -          -     15,189
    Time deposits $100M and over ..........          -      1,606      5,641       1,233      3,322          -          -     11,802
    Other time deposits ...................        144      3,924      6,662       2,240      6,124          -          -     19,094
    Federal funds purchased and customer
      repurchase agreements ...............      4,772          -          -       1,000          -          -          -      5,772
    FHLB advances .........................      5,000          -          -           -          -          -          -      5,000
                                              --------   --------   --------    --------   --------   --------   --------   --------
        Total interest bearing
          liabilities .....................   $ 35,104   $  5,530   $ 12,303    $  4,473   $  9,446   $      -   $      -   $ 66,856
                                              --------   --------   --------    --------   --------   --------   --------   --------

Interest sensitivity gap ..................   $  2,092   $  2,950   $ (2,648)   $  5,086   $    391   $  2,433   $    460   $ 10,764
Cumulative interest sensitivity gap .......   $  2,092   $  5,042   $  2,394    $  7,480   $  7,871   $ 10,304   $ 10,764
Gap ratio .................................       1.06       1.53        .78        2.14       1.04       1.00       1.00       1.16
Cumulative gap ratio ......................       1.06       1.12        1.05       1.13       1.12       1.15       1.16
</TABLE>
(1)  Securities with call features have been included in the period in which the
     security becomes callable.
(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.



                                       6
<PAGE>



<TABLE>
<CAPTION>
                                                                               December 31, 2002
                                                                               -----------------
                                                           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) .......................   $  1,190    $  3,415   $  4,983    $  5,675   $  3,541   $      -   $      -   $ 18,804
    Federal funds sold ...................      1,005           -          -           -          -          -          -      1,005
    Loans (2) ............................     19,410       4,587      4,286       3,979      8,376        842        220     41,700
                                             --------    --------   --------    --------   --------   --------   --------   --------
        Total interest earning assets ....     21,605       8,002      9,269       9,654     11,917        842        220     61,509
                                             --------    --------   --------    --------   --------   --------   --------   --------

Interest bearing deposits
    Interest bearing transaction accounts       7,859           -          -           -          -          -          -      7,859
    MMDA's & Savings .....................     11,584           -          -           -          -          -          -     11,584
    Time deposits $100M and over .........          -       2,594      5,303         949      1,723          -          -     10,569
    Other time deposits ..................          -       2,748      9,237       1,940      2,501          -          -     16,426
    Federal funds purchased and customer
      repurchase agreements ..............      3,983           -      1,000           -          -          -          -      4,983
                                             --------    --------   --------    --------   --------   --------   --------   --------
        Total interest bearing
          liabilities ....................   $ 23,426    $  5,342   $ 15,540    $  2,889   $  4,224   $      -   $      -   $ 51,421
                                             --------    --------   --------    --------   --------   --------   --------   --------
Interest sensitivity gap .................   $ (1,821)      2,660   $ (6,271)   $  6,765   $  7,693   $    842   $    220   $ 10,088
Cumulative interest sensitivity gap ......   $ (1,821)   $    839   $ (5,432)   $  1,333   $  9,026   $  9,868   $ 10,088
Gap ratio ................................        .92        1.50        .60        3.34       2.82          -          -       1.20
Cumulative gap ratio .....................        .92        1.03        .88        1.03       1.18       1.19       1.20
</TABLE>

(1)  Securities with call features have been included in the period in which the
     security becomes callable.
(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.

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.

<TABLE>
<CAPTION>
                                                                                           For the years ended December 31,
                                                                                           --------------------------------
                                                                                     2003                2002               2001
                                                                                     ----                ----               ----

<S>                                                                                <C>                <C>                 <C>
Allowance for possible loan losses, beginning of year ...................          $ 553,372          $ 384,320           $ 207,000
Provision for loan losses ...............................................            173,574            182,842             180,500
Charge-offs .............................................................                  -            (13,790)             (3,180)
Recoveries ..............................................................              1,025                  -                   -
                                                                                   ---------          ---------           ---------

Allowance for possible loan losses, end of year .........................          $ 727,971          $ 553,372           $ 384,320
                                                                                   =========          =========           =========
</TABLE>


         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
$145,000  to $617,000 in 2003 from  $472,000 in 2002 and  $191,000 in 2001.  The
increases are  primarily the result of increases in deposit  accounts and growth
in the  mortgage  loan  origination  department.  During  all of 2003  the  Bank
employed two mortgage  lenders.  During 2002 the Bank employed two lenders for a
portion of the year.



                                       7
<PAGE>

Other Expenses

         Other  expenses,  which  consist  primarily  of salaries  and  employee
benefits, net occupancy, and data processing totaled $2.5 million for 2003, $2.1
million for the year ended December 31, 2002 and $1.7 million for the year ended
December 31, 2001.  Salaries and employee  benefits rose to $1.4 million in 2003
from $1.2 million in 2002 and $850,000 for the year ended December 31, 2001. The
increases in each year were due to the hiring of additional staff to support the
Bank's growth and normal salary  increases.  The Bank added a commercial  lender
and two support  personnel during 2003. Salary and benefits expense in 2003 also
included  a full year of  expense  for  staff  hired to open the  Bank's  branch
location in August of 2002.  Net occupancy  increased by $111,000 or 35% for the
year ended  December 31, 2003 as compared to 2002.  This  increase was largely a
result of a full year of costs associated with the branch opened in August 2002.
Data  processing  expense  increased  by $27,000 or 20% to $159,000 for the year
ended  December  31, 2003 from  $133,000  for 2002 and  $103,000  for 2001.  The
increases are primarily the result of increases in the number of accounts on the
data  processing  system and increased  banking  transactions  due to the Bank's
growing  customer  base.  The  Company's  efficiency  ratio which is measured as
noninterest expense as a percentage of the sum of net interest income plus other
income  improved  to 78% in 2003  compared to 81% in 2002 and 98% in 2001 as the
Company's noninterest expenses were spread over a larger customer base.

Income Taxes

         For 2003 the Company  recorded income tax expense of $183,000  compared
to $61,000 for 2002.  During the year ended December 31, 2001, the Bank recorded
a tax benefit of $7,000.  The  increases are due to increased  profitability  as
well as the use of net operating loss  carry-forwards in previous  periods.  The
Bank  accounts  for income  taxes  under SFAS No.  109,  "Accounting  for Income
Taxes."  Certain  items of income and expense  (principally  provision  for loan
losses,  depreciation,  and pre-opening  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
Financial  Accounting  Standards  ("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,  2003,  2002 and  2001,  the  Bank's  investment
portfolio comprised approximately 17.8%, 28.2% and 25.5%, respectively, of total
assets.

         The following table  summarizes the carrying amounts of securities held
by the Bank at December  31, 2003 and 2002.  Available-for-sale  securities  are
stated at  estimated  fair  value.  Held-to-maturity  securities  are  stated at
amortized  cost.  Federal  Reserve  Bank 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.




                                       8
<PAGE>


                   Investment Securities Portfolio Composition

                                                                December 31,
                                                                ------------
                                                             2003          2002
                                                             ----          ----
                                                          (Dollars in thousands)
Available for sale:
   U.S. Government Agencies ........................       $ 8,463       $10,336
   Mortgage-backed securities ......................           680         1,033
   Corporate bonds .................................           227         1,521
                                                           -------       -------
      Total available for sale .....................         9,370        12,890

Held to maturity
   U.S. Government Agencies ........................         5,222         5,231
   Corporate bonds .................................             -           503
                                                           -------       -------
     Total held to maturity ........................         5,222         5,734

Federal Reserve Bank stock .........................           210           180
Federal Home Loan Bank of Atlanta stock ............           250             -
                                                           -------       -------

Total ..............................................       $15,052       $18,804
                                                           =======       =======

         The  following  table  presents  contractual  maturities  and  weighted
average  yields of  securities  at December  31, 2003 and 2002.  Securities  are
presented at their carrying value.

              Investment Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                                         December 31, 2003                  December 31, 2002
                                                                         -----------------                  -----------------
                                                                       Amount              Yield          Amount            Yield
                                                                       ------              -----          ------            -----
                                                                              (Dollars in                       (Dollars in
                                                                              thousands)                         thousands)
Available for sale securities:
U.S. Government Agencies
<S>                                                                   <C>                   <C>          <C>               <C>
     Within one year ......................................           $ 1,185               4.25%        $ 3,591           3.41%
     After one through five years .........................             5,000               3.07%          5,735           3.37%
     Six through ten years ................................             1,506               4.10%              -              -
     After ten years ......................................               772               1.71%          1,010           2.01%
FNMA Mortgage-backed security (1) .........................               680               4.08%          1,033           5.33%
Corporate bonds
     Within one year ......................................                 -                              1,302           4.24%
     After one through five years .........................               227               7.01%            219           6.98%

Held to maturity securities:
U.S. Government Agencies
     After one through five years .........................             5,222               4.64%          5,231           4.68%
Corporate bonds
     Within one year ......................................                 -                  -             503           4.03%

Other securities
     No stated maturity ...................................               460               4.78%            180           6.00%
                                                                      -------                            -------
     Total ................................................           $15,052               3.90%        $18,804           3.89%
                                                                      =======                            =======
</TABLE>
(1)  The FNMA Mortgage-backed  security matures within 10 years on an amortizing
     basis.

         Securities classified as available-for-sale are recorded at fair market
value.  While  four  individual  U.S.  Government  agency  securities  are in an
unrealized loss position as of December 31, 2003,  none of these  securities has
been in a continuous  loss position for twelve  months or more.  The Company has
the  ability  and intent 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   issuer   and    therefore,    these   losses   are   not   considered
other-than-temporary.

                                       9
<PAGE>

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 finance and  insurance,  real estate  rental and leasing,
professional, administrative support, waste management and remediation services,
scientific and technical services,  construction,  manufacturing,  retail trade,
and health care-related industries.

         The amount of loans outstanding at December 31, 2003 and 2002 are shown
in the following table according to type of loan:

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                              ------------
                                                                                 2003                                2002
                                                                                 ----                                ----
                                                                                       (Dollars in thousands)

                                                                                            % of                             % of
                                                                     Amount                Loans          Amount             Loans
                                                                     ------                -----          ------             -----
<S>                                                                <C>                     <C>          <C>                   <C>
Commercial and industrial ................................         $ 11,242                 18.9%       $   8,395              20.1%
Real Estate - construction ...............................           12,018                 20.2            8,473              20.3
Real Estate - mortgage
       1-4 family residential ............................           15,084                 25.4            9,543              22.9
       Nonfarm, nonresidential ...........................           16,662                 28.1           12,482              29.9
       Multifamily residential ...........................            1,681                  2.8              908               2.2
 Consumer installment ....................................            2,722                  4.6            1,899               4.6
                                                                   --------                -----        ---------             -----
         Total Loans .....................................           59,409                100.0%          41,700             100.0%
                                                                   --------                             ---------
       Less allowance for loan losses ....>>..............             (728)                                 (553)
                                                                   --------                             ---------
           Net Loans .....................................         $ 58,681                             $  41,147
                                                                   ========                             =========
</TABLE>

Maturity Distribution of Loans

         The following table sets forth the maturity  distribution of the Bank's
loans,  by type,  as of  December  31,  2003,  as well as the  type of  interest
requirement on such loans.

                         Maturity Distribution on Loans

<TABLE>
<CAPTION>
                                                                                               December 31, 2003
                                                                                               -----------------
                                                                                             (Dollars in Thousands)
                                                                              1 Year           1-5           5 Years
                                                                             or Less          Years          or More          Total
                                                                             -------          -----          -------          -----

<S>                                                                          <C>             <C>             <C>             <C>
Commercial and industrial ..........................................         $ 7,412         $ 3,801         $    29         $11,242
Real Estate-construction ...........................................           7,267           4,639             112          12,018
Real Estate-mortgage ...............................................           8,929          23,158           1,340          33,427
Consumer installment ...............................................           2,117             605               -           2,722
                                                                             -------         -------         -------         -------
      Total ........................................................         $25,725         $32,203         $ 1,481         $59,409
                                                                             =======         =======         =======         =======

Predetermined rate, maturity greater than one year .................         $     -         $15,501         $   981         $16,482

Variable rate or maturity within one year ..........................         $25,725         $16,702         $   500         $42,927
</TABLE>

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


                                       10
<PAGE>

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,  2003 and 2002,  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 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 no loans determined by management to
be potential problem loans at December 31, 2003.

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, 2003.

         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.




                                       11
<PAGE>



                         Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                                         Year Ended December 31,
                                                                                                         -----------------------
                                                                                                        2003                 2002
                                                                                                        ----                 ----
                                                                                                         (Dollars in thousands)
<S>                                                                                                  <C>                  <C>
Total loans outstanding at end of period,
      net of deferred net loan fees .....................................................            $ 59,409             $ 41,700
Average amount of loans outstanding .....................................................            $ 49,296             $ 36,970
Balance of allowance for loan losses-beginning ..........................................            $    553             $    384
Loans charged-off
      Commercial and industrial .........................................................            $      -             $    (13)
      Consumer installment ..............................................................            $      -             $     (1)
                                                                                                     --------             --------
      Total charge-offs .................................................................            $      -             $    (14)
Recoveries of loans previously charged-off
      Commercial and industrial .........................................................            $      -             $      -
      Consumer installment ..............................................................            $      1             $      -
                                                                                                     --------             --------
      Total recoveries ..................................................................            $      1             $      -
                                                                                                     --------             --------
Net (charge-offs) recoveries ............................................................            $      1             $    (14)
                                                                                                     --------             --------

Additions to allowance charged to expense ...............................................            $    174             $    183
                                                                                                     --------             --------

Balance of allowance for loan losses-ending .............................................            $    728             $    553
                                                                                                     ========             ========

Ratios
      Net (charge-offs) recoveries to average loans outstanding .........................                   -%              (0.04)%
      Net (charge-offs) recoveries to loans at end of period ............................                   -%              (0.03)%
      Allowance for loan losses to average loans ........................................                1.48%               1.50 %
      Allowance for loan losses to loans at end of period ...............................                1.23%               1.33 %
      Net (charge-offs) recoveries to allowance for loan losses .........................                 .14%              (2.53)%
      Net (charge-offs) recoveries to provision for loan losses .........................                 .57%              (7.65)%
</TABLE>

         The following  table  presents the allocation of the allowance for loan
losses at the end of the years ended  December 31, 2003 and 2002,  compared with
the percent of loans in the applicable  categories to total loans. The allowance
for loan  losses  is not  restricted  to  specific  categories  of loans  and is
available to absorb losses in all categories.

                     Allocation of Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                                    -----------------------
                                                                               2003                             2002
                                                                               ----                             ----
                                                                                        % of                                  % of
                                                                      Amount           Loans           Amount                 Loans
                                                                      ------           -----           ------                 -----
                                                                                     (Dollars in thousands)
<S>                                                                   <C>              <C>               <C>                 <C>
Commercial and industrial ..............................              $138              18.9%            $111                 20.1%
Real Estate - construction .............................               147              20.2%             113                 20.3%
Real Estate - mortgage .................................               410              56.3%             304                 55.0%
Consumer installment ...................................                33               4.6%              25                  4.6%
                                                                      ----             -----             ----                -----
      Total ............................................              $728             100.0%            $553                100.0%
                                                                      ====             =====             ====                =====
</TABLE>





                                       12
<PAGE>


Real Estate Owned

         The  Bank  had  no  real  estate  owned   pursuant  to  foreclosure  or
in-substance  foreclosure  at December 31, 2003.  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, 2003 and 2002 are summarized below:

                               Deposit Composition

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------
                                                                              2003                             2002
                                                                              ----                             ----
                                                                                   (Dollars in thousands)
                                                                                        % of                           % of
                                                                      Amount          Deposits       Amount          Deposits
                                                                      ------          --------       ------          --------
<S>                                                                  <C>               <C>          <C>               <C>
Noninterest bearing demand .................................         $ 9,202            14.1%       $ 7,269            13.5%
Interest bearing transaction accounts ......................           9,999            15.3          7,859            14.6
Savings ....................................................           3,764             5.8          2,932             5.5
Money market ...............................................          11,425            17.5          8,652            16.1
Time deposits $100,000 and over ............................          11,802            18.1         10,569            19.7
Other time deposits ........................................          19,094            29.2         16,426            30.6
                                                                     -------           -----        -------           -----
    Total deposits .........................................         $65,286           100.0%       $53,707           100.0%
                                                                     =======           =====        =======           =====
</TABLE>


         The average  amounts of and average  rate paid on deposits  held by the
Bank for the years ended December 31, 2003 and 2002, are summarized below:
                                Average Deposits

<TABLE>
<CAPTION>
                                                                                        Years ended December 31,
                                                                                        ------------------------
                                                                                2003                                2002
                                                                                ----                                ----
                                                                     Amount             Rate              Amount                Rate
                                                                     ------             ----              ------                ----
                                                                                        (Dollars in thousands)

<S>                                                               <C>                  <C>              <C>                    <C>
Noninterest bearing demand .............................          $ 7,847                 -%            $ 6,707                   -%
Interest bearing transaction accounts ..................            8,488              1.07%              6,945                1.44%
Savings and money market ...............................           13,320              1.21%             11,394                1.90%
Time deposits $100,000 and over ........................           11,750              2.94%              9,478                3.42%
Other time deposits ....................................           18,851              2.83%             13,693                3.46%
                                                                  -------                               -------
      Total average deposits ...........................          $60,256                               $48,217
                                                                  =======                               =======
</TABLE>

         As of December 31, 2003,  the Bank held $11.8  million of time deposits
of $100,000 or more with $1.6 million maturing within three months, $3.2 million
maturing over three through six months,  $2.4 million  maturing over six through
twelve months,  and $4.6 million maturing over twelve months.  The vast majority
of time deposits $100,000 and over are acquired from customers within the Bank's
service area in the ordinary  course of  business.  The Bank does not  generally
purchase brokered  deposits.  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.



                                       13
<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  (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, 2003 and 2002.

                                               2003                     2002
                                               ----                     ----
                                           December 31,             December 31,
                                           ------------             ------------

Return on assets ......................         .48%                     .40%
Return on equity ......................        4.45%                    3.20%
Dividend payout ratio .................        0.00%                    0.00%
Equity to assets ratio ................       10.86%                   12.57%

         The return on assets and equity  improved in 2003 due largely to growth
in the Company's customer base and to growth in the mortgage loan department.

         During 2004, the Bank's plan of operation is to attract new deposit and
loan  customers,  to increase the ratio of services per customer and the account
profitability of the Bank's current customers, and to possibly expand the Bank's
geographic  footprint.  Deposit  accounts  will be sought from  individuals  and
businesses in the Easley,  Berea, 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.  The Bank has added certain
deposit account  products and services for 2004.  These products are expected to
broaden the customer base and increase the  profitability of existing  accounts.
Loan  business  will be  sought  by  offering  competitive  rates  and  terms to
creditworthy   customers.    Management   will   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.

Customer Repurchase Agreements

         Customer  repurchase  agreements  totaled  $5,772,192 and $4,982,721 at
December 31, 2003 and 2002,  respectively.  U. S. Government  securities with an
amortized  cost of  $7,276,027  and  $6,432,662  (fair value of  $7,437,547  and
$6,630,019) are used as collateral for the sweep accounts and retail  repurchase
agreements,  at December 31, 2003 and 2002, respectively.  The majority of these
accounts pay interest on a floating rate basis.

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 63.3% of total assets at December 31, 2003.

         Asset liquidity is provided from several sources, including amounts due
from banks and federal funds sold, and funds from maturing  loans.  The Bank had
over $5.7 million in cash and liquid  assets at December 31, 2003.  The Bank has
$2.9 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, 2003 the Bank had $5.0 million at a variable rate
of  interest,  maturing  December  31,  2004  borrowed  from the FHLB.  The Bank
borrowed  for the first time from the FHLB in December  and the $5.0 million was
the highest  balance at any month end. The average balance for December 2003 was
$1.6 million.  The average rate paid on the borrowings  for 2003 was 1.46%.  The
interest  rate  as of  December  31,  2003  was  1.15%.  At  December  31,  2003
approximately  $3.0 million of additional  funds were  available  under the FHLB
line. Management believes that the Bank's overall liquidity sources are adequate
to meet its operating needs in the ordinary course of its business.



                                       14
<PAGE>

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, 2003,  the Bank had issued  commitments  to extend  credit of $14.1
million through  various types of lending  arrangements.  Of these  commitments,
$13.2 million are at variable  rates and $6.3 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.

         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
$159,000 at December  31, 2003.  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.

         Neither the Company nor its subsidiary 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 did not
maintain any obligations  under  non-cancelable  operating  lease  agreements at
December 31, 2003. The Company is in the final year of a five-year contract with
a data processing service. The annual costs are approximately $168,000. Refer to
notes  10  and  14  to  the  Company's  consolidated  financial  statements  for
discussions on commitments and contingencies and financial  instruments with off
balance sheet risk.

Capital Resources

         At December 31, 2003,  shareholders'  equity increased from the balance
at December 31, 2002 by approximately  $306,500.  Total shareholders'  equity at
December 31, 2003 was $8,166,652 compared to $7,860,137 as of December 31, 2002.
The  increase  is a result of net  income  of  $356,048  partially  offset by an
unrealized  loss on  investment  securities  and cash paid in lieu of fractional
shares as a result of a stock dividend paid in 2003. The Company does not expect
to have to raise additional capital in 2004.

         The Company made capital  expenditures  for bank premises and furniture
and  equipment  in 2003  totaling  approximately  $90,000.  It  expects  to make
additional  such   expenditures  in  2004  of   approximately   $500,000.   Such
expenditures were made or are expected to be made from cash on hand.

         The Bank is 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 Bank's regulatory capital  requirements and positions
are summarized in Note 18 to the consolidated financial statements.

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  established  trading market has developed and
none is expected to develop in the foreseeable  future.  The common stock is not


                                       15
<PAGE>

listed on any exchange nor is it traded on the NASDAQ  National  Market  System,
nor are there any market  makers known to  management.  During the past calendar
year,  management was aware of a number of  transactions  in which the Company's
common stock traded at $12.50 per share. However, management has not ascertained
that these transactions were the result of arm's length negotiations between the
parties, and because of the limited number of shares involved,  these prices may
not be indicative of the market value of the common stock.

         As of March 1, 2004, there were  approximately 488 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.




                                       16
<PAGE>









               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



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, 2003 and
2002 and the related consolidated statements of income, shareholders' equity and
comprehensive  income (loss),  and cash flows for each of the years in the three
year period ended December 31, 2003. 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 auditing standards generally
accepted in the United States of America.  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, 2003 and 2002 and the results
of their  operations  and cash  flows for each of the  years in the  three  year
period  ended  December 31,  2003,  in  conformity  with  accounting  principles
generally accepted in the United States of America.




                                                       /s/ Elliott Davis, LLC


Greenville, South Carolina
February 13, 2004





                                       17
<PAGE>



                       CORNERSTONE BANCORP AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                      2003                  2002
                                                                                                      ----                  ----
ASSETS

<S>                                                                                             <C>                    <C>
Cash and due from banks .............................................................           $  2,575,157           $  1,604,208

Federal funds sold ..................................................................              3,158,508              1,005,000

Investment securities
     Available-for-sale .............................................................              9,369,873             12,890,356
     Held-to-maturity (Fair value $5,455,080 in 2003 and $6,013,418 in 2002) ........              5,222,430              5,734,158
     Other investments ..............................................................                460,000                180,000

Loans, net ..........................................................................             58,681,134             41,146,730

Property and equipment, net .........................................................              3,474,852              3,595,724

Cash surrender value of life insurance policies .....................................              1,088,338                      -

Other assets ........................................................................                509,322                517,190
                                                                                                ------------           ------------
         Total assets ...............................................................           $ 84,539,614           $ 66,673,366
                                                                                                ============           ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
     Deposits
         Noninterest bearing ........................................................           $  9,202,362           $  7,269,138
         Interest bearing ...........................................................             56,083,857             46,438,384
                                                                                                ------------           ------------
         Total deposits .............................................................             65,286,219             53,707,522
     Customer repurchase agreements .................................................              5,772,192              4,982,721
     Borrowings from Federal Home Loan Bank of Atlanta ..............................              5,000,000                      -
     Other liabilities ..............................................................                314,551                122,986
                                                                                                ------------           ------------

         Total liabilities ..........................................................             76,372,962             58,813,229

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,
         967,968 and 879,994 shares issued at December 31, 2003
         and 2002, respectively .....................................................              7,984,608              7,984,925
     Retained earnings (deficit) ....................................................                150,314               (205,734)
     Accumulated other comprehensive income .........................................                 31,730                 80,946
                                                                                                ------------           ------------

         Total shareholders' equity .................................................              8,166,652              7,860,137
                                                                                                ------------           ------------
         Total liabilities and shareholders' equity .................................           $ 84,539,614           $ 66,673,366
                                                                                                ============           ============
</TABLE>

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



                                       18
<PAGE>





                       CORNERSTONE BANCORP AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                                          For the years ended December 31,
                                                                                          --------------------------------
                                                                                   2003               2002                  2001
                                                                                   ----               ----                  ----
INTEREST INCOME
<S>                                                                           <C>                  <C>                  <C>
     Loans and fees on loans .......................................          $ 3,166,185          $ 2,612,517          $ 2,009,424
     Investment securities .........................................              585,729              588,495              636,436
     Federal funds sold and other interest income ..................               49,158               92,278              281,604
                                                                              -----------          -----------          -----------

         Total interest income .....................................            3,801,072            3,293,290            2,927,464

INTEREST EXPENSE
     Deposits and repurchase agreements ............................            1,196,402            1,212,673            1,422,855
                                                                              -----------          -----------          -----------

         Net interest income .......................................            2,604,670            2,080,617            1,504,609

    Provision for possible loan losses .............................              173,574              182,842              180,500
                                                                              -----------          -----------          -----------

         Net interest income after provision for
            loan losses ............................................            2,431,096            1,897,775            1,324,109

NONINTEREST INCOME
     Mortgage loan origination fees ................................              366,433              257,955               47,278
     Service fees on deposit accounts ..............................              223,303              179,378              107,780
     Other .........................................................               27,258               34,675               35,731
                                                                              -----------          -----------          -----------

        Total noninterest income ...................................              616,994              472,008              190,789

                                                                              -----------          -----------          -----------
NONINTEREST EXPENSES
     Salaries and benefits .........................................            1,430,947            1,161,063              849,796
     Advertising ...................................................               34,241               27,992               51,459
     Supplies ......................................................               86,989               80,146               83,253
     Data processing ...............................................              159,404              132,636              102,779
     Occupancy and equipment .......................................              426,677              315,658              297,647
     Professional fees .............................................               80,866               71,603               72,202
     Directors fees ................................................               50,050               37,750               33,500
     Other operating ...............................................              239,450              235,150              168,640
                                                                              -----------          -----------          -----------

         Total noninterest expenses ................................            2,508,624            2,061,998            1,659,276
                                                                              -----------          -----------          -----------

         Income (loss) before income taxes .........................              539,466              307,785             (144,378)

    Income tax provision (benefit) .................................              183,418               60,500               (6,785)
                                                                              -----------          -----------          -----------
         Net income (loss) .........................................          $   356,048          $   247,285          $  (137,593)
                                                                              ===========          ===========          ===========

EARNINGS (LOSS) PER COMMON SHARE
    Basic ..........................................................          $       .37          $       .26          $      (.14)

    Diluted ........................................................          $       .36          $       .25          $      (.14)

WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
      Basic ........................................................              967,968              967,968              967,968

     Diluted .......................................................              982,884              977,525              967,962
</TABLE>

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



                                       19
<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            deficit       income (loss)       equity
                                                         ------        ------            -------       -------------       ------

<S>                                                      <C>         <C>              <C>              <C>              <C>
Balance, December 31, 2000 .....................         800,000     $ 7,985,000      $  (315,426)     $    22,309      $ 7,691,883
   Net loss ....................................               -               -         (137,593)               -         (137,593)
   Other comprehensive loss, net
     of income taxes
   Unrealized gain on investment
        Securities .............................               -               -                -           60,673           60,673
                                                                                                                        -----------
   Comprehensive loss ..........................               -               -                -                -          (76,920)
                                                         -------     -----------      -----------      -----------      -----------

Balance, December 31, 2001 .....................         800,000       7,985,000         (453,019)          82,982        7,614,963
                                                                                                                        -----------
   Net income ..................................               -               -          247,285                -          247,285
   Other comprehensive income, net
     of income taxes:
   Unrealized loss on investment
        Securities .............................               -               -                -           (2,036)          (2,036)
                                                                                                                        -----------
   Comprehensive income ........................                                                                            245,249
   Stock dividend (10%), net of cash)
     in lieu of fractional shares ..............          79,994             (75)               -                -              (75)
                                                         -------     -----------      -----------      -----------      -----------

Balance, December 31, 2002 .....................         879,994       7,984,925         (205,734)          80,946        7,860,137
                                                                                                                        -----------
   Net income ..................................               -               -          356,048                -          356,048
   Other comprehensive income, net
     of income taxes:
   Unrealized loss on investment
        securities .............................               -               -                -          (49,216)         (49,216)
                                                                                                                        -----------
   Comprehensive income ........................                                                                            306,832
   Stock dividend (10%), net of
     cash in lieu of fractional
     shares ....................................          87,974            (317)               -                -             (317)
                                                         -------     -----------      -----------      -----------      -----------

 Balance, December 31, 2003 ....................         967,968     $ 7,984,608      $   150,314      $    31,730      $ 8,166,652
                                                         =======     ===========      ===========      ===========      ===========
</TABLE>















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



                                       20
<PAGE>



                       CORNERSTONE BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             For the years ended December 31,
                                                                                             --------------------------------
                                                                                      2003                2002                 2001
                                                                                      ----                ----                 ----
Operating Activities
<S>                                                                              <C>                <C>                <C>
     Net income (loss) ....................................................      $    356,048       $    247,285       $   (137,593)
     Adjustments to reconcile net income (loss) to net cash
         provided by operating activities
        Depreciation and net amortization .................................           281,036            244,632            151,035
        Deferred income tax provision (benefit) ...........................           (39,200)            20,571             (6,785)
        Provision for possible loan losses ................................           173,574            182,842            180,500
        Loss on sale of property and equipment ............................             2,191                  -                  -
        (Increase) decrease in other assets ...............................            72,422            (43,742)          (111,583)
        Increase (decrease) in other liabilities ..........................           191,565             (9,469)            12,014
                                                                                 ------------       ------------       ------------

           Net cash provided by operating activities ......................         1,037,636            642,119             87,588
                                                                                 ------------       ------------       ------------

Investing Activities
     Decrease (increase) in federal funds sold ............................        (2,153,508)           (35,000)         2,360,000
     Proceeds from maturities and principal paydowns of
        investment securities .............................................        11,381,446         10,043,430          6,616,892
     Purchase of investment securities ....................................        (7,501,000)       (15,937,498)        (9,491,242)
     Purchase of Federal Home Loan Bank of Atlanta stock ..................          (280,000)                 -                  -
     Purchase of life insurance policies ..................................        (1,088,338)                 -                  -
     Increase in loans, net ...............................................       (17,707,978)       (10,241,025)       (13,038,277)
     Proceeds from sale of property and equipment .........................             2,500                  -                  -
     Purchase of property and equipment ...................................           (87,660)        (1,005,292)          (626,541)
                                                                                 ------------       ------------       ------------

           Net cash used for investing activities .........................       (17,434,538)       (17,175,385)       (14,179,168)
                                                                                 ------------       ------------       ------------

Financing Activities
     Net increase in deposits .............................................        11,578,697         13,797,838         15,118,823
     Net increase in customer repurchase agreements .......................           789,471          1,689,761            513,706
     Borrowings from Federal Home Loan Bank of Atlanta ....................         5,000,000                  -                  -
     Cash in lieu of fractional shares ....................................              (317)               (75)                 -
                                                                                 ------------       ------------       ------------

           Net cash provided by financing activities ......................        17,367,851         15,487,524         15,632,529
                                                                                 ------------       ------------       ------------

           Net increase (decrease) in cash and cash equivalents ...........           970,949         (1,045,742)         1,540,949

Cash and due from banks, beginning of year ................................         1,604,208          2,649,950          1,109,001
                                                                                 ------------       ------------       ------------

Cash and due from banks, end of year ......................................      $  2,575,157       $  1,604,208       $  2,649,950
                                                                                 ============       ============       ============

Cash paid for:
     Interest .............................................................      $  1,193,619       $  1,251,165       $  1,424,848
                                                                                 ============       ============       ============

     Income taxes .........................................................      $     42,679       $      2,740       $     47,951
                                                                                 ============       ============       ============
</TABLE>


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



                                       21
<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  offered its
common stock for sale to the public under an initial  public  offering  price of
$10 per share and raised  approximately  $8 million in capital,  net of offering
expenses.  The Company obtained  regulatory  approval to operate a national bank
and  opened  the  Bank  for  business  on  September  15,  1999,  with  a  total
capitalization  of $6 million.  The Bank opened a branch location in Greenville,
South Carolina in 2002. 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 the regulation of the Federal Reserve Board.

   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  has
     concentrations  of credit in  construction,  manufacturing,  retail  trade,
     finance  and  insurance,  real  estate  rental and  leasing,  professional,
     scientific and technical services, administrative support, waste management
     and remediation  services,  and health care social  assistance  industries,
     which by category  comprise over 25 percent 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).

     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.


                                                                     (Continued)



                                       22
<PAGE>



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

     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.

     Other  investments  include  the Bank's  stock  investments  in the Federal
     Reserve Bank  ("FRB") and the Federal  Home Loan Bank of Atlanta  ("FHLB").
     The  Bank,  as a member  institution,  is  required  to own  certain  stock
     investments in the FRB and FHLB. The stock is generally pledged against any
     borrowings  from the FRB 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.

     Loans are generally placed on non-accrual status when principal or interest
     becomes  ninety days past due, or when payment in full is not  anticipated.
     When a loan is placed  on  non-accrual  status,  interest  accrued  but not
     received is generally  reversed against interest income.  If collectibility
     is in  doubt,  cash  receipts  on  non-accrual  loans are not  recorded  as
     interest income, but are used to reduce principal.

     Non-performing  assets include real estate acquired through  foreclosure or
     deed taken in lieu of foreclosure,  and loans on non-accrual status.  Loans
     are placed on non-accrual  status when, in the opinion of  management,  the
     collection of additional  interest is questionable.  Thereafter no interest
     is taken  into  income  unless  received  in cash or until such time as the
     borrower demonstrates the ability to pay principal and interest.

   Allowance for possible loan losses
     The  provision  for  possible  loan losses  charged to  operating  expenses
     reflects  the amount  deemed  appropriate  by  management  to  establish an
     adequate  reserve to meet the present and estimated  losses inherent 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 and prevailing
     and  anticipated  economic  conditions.  Loans  that are  determined  to be
     uncollectible  are charged  against the allowance.  Provisions for possible
     loan losses and recoveries on loans previously charged off are added to the
     allowance.

     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  loans 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.  Fair value 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.
                                                                     (Continued)


                                       23
<PAGE>

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

   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.

   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.

   Earnings (loss) per common share
     Basic  earnings  (loss) 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 (loss) per common share. The
     Company declared 10 percent stock dividends to shareholders of record as of
     March 17, 2003 and April 30, 2002. All per share amounts have been restated
     to reflect these transactions.

   Statement of cash flows
     For purposes of reporting cash flows, cash and cash equivalents are defined
     as those  amounts  included in the balance sheet caption "Cash and Due From
     Banks". Cash and cash equivalents have an original maturity of three months
     or less. Federal funds sold are reported  separately due to the materiality
     of balances from time to time.

   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
     (cash on hand and due from banks) approximate their fair value.

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


                                                                     (Continued)


                                       24
<PAGE>

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

          Investment  securities  - Fair values for  investment  securities  are
          based on quoted market  prices.  The carrying  amounts of FRB 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 - The fair  values  disclosed  for demand  deposits  are,  by
          definition,  equal to their carrying amounts.  The carrying amounts of
          variable  rate,   fixed-term  money  market  accounts  and  short-term
          certificates of deposit approximate their fair values at the reporting
          date. Fair values for long-term fixed-rate certificates of deposit are
          estimated  using a  discounted  cash  flow  calculation  that  applies
          interest rates  currently  being offered on certificates to a schedule
          of aggregated expected monthly maturities.

          Customer  repurchase  agreements - The carrying  amounts of securities
          sold under repurchase agreements approximate their fair value.

          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  estimated
          using a discounted cash flow  calculation  that applies interest rates
          currently  being  offered  on  advances  to a schedule  of  aggregated
          expected maturities.





















                                                                     (Continued)



                                       25
<PAGE>


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

   Stock Based Compensation
     The Company has stock-based  director and employee  compensation plans (the
     "1999  Plan" and the  "2003  Plan" as  further  described  in Note 16.  The
     Company  accounts  for the plans  under  the  recognition  and  measurement
     principles  of  Accounting   Principles   Board  ("APB")  Opinion  No.  25,
     "Accounting for Stock Issued to Employees", and related Interpretations. No
     stock-based  compensation  cost is  reflected  in net income,  as all stock
     options  granted  under the 1999 Plan had an  exercise  price  equal to the
     market value of the  underlying  common stock on the date of grant,  and no
     awards  have been made as of  December  31,  2003 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, "Accounting for Stock-Based Compensation", to stock-based director
     compensation.

<TABLE>
<CAPTION>
                                                                                                   For the years ended
                                                                                                       December 31,
                                                                                                       ------------
                                                                                         2003              2002             2001
                                                                                         ----              ----             ----
Net income (loss):
<S>                                                                                 <C>               <C>               <C>
As reported .................................................................       $   356,048       $   247,285       $  (137,593)
Deduct:  Total stock-based compensation expense determined
under fair value based method for all awards,  net of related tax
effects .....................................................................                 -                 -           (17,200)
                                                                                    -----------       -----------       -----------
Pro forma ...................................................................       $   356,048       $   247,285       $  (154,793)
                                                                                    ===========       ===========       ===========

Basic earnings (loss) per common share
As reported .................................................................       $        .37      $        .26      $      (.14)
Pro forma ...................................................................       $        .37      $        .26      $      (.16)

Diluted earnings (loss) per common share
As reported .................................................................       $        .36      $        .25      $      (.14)
 Pro forma ..................................................................       $        .36      $        .25      $      (.16)
</TABLE>

     The fair value of the option  grant is estimated on the date of grant using
     the  Black-Scholes  option pricing model.  The risk free interest rate used
     was 5.89  percent  and the assumed  dividend  rate was zero.  The  expected
     option  life was 3 years.  As a result,  the pro forma  amounts  were fully
     expensed as of December 31, 2001.

   Recently issued accounting standards

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

     In December 2002, the Financial  Accounting Standards Board ("FASB") issued
     SFAS No. 148,  "Accounting  for  Stock-based  Compensation--Transition  and
     Disclosure",  an  amendment  of FASB  Statement  No. 123,  "Accounting  for
     Stock-Based Compensation", to provide alternative methods of transition for
     a  voluntary  change  to the fair  value  based  method of  accounting  for
     stock-based employee compensation.  SFAS No. 148 also amends the disclosure
     provisions  of SFAS No.  123 and APB  Opinion  No. 28,  "Interim  Financial
     Reporting",  to require disclosure in the summary of significant accounting
     policies of the effects of an entity's  accounting  policy with  respect to
     stock-based  employee  compensation on reported net income and earnings per
     share in annual and interim financial  statements.  While SFAS No. 148 does
     not amend SFAS No. 123 to require  companies to account for employee  stock
     options using the fair value method, the disclosure  provisions of SFAS No.
     148 are applicable to all companies with stock-based employee compensation,
     regardless  of whether  they account for that  compensation  using the fair
     value method of SFAS No. 123 or the  intrinsic  value method of APB Opinion
     No. 25. The provisions of SFAS No. 148 were effective for annual  financial
     statements  for fiscal  years  ending  after  December  15,  2002,  and for
     financial reports  containing  condensed  financial  statements for interim
     periods  beginning  after  December 15,  2002.  The Company has adopted the
     disclosure provisions of SFAS No. 148, which had no impact on the financial
     condition or operating results of the Company.

                                                                     (Continued)

                                       26
<PAGE>


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

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
     Derivative  Instruments  and Hedging  Activities."  SFAS No. 149 amends and
     clarifies   accounting  for  derivative   instruments,   including  certain
     derivative  instruments  embedded in other  contracts and loan  commitments
     that relate to the  origination  of mortgage  loans held for sale,  and for
     hedging activities under SFAS No. 133. SFAS No. 149 was generally effective
     for contracts entered into or modified after June 30, 2003. The adoption of
     SFAS No. 149 did not have a material  impact on the financial  condition or
     operating results of the Company.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with Characteristics of both Liabilities and Equity."
     SFAS  No.  150  establishes  standards  for how an  issuer  classifies  and
     measures  certain  financial   instruments  with  characteristics  of  both
     liabilities  and equity.  It requires  that an issuer  classify a financial
     instrument  that is within  its scope as a  liability  (or an asset in some
     circumstances.)  Many of those  instruments  were previously  classified as
     equity.  SFAS No. 150 was generally  effective  for  financial  instruments
     entered into or modified after May 31, 2003, and otherwise was effective at
     the beginning of the first interim  period  beginning  after  September 15,
     2003.  The  adoption of SFAS No. 150 did not have a material  impact on the
     financial condition or operating results of the Company.

     In  November  2002,  the  FASB  issued   Interpretation   ("FIN")  No.  45,
     "Guarantor's   Accounting  and  Disclosure   Requirements  for  Guarantees,
     Including  Indirect  Guarantees  of  Indebtedness  of  Others".  FIN No. 45
     requires a company,  at the time it issues a  guarantee,  to  recognize  an
     initial  liability  for the fair  value of  obligations  assumed  under the
     guarantee and  elaborates on existing  disclosure  requirements  related to
     guarantees and warranties.  The initial recognition requirements of FIN No.
     45 are effective for guarantees issued or modified after December 31, 2002.
     The  disclosure  requirements  were  effective for financial  statements of
     periods  ending after December 15, 2002. The adoption of FIN No. 45 did not
     have a material  effect on the Company's  financial  position or results of
     operations.

     In January  2003,  the FASB issued FIN No. 46,  "Consolidation  of Variable
     Interest  Entities." FIN No. 46 requires a variable  interest  entity to be
     consolidated  by a company if that  company is subject to a majority of the
     risk of loss from the variable interest entity's  activities or entitled to
     receive a majority of the entity's  residual  returns,  or both. FIN No. 46
     also requires  disclosures  about variable interest entities that a company
     is not required to consolidate,  but in which it has a significant variable
     interest.  FIN No. 46 provides  guidance for determining  whether an entity
     qualifies  as a  variable  interest  entity  by  considering,  among  other
     considerations,  whether the entity lacks  sufficient  equity or its equity
     holders  lack   adequate   decision-making   ability.   The   consolidation
     requirements  of FIN  No.  46  applied  immediately  to  variable  interest
     entities  created after January 31, 2003.  The  consolidation  requirements
     applied to  existing  entities in the first  fiscal year or interim  period
     beginning after June 15, 2003. Certain of the disclosure requirements apply
     in all financial  statements  issued after January 31, 2003,  regardless of
     when the variable interest entity was established.  The adoption of FIN No.
     46 did not have a material  effect on the Company's  financial  position or
     results of operations since the Company has no variable interest entities.

     In  November  2003,  the  Emerging  Issues  Task Force  ("EITF")  reached a
     consensus that certain  quantitative and qualitative  disclosures should be
     required for debt and marketable equity securities  classified as available
     for sale or held to  maturity  under SFAS No. 115 and SFAS No. 124 that are
     impaired  at the balance  sheet date but for which an  other-than-temporary
     impairment has not been recognized.  Accordingly,  the EITF issued EITF No.
     03-1, "The Meaning of  Other-Than-Temporary  Impairment and Its Application
     to   Certain   Investments."   This   issue   addresses   the   meaning  of
     other-than-temporary   impairment   and  its   application  to  investments
     classified as either  available for sale or held to maturity under SFAS No.
     115 and provides guidance on quantitative and qualitative disclosures. EITF
     No. 03-1 was  effective  for fiscal years  ending after  December 15, 2003.
     Adopting the disclosure provisions of EITF No. 03-1 did not have a material
     effect on the Company's financial position or results of operations.

     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.


                                                                     (Continued)



                                       27
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued

Risks and Uncertainties
     In the normal course of its business the Company encounters two significant
     types of risks: economic and regulatory. There are three main components of
     economic risk: interest rate risk, credit risk and market risk. The Company
     is subject to interest  rate risk to the degree  that its  interest-bearing
     liabilities  mature or reprice at different  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 Federal  Reserve Bank. At December 31, 2003 and 2002
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, 2003 and 2002 federal  funds sold  amounted to  $3,158,508  and  $1,005,000,
respectively.

NOTE 4 - INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                                              December 31, 2003
                                                                                              -----------------
                                                                                               Gross unrealized
                                                                        Amortized              ----------------              Fair
                                                                           cost             Gains           Losses           value
                                                                           ----             -----           ------           -----
<S>                                                                    <C>              <C>              <C>              <C>
Federal agencies ...............................................       $8,435,682       $   37,763       $   10,776       $8,462,669
Mortgage-backed securities .....................................          669,956            9,981                -          679,937
Corporate bonds ................................................          216,160           11,107                -          227,267
                                                                       ----------       ----------       ----------       ----------
        Total investment securities available-for-sale .........       $9,321,798       $   58,851       $   10,776       $9,369,873
                                                                       ==========       ==========       ==========       ==========
</TABLE>



<TABLE>
<CAPTION>
                                                                                           December 31, 2002
                                                                                           -----------------
                                                                                            Gross unrealized
                                                                    Amortized               ----------------                Fair
                                                                       cost              Gains             Losses           value
                                                                       ----              -----             ------           -----
<S>                                                                <C>               <C>               <C>               <C>
Federal agencies ...........................................       $10,223,713       $   112,595       $         -       $10,336,308
Mortgage-backed securities .................................         1,028,836             4,357                 -         1,033,193
Corporate bonds ............................................         1,515,161             6,724             1,030         1,520,855
                                                                   -----------       -----------       -----------       -----------
        Total investment securities available-for-sale .....       $12,767,710       $   123,676       $     1,030       $12,890,356
                                                                   ===========       ===========       ===========       ===========
</TABLE>


                                                                     (Continued)



                                       28
<PAGE>

NOTE 4 - INVESTMENT SECURITIES, Continued

         While four  individual  U.S.  Government  agency  securities  are in an
unrealized loss position as of December 31, 2003,  none of these  securities has
been in a continuous  loss position for twelve  months or more.  The Company has
the  ability  and intent 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   issuer   and    therefore,    these   losses   are   not   considered
other-than-temporary.

         The   amortized   cost  and  fair   value  of   investment   securities
held-to-maturity  as of December 31, 2003 and 2002 are  summarized  in the table
below.

<TABLE>
<CAPTION>
                                                                                              December 31, 2003
                                                                                              -----------------
                                                                                              Gross unrealized
                                                                    Amortized                 ----------------              Fair
                                                                      cost                 Gains           Losses           value
                                                                      ----                 -----           ------           -----
<S>                                                               <C>                  <C>                   <C>          <C>
Federal agencies held-to-maturity ..........                      $5,222,430           $  232,650            $-           $5,455,080
                                                                  ==========           ==========            ==           ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                              December 31, 2002
                                                                                              -----------------
                                                                                               Gross unrealized
                                                                    Amortized                  ----------------             Fair
                                                                       cost                 Gains          Losses           value
                                                                       ----                 -----          ------           -----
<S>                                                                <C>                  <C>                  <C>          <C>
Federal agencies .......................................           $5,231,214           $  272,782           $-           $5,503,996
Corporate bonds ........................................              502,944                6,478            -              509,422
                                                                   ----------           ----------           --           ----------
        Total investment securities
        held-to-maturity ...............................           $5,734,158           $  279,260           $-           $6,013,418
                                                                   ==========           ==========           ==           ==========
</TABLE>

         The Bank, as a member institution,  is required to own stock in the FRB
and the FHLB. 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, 2003 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.

<TABLE>
<CAPTION>
                                                                                                            December 31, 2003
                                                                                                            -----------------
                                                                                                    Amortized               Fair
                                                                                                      Cost                  Value
                                                                                                      ----                  -----

<S>                                                                                               <C>                    <C>
Within one year ......................................................................            $ 1,172,826            $ 1,185,234
Due after one through five years .....................................................             10,439,366             10,682,191
Due after five through ten years .....................................................              2,169,956              2,185,642
Due in over ten years ................................................................                762,080                771,886
Federal Reserve and Federal Home Loan Bank stock (no maturity) .......................                460,000                460,000
                                                                                                  -----------            -----------

    Total investment securities ......................................................            $15,004,228            $15,284,953
                                                                                                  ===========            ===========
</TABLE>

         At  December  31,  2003  and  2002,  securities  with a fair  value  of
$9,109,898 and $10,563,862,  respectively,  were pledged to collateralize public
deposits, sweep accounts, and repurchase agreements.




                                       29
<PAGE>


NOTE 5 - LOANS

         The composition of net loans by major loan category is presented below.


                                                             December 31,
                                                             ------------
                                                         2003            2002
                                                         ----            ----
Commercial .....................................     $11,242,095     $ 8,395,171
Real estate - construction .....................      12,018,222       8,472,508
Real estate - mortgage .........................      33,427,094      22,933,566
Consumer .......................................       2,721,694       1,898,857
                                                     -----------     -----------

Loans, gross ...................................      59,409,105      41,700,102

Less allowance for possible loan losses ........         727,971         553,372
                                                     -----------     -----------

Loans, net .....................................     $58,681,134     $41,146,730
                                                     ===========     ===========


         At  December  31, 2003 and 2002 there were no  nonaccruing  or impaired
loans.  Activity in the  allowance  for possible loan losses for the years ended
December 31, 2003, 2002, and 2001 is summarized in the table below.

<TABLE>
<CAPTION>
                                                                                         For the years ended December 31,
                                                                                         --------------------------------
                                                                                      2003               2002               2001
                                                                                      ----               ----               ----
<S>                                                                                <C>                <C>                 <C>
Allowance for possible loan losses, beginning of year ...................          $ 553,372          $ 384,320           $ 207,000
Provision for loan losses ...............................................            173,574            182,842             180,500
Charge-offs .............................................................                  -            (13,790)             (3,180)
Recoveries ..............................................................              1,025                  -                   -
                                                                                   ---------          ---------           ---------

Allowance for possible loan losses, end of year .........................          $ 727,971          $ 553,372           $ 384,320
                                                                                   =========          =========           =========
</TABLE>


         As of December 31, 2003,  approximately $33.8 million or 56.9% of total
gross loans were variable rate loans.  As of December 31, 2003,  the FHLB held a
blanket lien on the Bank's loans as collateral for borrowings.


NOTE 6 - PROPERTY AND EQUIPMENT

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

                                                              December 31,
                                                              ------------
                                                         2003            2002
                                                         ----            ----
Land and improvements ........................       $1,066,952       $1,066,952
Bank premises ................................        2,063,345        2,063,345
Furniture, equipment and software ............          869,424          823,246
Vehicles .....................................           60,869           50,129
                                                     ----------       ----------
                                                      4,060,590        4,003,672
Accumulated depreciation .....................          585,738          407,948
                                                     ----------       ----------

    Total property and equipment .............       $3,474,852       $3,595,724
                                                     ==========       ==========


                                                                     (Continued)




                                       30
<PAGE>


NOTE 6 - PROPERTY AND EQUIPMENT, Continued

         Depreciation  expense for the years ended  December 31, 2003,  2002 and
2001 amounted to $203,841, $170,829, and $151,035, 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>
      Software                                              3                                   Straight-line
      Furniture, equipment and software                     5 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,
                                                           ------------
                                                      2003              2002
                                                      ----              ----

Noninterest bearing ........................       $ 9,202,362       $ 7,269,138
Interest bearing:
     NOW accounts ..........................         9,999,335         7,859,404
     Money market accounts .................        11,424,959         8,652,450
     Savings ...............................         3,763,669         2,931,777
     Time, less than $100,000 ..............        19,093,476        16,426,078
     Time, $100,000 and over ...............        11,802,418        10,568,675
                                                   -----------       -----------

     Total deposits ........................       $65,286,219       $53,707,522
                                                   ===========       ===========

         Interest expense on time deposits greater than $100,000 was $345,564 in
2003, $324,001 in 2002, and $366,797 in 2001.

         At December  31,  2003 the  scheduled  maturities  of  certificates  of
deposit are as follows:

         2004 ..........................................      $17,958,127
         2005 ..........................................        3,075,219
         2006 ..........................................          416,849
         2007 ..........................................        4,187,209
         2008 ..........................................        5,258,490
                                                              -----------
                                                              $30,895,894
                                                              ===========





                                       31
<PAGE>


NOTE 8 - CUSTOMER REPURCHASE AGREEMENTS

         Customer repurchase agreements consist of the following:

                                                            December 31,
                                                            ------------
                                                       2003             2002
                                                       ----             ----
Sweep accounts .............................        $4,772,192        $3,982,721
Retail repurchase agreements ...............         1,000,000         1,000,000
                                                    ----------        ----------
                                                    $5,772,192        $4,982,721
                                                    ==========        ==========


         The Bank enters into sweep and retail  repurchase  agreements  with its
customers.  The sweep  agreements  generally mature  overnight.  At December 31,
2003, the Bank had one retail repurchase  agreement that matures in April, 2005.
U. S. Government  securities with an amortized cost of $7,276,027 and $6,432,662
(fair value of $7,437,547 and  $6,630,019)  are used as collateral for the sweep
accounts and repurchase agreements, at December 31, 2003 and 2002, respectively.


NOTE 9 -BORROWINGS FROM FEDERAL HOME LOAN BANK OF ATLANTA

         At December  31,  2003,  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  loans  or  mortgage-backed
securities. At December 31, 2003 the Bank had a $5,000,000 advance at a variable
rate of interest borrowed under the line. The advance matures December 17, 2004,
and can be repaid at any time prior to that date  without  penalty.  At December
31, 2003 the interest rate on the borrowing was 1.15%. The highest balance as of
any month end for  borrowings  from the FHLB was $5.0 million.  The average rate
paid on the advance during the year was 1.46%.  The average balance for the only
month the advance was outstanding was $1.6 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,  2003,  there is no  litigation
pending.

         The Company has approximately one year remaining on its contract with a
data processing service. Monthly costs are approximately $13,300.

         From time to time the Bank may guarantee  merchant credit card accounts
on behalf of certain customers. At December 31, 2003 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,  2003,  the Bank had unused lines of credit to purchase
federal funds totaling  $2,850,000 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.





                                       32
<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>
                                                                             For the years ended December 31,
                                                                             --------------------------------
                                                                   2003                     2002                        2001
                                                                   ----                     ----                        ----

<S>                                                   <C>                <C>     <C>                <C>     <C>                <C>
Tax expense (benefit) at statutory rate ...........   $ 183,400           34%    $ 104,650           34%    $ (49,089)          34%
Increase (decrease) in taxes resulting
from:
     Valuation allowance adjustment ...............     (16,140)          (3)      (52,641)         (17)       42,304          (29)
     State income taxes, net of federal
     benefit ......................................      10,600            2         8,491            3             -            -
     Other ........................................       5,558            1             -            -             -            -
                                                      ---------           --     ---------           --     ---------           --
Income tax provision (benefit) ....................   $ 183,418           34%    $  60,500           20%    $  (6,785)           5%
                                                      =========           ==     =========           ==     =========           ==
</TABLE>


         The income tax effect of cumulative  temporary  differences at December
31, are as follows:

<TABLE>
<CAPTION>
                                                                                                       2003                   2002
                                                                                                       ----                   ----

Deferred tax asset (liability):
<S>                                                                                                <C>                    <C>
        Allowance for loan losses ....................................................             $ 243,000              $ 179,540
        Unrealized net gains on securities available for sale ........................               (16,300)               (41,700)
         Depreciation ................................................................              (111,500)               (71,100)
                                                                                                   ---------              ---------
               Net deferred tax assets ...............................................               115,200                 66,740
               Less valuation allowance ..............................................                52,951                 69,091
                                                                                                   ---------              ---------

               Net deferred tax asset (liability) ....................................             $  62,249              $  (2,351)
                                                                                                   =========              =========
</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:

                                                    For the years ended
                                                          December 31,
                                                          ------------
                                                2003         2002        2001
                                                ----         ----        ----

Income taxes currently payable ...........   $ 222,618    $  39,929   $       -

Deferred income tax provision (benefit) ..     (39,200)      20,571      (6,785)
                                             ---------    ---------   ---------
        Income tax provision (benefit) ...   $ 183,418    $  60,500   $  (6,785)
                                             =========    =========   =========



                                       33
<PAGE>


NOTE 13 - RELATED PARTY TRANSACTIONS

         Certain directors, executive officers and companies with which they are
affiliated,  are customers of and have banking 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.

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

                                                   For the years ended
                                                      December 31,
                                                      ------------
                                          2003            2002           2001
                                          ----            ----           ----
Balance, beginning of year ........     $1,461,682     $1,896,689     $1,540,130
New loans or lines of credit ......      3,830,800        880,647      1,115,409
Less loan payments ................      1,566,759      1,315,654        758,850
                                        ----------     ----------     ----------
Balance, end of year ..............     $3,725,723     $1,461,682     $1,896,689
                                        ==========     ==========     ==========


         Deposits by directors, executive officers, and their related interests,
at December 31, 2003 and 2002 were $1,647,139 and $1,516,941, 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 amount of those instruments  reflects 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, 2003 and 2002,
unfunded   commitments  to  extend  credit  were   $14,054,616  and  $8,985,246,
respectively,  and  outstanding  letters of credit were  $158,709 and  $232,554,
respectively.  At December 31, 2003, the unfunded commitments consisted of $13.2
million at variable rates and $849,000 at fixed rates with $6.3 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,  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 2003 and 2002.


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 2003, 2002, and 2001
amounted to $29,831, $25,142, and $21,023, respectively.




                                       34
<PAGE>


NOTE 16 - STOCK OPTION PLANS

         The Board of Directors  and  shareholders  approved a stock option plan
for the benefit of the  directors in 1999 (the "1999  Plan").  The Board granted
40,000  options at an option price of $10 per share  (adjusted to 48,400 options
at an option price of $8.26 per share by the stock  dividends  discussed in Note
17).  All options  under the 1999 Plan vest 33 percent each year for three years
and expire 10 years from the grant date. A summary of the 1999 Plan is presented
below:


<TABLE>
<CAPTION>
                                                                            For the years ended December 31,
                                                                            --------------------------------
                                                            2003                          2002                        2001
                                                            ----                          ----                        ----
                                                                    Weighted                      Weighted                  Weighted
                                                                     average                      average                   average
                                                      Shares        exercise        Shares        exercise      Shares      exercise
                                                                      price                        price                     price
                                                      ------          -----       --------         -----       -------       -----

<S>                                                   <C>          <C>             <C>          <C>             <C>         <C>
Outstanding at beginning of year .................    46,786       $  8.26         48,400       $  8.26         48,400      $   8.26
Granted ..........................................         -             -              -             -              -             -
Exercised ........................................         -             -              -             -              -             -
Forfeited or expired .............................    (3,226)         8.26         (1,614)         8.26              -             -
                                                      ------                       ------                       ------

Outstanding at end of year .......................    43,560          8.26         46,786          8.26         48,400          8.26
                                                      ======                       ======                       ======

Options exercisable at end of year ...............    43,560          8.26         46,786          8.26         32,267          8.26
Shares available for grant .......................     4,840                        1,614                         None
</TABLE>

         As  described  in Note 17  below,  the  Company's  Board  of  Directors
declared 10 percent stock  dividends to shareholders of record on March 17, 2003
and on April 30, 2002. The Company's stock option agreements under the 1999 Plan
provide for stock  dividends and other similar stock  transactions to affect the
options  granted  under the  agreements.  The  agreements  also  provide for the
aggregate  consideration  to be paid  upon  exercise  of the  options  to remain
unchanged  following a stock  dividend.  Therefore,  the above table  reflects a
weighted  average  exercise  price of $8.26 per  share  rather  than the  $10.00
original exercise price.

         In May 2003 the Company's shareholders approved the Cornerstone Bancorp
2003 Stock Option Plan (the "2003  Plan").  The 2003 Plan provides for a maximum
of 125,000  options to be  granted.  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.  As of December 31, 2003,  no
options had been granted under the 2003 Plan.


NOTE 17 - DIVIDENDS

         There are no current  plans to initiate  payment of cash  dividends and
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. Federal banking regulations restrict the amount of
dividends  that the Bank can pay to the  Company.  At December 31, 2003 the Bank
has no plans to pay cash  dividends  because of the  Bank's  growth  plans.  The
Company's Board of Directors declared 10 percent stock dividends to shareholders
of record on March 17, 2003 and on April 30,  2002.  The total  number of common
shares outstanding as of December 31, 2003 is 967,968.





                                       35
<PAGE>


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, 2003,
that the Bank meets all capital adequacy requirements to which it is subject.

         As of December 31, 2003,  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
                                                             ------         -----      ------         -----      ------        -----
                                                                                     (dollars in thousands)
As of December 31, 2003
<S>                                                         <C>            <C>        <C>             <C>       <C>            <C>
   Total Capital (to risk weighted
        assets) ....................................        $7,959         12.2%      $5,236          8.0%      $6,545         10.0%
   Tier 1 Capital (to risk weighted
        assets) ....................................         7,231         11.1        2,618          4.0        3,927          6.0
   Tier 1 Capital (to average
        assets) ....................................         7,231          9.0        3,201          4.0        4,001          5.0

As of December 31, 2002
   Total Capital (to risk weighted
        assets) ....................................        $7,385         15.0%      $3,938          8.0%      $4,923         10.0%
   Tier 1 Capital (to risk weighted
        assets) ....................................         6,832         13.9        1,969          4.0        2,954          6.0
   Tier 1 Capital (to average
        assets) ....................................         6,832          9.8        2,799          4.0        3,498          5.0
</TABLE>






                                       36
<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,
                                                                                               ------------
                                                                                   2003                               2002
                                                                                   ----                               ----
                                                                         Carrying         Fair            Carrying           Fair
                                                                          Amount          Value            Amount            Value
                                                                          ------          -----            ------            -----
FINANCIAL ASSETS
<S>                                                                   <C>              <C>              <C>              <C>
      Cash and due from banks ..................................      $ 2,575,157      $ 2,575,157      $ 1,604,208      $ 1,604,208
      Federal funds sold .......................................        3,158,508        3,158,508        1,005,000        1,005,000
      Investment securities ....................................       15,052,303       15,284,953       18,804,514       19,083,775
      Loans, gross .............................................       59,409,105       60,235,361       41,700,102       42,327,723
FINANCIAL LIABILITIES
      Deposits .................................................       65,286,219       65,932,064       53,707,522       54,074,096
      Securities sold under repurchase agreements ..............        5,772,192        5,772,192        4,982,721        4,982,721
      Borrowings from Federal Home Loan Bank of Atlanta ........        5,000,000        5,000,000                -                -
</TABLE>


NOTE 20 - PARENT COMPANY INFORMATION

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

                                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                              ------------
                                                                                                       2003                  2002
                                                                                                       ----                  ----
ASSETS
<S>                                                                                                <C>                    <C>
     Cash and interest bearing deposits ..............................................             $  870,019             $  907,559
     Investment in subsidiary ........................................................              7,262,623              6,912,836
     Other assets ....................................................................                 40,000                 40,000
                                                                                                   ----------             ----------

                                 Total Assets ........................................             $8,172,642             $7,860,395
                                                                                                   ==========             ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
     Accrued expenses ................................................................             $    5,990             $      258
     Shareholders' equity ............................................................              8,166,652              7,860,137
                                                                                                   ----------             ----------

                  Total Liabilities and shareholders' equity .........................             $8,172,642             $7,860,395
                                                                                                   ==========             ==========
</TABLE>












                                                                     (Continued)




                                       37
<PAGE>


NOTE 20 - PARENT COMPANY INFORMATION, Continued

                         CONDENSED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                                           For the years ended December 31,
                                                                                           --------------------------------
                                                                                     2003               2002                 2001
                                                                                     ----               ----                 ----
INCOME
<S>                                                                              <C>                  <C>                 <C>
   Interest ..........................................................           $  11,839            $  35,877           $  71,725

EXPENSES
   Sundry ............................................................              54,794               30,564              32,813
      Income (loss) before equity in undistributed
       net income (loss) of bank subsidiary ..........................             (42,955)               5,313              38,912

   Equity  in  undistributed net income (loss) of ....................             399,003              241,972            (176,505)
      subsidiary
                                                                                 ---------            ---------           ---------
      Net income (loss) ..............................................           $ 356,048            $ 247,285           $(137,593)
                                                                                 =========            =========           =========
</TABLE>



                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                          For the years ended December 31,
                                                                                          --------------------------------
                                                                                   2003                 2002                 2001
                                                                                   ----                 ----                 ----
OPERATING ACTIVITIES
<S>                                                                           <C>                  <C>                  <C>
    Net income (loss) ...............................................         $   356,048          $   247,285          $  (137,593)
       Adjustments  to reconcile  net income (loss) to
       net  cash  provided  by  (used  for)  operating
       activities
       Equity in  undistributed  net (income)  loss of
       subsidiary ...................................................            (399,003)            (241,972)             176,505
       Increase in other assets .....................................                   -                    -              (35,472)
       Increase (decrease) in accrued expenses ......................               5,732                 (578)              (1,064)
                                                                              -----------          -----------          -----------
          Net cash provided by (used for) operating
          activities ................................................             (37,223)               4,735                2,376
                                                                              -----------          -----------          -----------

INVESTING ACTIVITIES
    Investment in bank subsidiary ...................................                   -           (1,000,000)                   -
    Proceeds from maturity of certificate of deposit ................                   -                    -              100,000
                                                                              -----------          -----------          -----------
          Net cash  provided  by (used for)  investing
          activities ................................................                   -           (1,000,000)             100,000
                                                                              -----------          -----------          -----------
 FINANCING ACTIVITIES
          Cash paid in lieu of fractional shares ....................                (317)                 (75)                   -
                                                                              -----------          -----------          -----------
          Net increase (decrease) in cash ...........................             (37,540)            (995,340)             102,376

Cash, beginning of year .............................................             907,559            1,902,899            1,800,523
                                                                              -----------          -----------          -----------

Cash, end of year ...................................................         $   870,019          $   907,559          $ 1,902,899
                                                                              ===========          ===========          ===========
</TABLE>




                                       38