EXHIBIT 13


















                               CORNERSTONE BANCORP

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




<PAGE>
FORWARD LOOKING STATEMENTS

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

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

     o    The Company's growth and ability to maintain growth;

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

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

     o    the effects of competition from other financial institutions operating
          in the Company's  market areas and elsewhere,  including  institutions
          operating locally, regionally, nationally and internationally;

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

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

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

WEBSITE REFERENCES

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

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 Bank  established a wholly owned  subsidiary,
Crescent Financial Services,  Inc. ("Crescent") in 2004. Crescent did not engage
in any transactions in 2004.

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

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


                                       2
<PAGE>

significant accounting policies of the Company are described in the notes to the
consolidated financial statements.

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

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

Earnings Performance

         The Company earned $664,000 or $.62 per basic common share and $.61 per
diluted  common share for the year ended  December 31,  2004.  This  compares to
$356,000 or $.33 per basic and diluted  common share for the year ended December
31,  2003.  The Company had net income of $247,000 or $.23 per basic and diluted
common share for the year ended December 31, 2002.  The Company's  earnings have
consistently 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 $3.2 million,  $2.6 million,  and $2.1
million for 2004,  2003,  and 2002,  respectively.  The  Company  also had other
operating income (principally mortgage loan origination fees and service fees on
deposits)  of  $719,000,  $617,000,  and  $472,000  in  2004,  2003,  and  2002,
respectively.  The Company  provided  $197,000,  $174,000,  and  $183,000 to its
allowance for loan losses in 2004, 2003, and 2002,  respectively,  and had other
operating  expenses  (principally  salaries  and  benefits,  occupancy  and data
processing  expenses)  of $2.7 million in 2004,  $2.5 million in 2003,  and $2.1
million in 2002. Over the past several years the consistent rise in earnings has
been a 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 23.5% in 2004 over 2003,  while  noninterest
expense  increased only 8.0% for the year. 2003 results compared to 2002 results
show a similar  relationship between net interest income after the provision for
loan losses and noninterest expenses.

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

         For the years ended  December  31,  2004,  2003,  and 2002 net interest
income was $3.2 million,  $2.6  million,  and $2.1  million,  respectively.  The
consistent  increases were primarily  attributable to increases in the volume of
loans  (see  "Rate/Volume  Analysis  of Net  Interest  Income"  below).  Average
interest earning assets increased to $81.3 million in 2004 from $68.7 million in
2003.  The Bank's  relatively  young age makes  interest  earning asset growth a
primary  driver of net interest  income.  The average yield on interest  earning
assets increased slightly in 2004 to 5.58% from 5.54% in 2003 and decreased from
5.81% in 2002 to 5.54% in 2003. The average cost of interest bearing liabilities


                                       3
<PAGE>

continued  its  decline to 1.83% in 2004 from 2.08% in 2003.  The  average  cost
decreased from 2.59% in 2002 to 2.08% in 2003. The net yield on average interest
earning assets increased in 2004 to 3.99% from 3.79% in 2003.

         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, 2004 and 2003.

                       Average Balances, Yields and Rates
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                Year Ended December 31, 2004      Year Ended December 31, 2003
                                                                ----------------------------      ----------------------------
                                                                            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 ................................................    $12,752        $  494     3.87%      $14,986        $  586    3.91%
Federal Funds Sold ........................................      3,389            48     1.42%        4,378            49    1.12%
Loans (3), (7) ............................................     65,128         3,990     6.13%       49,296         3,166    6.42%
                                                               -------        -------               -------        ------
       Total interest earning assets ......................     81,269         4,532     5.58%       68,660         3,801    5.54%
Cash and due from banks ...................................      2,016                                1,578
Allowance for loan losses .................................       (816)                                (626)
Premises and equipment ....................................      3,510                                3,557
Cash surrender value of life insurance policies ...........      1,434                                  107
Other assets ..............................................        548                                  507
                                                               -------                              -------
       Total assets .......................................    $87,961                              $73,783
                                                               =======                              =======

Liabilities and shareholders' equity
Interest bearing liabilities
     Interest bearing transaction accounts ................    $11,833          120      1.01%       $8,488       $   91     1.07%
     Savings and money market .............................     15,829          161      1.02%       13,320          161     1.21%
     Time deposits $100,000 and over ......................     13,707          374      2.73%       11,750          346     2.94%
     Other time deposits ..................................     20,849          521      2.50%       18,851          533     2.83%
                                                               -------       ------                 -------       ------
       Total interest bearing deposits ....................     62,218        1,176      1.89%       52,409        1,131     2.16%
Federal Funds purchased and
    customer repurchase agreements ........................      5,886           68      1.15%        5,094           64     1.25%
FHLB advances .............................................      2,509           47      1.87%          137            2     1.46%
                                                               -------       ------                 -------       ------
       Total interest bearing liabilities .................     70,613        1,291      1.83%       57,640        1,197     2.08%
Noninterest bearing demand deposits .......................      8,652                                7,847
Other liabilities .........................................        279                                  288
Shareholders' equity ......................................      8,417                                8,008
                                                               -------                              -------
       Total liabilities and shareholders' equity .........    $87,961                              $73,783
                                                               =======                              =======
Interest rate spread (4) ..................................                             3.75%                                3.46%
Net interest income and net yield on earning assets(5) ....                  $3,241     3.99%                     $2,604     3.79%
Interest free funds supporting earning assets (6) .........    $10,656                              $11,020
</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, 2004 compared to 2003

<TABLE>
<CAPTION>
                                                                                            Increase (Decrease) Due to
                                                                                            --------------------------
                                                                                              (Dollars in Thousands)
                                                                                                             Volume/
                                                                              Volume           Rate          Rate (1)        Change
                                                                              ------           ----          --------        ------

Interest earned on:
<S>                                                                         <C>             <C>             <C>             <C>
     Securities ....................................................        $   (87)        $    (6)        $     1         $   (92)

     Federal Funds sold ............................................            (11)             12              (3)             (2)
     Loans .........................................................          1,017            (145)            (47)            825
                                                                            -------         -------         -------         -------
          Total interest income ....................................            919            (139)            (49)            731

Interest paid on:
     Deposits ......................................................            180            (117)            (17)             46
     Federal Funds purchased & customer repurchase
         agreements ................................................             10              (5)             (1)              4
FHLB advances ......................................................             37               -               8              45
                                                                            -------         -------         -------         -------
          Total interest expense ...................................            227            (122)            (10)             95
                                                                            -------         -------         -------         -------

Change in Net Interest Income ......................................        $   692         $   (17)        $   (39)        $   636
                                                                            =======         =======         =======         =======
</TABLE>

                  Year Ended December 31, 2003 compared to 2002

<TABLE>
<CAPTION>
                                                                                            Increase (Decrease) Due to
                                                                                            --------------------------
                                                                                              (Dollars in Thousands)
                                                                                                             Volume/
                                                                              Volume           Rate          Rate (1)        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>

(1) Volume/Rate is calculated as the difference between the average balances for
the periods  multiplied  by the  difference  between  the average  rates for the
periods.



                                       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 2004 of
$14.4  million,  for a cumulative  gap ratio of 1.26  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 2004 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, 2004
                                                                                      -----------------
                                                                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) ..............................         -     5,202     1,498      4,706          -      1,283       532    13,221
    Federal funds sold ..........................     4,131         -         -          -          -          -         -     4,131
    Loans (2) ...................................    46,111     5,620     7,338      7,454      7,505      1,130         -    75,158
                                                    -------   -------   -------    -------    -------    -------    ------   -------
        Total interest earning assets ...........    50,242    10,822     8,836     12,160      7,505      2,413       532    92,510
                                                    -------   -------   -------    -------    -------    -------    ------   -------

Interest bearing deposits
    Interest bearing transaction accounts .......    13,416         -         -          -          -          -         -    13,416
    MMDA's & Savings ............................    19,379         -         -          -          -          -         -    19,379
    Time deposits $100M and over ................       132       643     4,779      7,706      3,752          -         -    17,012
    Other time deposits .........................       969     2,762     7,904      7,291      4,381          -         -    23,307
    Customer repurchase agreements ..............     4,484         -     1,000          -          -          -         -     5,484
    FHLB advances ...............................         -        11        33      1,633      1,634         89         -     3,400
                                                    -------   -------   -------    -------    -------    -------    ------   -------
        Total interest bearing liabilities ......    38,380     3,416    13,716     16,630      9,767         89         -    81,998
                                                    -------   -------   -------    -------    -------    -------    ------   -------

Interest sensitivity gap ........................    11,862     7,406    (4,880)    (4,470)    (2,262)     2,324       532    10,512
Cumulative interest sensitivity gap .............    11,862    19,268    14,388      9,918      7,656      9,980    10,512
Gap ratio .......................................      1.31      3.17       .64        .73        .77       1.00      1.00
Cumulative gap ratio ............................      1.31      1.46      1.26       1.14       1.09       1.12      1.13
</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, 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
    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.

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>
                                                                                                Year ended December 31,
                                                                                                -----------------------
                                                                                      2004                2003               2002
                                                                                      ----                ----               ----

<S>                                                                                 <C>                 <C>                <C>
Allowance for possible loan losses, beginning of year ...................           $727,971            $553,372           $384,320
Provision for loan losses ...............................................            197,010             173,574            182,842
Charge-offs .............................................................             (5,597)                  -            (13,790)
Recoveries ..............................................................                  -               1,025                  -
                                                                                    --------            --------           --------

Allowance for possible loan losses, end of year .........................           $919,384            $727,971           $553,372
                                                                                    ========            ========           ========
</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
$102,000 to approximately $719,000 in 2004 from $617,000 in 2003 and $472,000 in
2002. The increase in 2004 is primarily the result of increases in the number of
deposit accounts and fees from the Bank's overdraft  protection product.  Growth
in the mortgage loan origination  department was responsible for the increase in
fees from 2002 to 2003. However,  mortgage  origination volume in 2004 decreased
after the unusually high level of refinancing  activity in previous years slowed
as a result of the stabilization of interest rates.



                                       7
<PAGE>


Other Expenses

         Other  expenses,  which  consist  primarily  of salaries  and  employee
benefits,  occupancy,  and data  processing  totaled $2.7 million for 2004, $2.5
million  for 2003,  and $2.1  million  for the year  ended  December  31,  2002.
Salaries and employee benefits rose to $1.5 million in 2004 from $1.4 million in
2003 and $1.2 million in 2002. The increases in each year were due to the hiring
of additional  staff to support the Bank's  growth and annual salary  increases.
Net  occupancy  increased by 2.8% in 2004 to $439,000.  This  increase is due to
price increases.  These expenses  increased $111,000 or 35.2% 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 decreased by 10.6% in 2004 as compared to 2003 as a result of
renegotiation of certain  contractual  arrangements.  The increase of $27,000 or
20.2% to  $159,000  for 2003  from  $133,000  for 2002 was due to  growth in the
number of accounts  processed  under certain  terms of the Bank's  previous data
processing  contract.  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 68% in 2004  compared to 78% in 2003 and 81% in 2002 as the
Company's noninterest expenses were spread over a larger customer base.

Income Taxes

         For 2004 the Company  recorded income tax expense of $389,000  compared
to $183,000 in 2003 and $61,000 for 2002.  The  increases  are due to  increased
profitability.  The Bank  accounts for income taxes under  Financial  Accounting
Standards  ("SFAS") No. 109,  "Accounting  for Income  Taxes."  Certain items of
income and expense  (principally  provision for loan losses,  depreciation,  and
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
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, 2004,
2003 and 2002, the Bank's investment  portfolio comprised  approximately  13.1%,
17.8%, and 28.2%, respectively, of total assets.

         The following table  summarizes the carrying amounts of securities held
by the Bank at December  31, 2004 and 2003.  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.

                   Investment Securities Portfolio Composition

                                                                December 31,
                                                                ------------
                                                             2004          2003
                                                             ----          ----
                                                          (Dollars in thousands)
Available for sale:
   U.S. Government Agencies ........................        $7,475        $8,463
   Mortgage-backed securities ......................           880           680
   Corporate bonds .................................           217           227
   Municipal bonds .................................           403             -
                                                           -------       -------
      Total available for sale .....................         8,975         9,370

Held to maturity
   U.S. Government Agencies ........................         3,714         5,222

Federal Reserve Bank stock .........................           210           210
Federal Home Loan Bank of Atlanta stock ............           322           250
                                                           -------       -------

Total ..............................................       $13,221       $15,052
                                                           =======       =======

                                       8
<PAGE>

         The  following  table  presents  contractual  maturities  and  weighted
average  yields of  securities  at December  31, 2004 and 2003.  Securities  are
presented at their carrying value.

              Investment Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                                               December 31, 2004              December 31, 2003
                                                                               -----------------              -----------------
                                                                             Amount          Yield           Amount         Yield
                                                                             ------          -----           ------         -----
                                                                            (Dollars in thousands)          (Dollars in thousands)
Available for sale securities:
U.S. Government Agencies
<S>                                                                        <C>                <C>          <C>              <C>
     Within one year ...........................................           $   496            2.68%        $ 1,185          4.25%
     After one through five years ..............................             6,979            3.27%          5,000          3.07%
     After five through ten years ..............................                 -               -%          1,506          4.10%
     After ten years ...........................................                 -               -%            772          1.71%
FNMA Mortgage-backed securities (1) ............................               880            3.66%            680          4.08%
Corporate bonds
     Within one year ...........................................               217            7.05%              -             -%
     After one through five years ..............................                 -               -%            227          7.01%
Municipal bonds maturing in five to ten years ..................               403            4.54%              -             -%



Held to maturity securities:
U.S. Government Agencies
     After one through five years ..............................             3,714            4.65%          5,222          4.64%

Other securities
     No stated maturity ........................................               532            4.64%            460          4.78%
                                                                           -------                         -------
     Total .....................................................           $13,221            3.82%        $15,052          3.90%
                                                                           =======                         =======
</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  several  individual  securities  are in an  unrealized  loss
     position as of December 31, 2004,  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.

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no significant  concentrations of loans to any particular  individuals or in
industries which management believes pose a material risk to the Bank, and there
are no foreign loans.  The Bank does have loans in certain broad categories that
comprise over 25% of Tier 1 Capital  adjusted for the allowance for loan losses.
Those categories are as follows:  real estate rental and leasing,  construction,
retail trade,  professional,  scientific and technical services,  manufacturing,
health care and social assistance, and other services.



                                       9
<PAGE>



         The amount of loans outstanding at December 31, 2004 and 2003 are shown
in the following table according to type of loan:

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                               ------------
                                                                                 2004                                2003
                                                                                 ----                                ----
                                                                                          (Dollars in thousands)
                                                                                         % of                               % of
                                                                     Amount             Loans               Amount          Loans
                                                                     ------             -----               ------          -----
<S>                                                                <C>                 <C>                 <C>              <C>
Commercial and industrial ................................         $ 13,355             17.8%              $11,242           18.9%
Real Estate - construction ...............................           16,011             21.3                12,018           20.2
Real Estate - mortgage
       1-4 family residential ............................           17,211             22.9                15,084           25.4
       Nonfarm, nonresidential ...........................           23,204             30.9                16,662           28.1
       Multifamily residential ...........................            2,517              3.3                 1,681            2.8
Consumer installment .....................................            2,860              3.8                 2,722            4.6
                                                                   --------            -----              --------          -----
         Total Loans .....................................           75,158            100.0%               59,409          100.0%
        Less allowance for loan losses ...................             (919)                                  (728)
                                                                   --------                                -------
         Net Loans .......................................         $ 74,239                                $58,681
                                                                   ========                                =======
</TABLE>

Maturity Distribution of Loans

         The following table sets forth the maturity  distribution of the Bank's
loans,  by type,  as of  December  31,  2004,  as well as the  type of  interest
requirement on such loans.

                         Maturity Distribution on Loans

<TABLE>
<CAPTION>
                                                                                                December 31, 2004
                                                                                                -----------------
                                                                                              (Dollars in Thousands)
                                                                              1 Year           1-5           5 Years
                                                                             or Less          Years          or More          Total
                                                                             -------          -----          -------          -----

<S>                                                                          <C>             <C>             <C>             <C>
Commercial and industrial ..........................................         $11,013         $ 2,342         $     -         $13,355
Real Estate-construction ...........................................          14,448           1,359             204          16,011
Real Estate-mortgage ...............................................          29,621          11,496           1,815          42,932
Consumer installment ...............................................           2,120             715              25           2,860
                                                                             -------         -------         -------         -------
      Total ........................................................         $57,202         $15,912         $ 2,044         $75,158
                                                                             =======         =======         =======         =======

Predetermined rate, maturity greater than one year .................         $     -         $15,004         $ 1,130         $16,134

Variable rate, maturity greater than one year ......................         $     -         $22,446         $   481         $59,024
</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
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,  2004 and 2003,  the Bank had no  nonaccrual  loans or loans 90 days or more
past due and no restructured loans.



                                       10
<PAGE>

         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, 2004.

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, 2004.

         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,
                                                                                                       2004                  2003
                                                                                                       ----                  ----
                                                                                                         (Dollars in thousands)

<S>                                                                                                  <C>                   <C>
Total loans outstanding at end of period,
      net of deferred net loan fees ....................................................             $75,158               $59,409
Average amount of loans outstanding ....................................................             $65,128               $49,296

Balance of allowance for loan losses-beginning .........................................             $   728               $   553
Loans charged-off
      Real estate mortgage .............................................................                   4                     -
      Consumer installment .............................................................                   2                     -
                                                                                                     -------               -------
      Total charge-offs ................................................................                   6                     -
Recoveries of loans previously charged-off
      Consumer installment .............................................................                   -                     1
                                                                                                     -------               -------
      Total recoveries .................................................................                   -                     1
                                                                                                     -------               -------
Net (charge-offs) recoveries ...........................................................                  (6)                    1
                                                                                                     -------               -------
Additions to allowance charged to expense ..............................................                 197                   174
                                                                                                     -------               -------
Balance of allowance for loan losses-ending ............................................             $   919               $   728
                                                                                                     =======               =======
Ratios
      Net (charge-offs) recoveries to average loans outstanding ........................               <(.01%)                <.01%
      Net (charge-offs) recoveries to loans at end of period ...........................               <(.01%)                <.01%
      Allowance for loan losses to average loans .......................................                1.41%                 1.48%
      Allowance for loan losses to loans at end of period ..............................                1.22%                 1.23%
      Net (charge-offs) recoveries to allowance for loan losses ........................                (.60%)                 .14%
      Net (charge-offs) recoveries to provision for loan losses ........................               (2.84%)                 .57%
</TABLE>

         The following  table  presents the allocation of the allowance for loan
losses at the end of the years ended  December 31, 2004 and 2003,  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,
                                                                                        -----------------------
                                                                                2004                                2003
                                                                                ----                                ----
                                                                                          % of                                 % of
                                                                     Amount               Loans           Amount              Loans
                                                                     ------               -----           ------              -----
                                                                                           (Dollars in thousands)
<S>                                                                   <C>                 <C>              <C>                 <C>
Commercial and industrial ..............................              $163                17.8%            $138                18.9%
Real Estate - construction .............................               196                21.3%             147                20.2%
Real Estate - mortgage .................................               525                57.1%             410                56.3%
Consumer installment ...................................                35                 3.8%              33                 4.6%
                                                                      ----               -----             ----               -----
      Total ............................................              $919               100.0%            $728               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, 2004.  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, 2004 and 2003 are summarized below:

                               Deposit Composition

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                                ------------
                                                                                   2004                             2003
                                                                                   ----                             ----
                                                                                            (Dollars in thousands)
                                                                                            % of                             % of
                                                                          Amount          Deposits          Amount          Deposits
                                                                          ------          --------          ------          --------

<S>                                                                      <C>               <C>            <C>                 <C>
Noninterest bearing demand ...................................           $ 9,405            11.4%         $ 9,202              14.1%
Interest bearing transaction accounts ........................            13,416            16.3            9,999              15.3
Savings ......................................................             4,006             4.9            3,764               5.8
Money market .................................................            15,373            18.6           11,425              17.5
Time deposits $100,000 and over ..............................            17,012            20.6           11,802              18.1
Other time deposits ..........................................            23,307            28.2           19,094              29.2
                                                                         -------           -----          -------             -----
    Total deposits ...........................................           $82,519           100.0%         $65,286             100.0%
                                                                         =======           =====          =======             =====
</TABLE>


         The average  amounts of and average  rate paid on deposits  held by the
Bank for the years ended December 31, 2004 and 2003, are summarized below:

                                Average Deposits

<TABLE>
<CAPTION>
                                                                                    Year ended December 31,
                                                                                    -----------------------
                                                                             2004                              2003
                                                                             ----                              ----
                                                                   Amount            Rate            Amount              Rate
                                                                   ------            ----            ------              ----
                                                                                    (Dollars in thousands)

<S>                                                               <C>                <C>            <C>                  <C>
Noninterest bearing demand .............................          $ 8,652               -%          $ 7,847                 -%
Interest bearing transaction accounts ..................           11,833            1.01%            8,488              1.07%
Savings and money market ...............................           15,829            1.02%           13,320              1.21%
Time deposits $100,000 and over ........................           13,707            2.73%           11,750              2.94%
Other time deposits ....................................           20,849            2.50%           18,851              2.83%
                                                                  -------                           -------
      Total average deposits ...........................          $70,870                           $60,256
                                                                  =======                           =======
</TABLE>

         As of December 31, 2004,  the Bank held $17.0  million of time deposits
of  $100,000  or more with  $643,000  maturing  within  three  months,  $968,000
maturing over three through six months,  $3.9 million  maturing over six through
twelve months,  and $11.5 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.  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, 2004 and 2003.

                                                2004                2003
                                                ----                ----

Return on assets .........................      .75%                 .48%
Return on equity .........................     7.89%                4.45%
Dividend payout ratio ....................        -%                   -%
Equity to assets ratio ...................     9.54%               10.86%

         The return on assets and equity  improved in 2004 due largely to growth
in the Company's customer base

         During 2005, 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  expand  the  Bank's
geographic  footprint.  Deposit  accounts  will be sought from  individuals  and
businesses in the Easley, Berea,  Powdersville and surrounding markets. The Bank
intends to offer  competitive  rates for such accounts and may seek new accounts
by offering rates slightly  above those  prevailing in the market.  The Bank has
added a number of new deposit  account  products and  services  for 2005.  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  consist of sweep  accounts and retail
repurchase agreements, and totaled $5.5 million and $5.8 million at December 31,
2004 and 2003, respectively.  U. S. Government securities with an amortized cost
of $6.5 million and $7.3 million  (fair value of $6.5 million and $7.4  million)
were used as collateral for the sweep accounts and retail repurchase agreements,
at December 31, 2004 and 2003, 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 65.1% of total assets at December 31, 2004.

         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 $7.1 million in cash and liquid  assets at December 31, 2004.  The Bank has
$4.4 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, 2004,  the Bank had $3.4 million at various fixed
rates of interest,  maturing at various  dates  through 2013  borrowed  from the
FHLB. The highest balance at any month end was $5.0 million. The average balance
for 2004 was $2.5 million.  The average rate paid on the borrowings for 2004 was
1.88%.  The weighted average interest rate as of December 31, 2004 was 3.40%. At
December 31, 2004  approximately $6.6 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.

         Subsequent  to December  31,  2004,  the Bank signed a contract  with a
design-build  firm to build a new branch  location.  The Bank expects to spend a


                                       14
<PAGE>

total of $1.0 million to construct the branch,  including land purchased in 2004
and included in the accompanying Consolidated Balance Sheet.

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, 2004,  the Bank had issued  commitments  to extend  credit of $14.9
million through  various types of lending  arrangements.  Of these  commitments,
$11.3 million are at variable  rates and $9.8 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
$464,000 at December  31, 2004.  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, 2004. The Company is in the first year of a five-year contract with
a data processing service. The annual costs are approximately $109,200. 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, 2004,  shareholders'  equity increased from the balance
at December 31, 2003 by approximately  $611,000.  Total shareholders'  equity at
December 31, 2004 was $8.8  million  compared to $8.2 million as of December 31,
2003. The increase is a result of net income of $664,000  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 2004. The Company does not expect
be required to raise  additional  capital in 2005 if growth  occurs in line with
current expectations. However, if market conditions allow for growth faster than
projected, the Company may need to raise additional capital in 2005.

         The Company made capital  expenditures  for bank premises and furniture
and  equipment  in 2004  totaling  approximately  $524,000.  It  expects to make
additional  such  expenditures  in 2005 of  approximately  $700,000  in order to
construct a new branch location. Such expenditures were made, or are expected to
be made, from cash on hand.

         The  Company and the Bank are subject to  regulatory  capital  adequacy
standards.  Under  these  standards,  financial  institutions  are  required  to
maintain certain minimum ratios of capital to  risk-weighted  assets and average
total assets. Under the provisions of the Federal Deposit Insurance  Corporation
Improvements Act of 1991, federal financial institution  regulatory  authorities
are  required  to  implement  prescribed  "prompt  corrective  action"  upon the
deterioration  of the capital  position of a bank. If the capital position of an
affected institution were to fall below certain levels,  increasingly  stringent
regulatory  corrective  actions  are  mandated.  The Bank's  regulatory  capital
requirements  and  positions  are  summarized  in  note  18 to the  consolidated
financial  statements.  Because the  Company's  total  assets are less than $150
million,  the  Company's  capital  adequacy is  measured  by the Bank's  capital
adequacy.

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.



                                       15
<PAGE>


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
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  between  $12.50 per share and $13.00 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, 2005, there were  approximately 501 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 REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
Cornerstone Bancorp and Subsidiary
Easley, South Carolina


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

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Cornerstone Bancorp and Subsidiary at December 31, 2004 and 2003 and the results
of their operations and their cash flows for each of the years in the three year
period ended  December 31, 2004,  in  conformity  with United  States  generally
accepted accounting principles.




                                                          /s/ Elliott Davis, LLC


Greenville, South Carolina
February 11, 2005





                                       17
<PAGE>



                       CORNERSTONE BANCORP AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                             ------------
                                                                                                      2004                  2003
                                                                                                      ----                  ----
ASSETS

<S>                                                                                             <C>                      <C>
Cash and due from banks .............................................................           $  3,008,847             $ 2,575,157

Federal funds sold ..................................................................              4,130,595               3,158,508

Investment securities
     Available-for-sale .............................................................              8,975,528               9,369,873
     Held-to-maturity (Fair value $3,812,437 in 2004 and
        $5,455,080 in 2003) .........................................................              3,713,645               5,222,430
     Other investments ..............................................................                532,100                 460,000

Loans, net ..........................................................................             74,238,769              58,681,134

Property and equipment, net .........................................................              3,778,983               3,474,852

Cash surrender value of life insurance policies .....................................              1,515,172               1,088,338

Other assets ........................................................................                738,480                 509,322
                                                                                                ------------             -----------
         Total assets ...............................................................           $100,632,119             $84,539,614
                                                                                                ============             ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
     Deposits
         Noninterest bearing ........................................................             $9,405,079             $ 9,202,362
         Interest bearing ...........................................................             73,113,865              56,083,857
                                                                                                ------------             -----------
         Total deposits .............................................................             82,518,944              65,286,219
     Customer repurchase agreements .................................................              5,483,993               5,772,192
     Borrowings from Federal Home Loan Bank of Atlanta ..............................              3,400,000               5,000,000
     Other liabilities ..............................................................                451,722                 314,551
                                                                                                ------------             -----------

         Total liabilities ..........................................................             91,854,659              76,372,962

Commitments and contingencies -Notes 10 and 14

Shareholders' equity
     Preferred stock, 10,000 shares authorized, no shares issued ....................                      -                       -
     Common stock, no par value, 20,000,000 shares authorized,
          1,064,656 and 967,968 shares issued at December 31,
          2004 and 2003, respectively ...............................................              8,253,812               7,984,608
     Retained earnings ..............................................................                543,807                 150,314
     Accumulated other comprehensive income (loss) ..................................                (20,159)                 31,730
                                                                                                ------------             -----------

         Total shareholders' equity .................................................              8,777,460               8,166,652
                                                                                                ------------             -----------
         Total liabilities and shareholders' equity .................................           $100,632,119             $84,539,614
                                                                                                ============             ===========
</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>
                                                                                                 Year ended December 31,
                                                                                                 -----------------------
                                                                                       2004               2003               2002
                                                                                       ----               ----               ----
INTEREST INCOME
<S>                                                                                 <C>                <C>                <C>
     Loans and fees on loans ..............................................         $3,990,474         $3,166,185         $2,612,517
     Investment securities ................................................            493,578            585,729            588,495
     Federal funds sold and other interest income .........................             47,618             49,158             92,278
                                                                                    ----------         ----------         ----------

         Total interest income ............................................          4,531,670          3,801,072          3,293,290

INTEREST EXPENSE
     Deposits and repurchase agreements ...................................          1,242,390          1,194,143          1,212,673
     Federal Home Loan Bank advances and federal funds sold ...............             48,253              2,259                  -
                                                                                                       ----------         ----------

         Total interest expense ...........................................          1,290,643          1,196,402          1,212,673
                                                                                    ----------         ----------         ----------

         Net interest income ..............................................          3,241,027          2,604,670          2,080,617

    Provision for possible loan losses ....................................            197,010            173,574            182,842
                                                                                    ----------         ----------         ----------

         Net interest income after provision for
            loan losses ...................................................          3,044,017          2,431,096          1,897,775

NONINTEREST INCOME
     Mortgage loan origination fees .......................................            289,962            366,433            257,955
     Service fees on deposit accounts .....................................            383,125            223,303            179,378
     Gain on sale of security .............................................              5,230                  -                  -
     Other ................................................................             40,958             27,258             34,675
                                                                                    ----------         ----------         ----------

        Total noninterest income ..........................................            719,275            616,994            472,008
                                                                                    ----------         ----------         ----------

NONINTEREST EXPENSES
     Salaries and benefits ................................................          1,520,890          1,430,947          1,161,063
     Advertising ..........................................................             54,332             34,241             27,992
     Supplies .............................................................             65,402             85,012             80,146
     Data processing ......................................................            142,523            159,404            132,636
     Occupancy and equipment ..............................................            438,848            426,677            315,658
     Professional fees ....................................................             95,790             79,184             71,603
     Directors fees .......................................................             58,100             50,050             37,750
     Deposit charge-offs ..................................................             65,999              9,421              5,205
     Other operating ......................................................            268,453            233,688            229,945
                                                                                    ----------         ----------         ----------

         Total noninterest expenses .......................................          2,710,337          2,508,624          2,061,998
                                                                                    ----------         ----------         ----------

         Income before income taxes .......................................          1,052,955            539,466            307,785

    Income tax provision ..................................................            388,898            183,418             60,500
                                                                                    ----------         ----------         ----------
         Net income .......................................................         $  664,057         $  356,048         $  247,285
                                                                                    ==========         ==========         ==========

EARNINGS  PER COMMON SHARE
    Basic .................................................................         $      .62         $      .33         $      .23
    Diluted ...............................................................         $      .61         $      .33         $      .23

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    Basic .................................................................          1,064,656          1,064,656          1,064,656
    Diluted ...............................................................          1,086,254          1,081,172          1,075,278
</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              Retained            other           Total
                                                              ------------              earnings       comprehensive   shareholders'
                                                         Shares         Amount          (deficit)       income (loss)      equity
                                                         ------         ------          ---------       -------------      ------


<S>                                                   <C>             <C>               <C>               <C>            <C>
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
                                                                                                                         ----------
Net income ....................................                                           664,057                           664,057
   Other comprehensive income, net
     of income taxes:
   Unrealized loss on investment securities ...                                                            (51,889)         (51,889)
                                                                                                                         ----------
   Comprehensive income .......................                                                                             612,168

   Stock dividend (10%), net of
     cash in lieu of fractional shares ........          96,688          269,204         (270,564)                           (1,360)
                                                      ---------       ----------        ---------         --------       ----------

Balance, December 31, 2004 ....................       1,064,656       $8,253,812        $ 543,807         $(20,159)      $8,777,460
                                                      =========       ==========        =========         ========       ==========
</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>
                                                                                                  Year ended December 31,
                                                                                                  -----------------------
                                                                                       2004               2003                 2002
                                                                                       ----               ----                 ----
Operating Activities
<S>                                                                              <C>                <C>                <C>
     Net income ...........................................................      $    664,057       $    356,048       $    247,285
     Adjustments to reconcile net income to net cash
         provided by operating activities
        Depreciation and net amortization .................................           233,714            281,036            244,632
        Deferred income tax provision (benefit) ...........................           (72,500)           (39,200)            20,571
        Provision for possible loan losses ................................           197,010            173,574            182,842
        (Gain) loss on sale of property and equipment .....................            (1,255)             2,191                  -
        Gain on sale of securities ........................................            (5,230)                 -                  -
        (Increase) decrease in other assets ...............................           (34,709)            72,422            (43,742)
        Increase (decrease) in other liabilities ..........................            36,302            191,565             (9,469)
                                                                                 ------------       ------------       ------------

           Net cash provided by operating activities ......................         1,017,389          1,037,636            642,119
                                                                                 ------------       ------------       ------------

Investing Activities
     Increase in federal funds sold .......................................          (972,087)        (2,153,508)           (35,000)
     Proceeds from maturities and principal paydowns of
        investment securities .............................................         6,972,660         11,381,446         10,043,430
     Proceeds from sales of securities ....................................           708,422                  -                  -
     Purchase of investment securities ....................................        (5,872,451)        (7,501,000)       (15,937,498)
     Purchase of Federal Home Loan Bank of Atlanta stock, net .............           (72,100)          (280,000)                 -
     Purchase of life insurance policies ..................................          (421,183)        (1,088,338)                 -
     Increase in loans, net ...............................................       (15,754,645)       (17,707,978)       (10,241,025)
     Proceeds from sale of property and equipment .........................             8,299              2,500                  -
     Purchase of property and equipment ...................................          (523,780)           (87,660)        (1,005,292)
                                                                                 ------------       ------------       ------------

           Net cash used for investing activities .........................       (15,926,865)       (17,434,538)       (17,175,385)
                                                                                 ------------       ------------       ------------

Financing Activities
     Net increase in deposits .............................................        17,232,725         11,578,697         13,797,838
     Net increase (decrease) in customer repurchase agreements ............          (288,199)           789,471          1,689,761
     Borrowings from Federal Home Loan Bank of Atlanta ....................         3,400,000          5,000,000                  -
     Repayments to Federal Home Loan Bank of Atlanta ......................        (5,000,000)                 -                  -
     Cash paid in lieu of fractional shares ...............................            (1,360)              (317)               (75)
                                                                                 ------------       ------------       ------------

           Net cash provided by financing activities ......................        15,343,166         17,367,851         15,487,524
                                                                                 ------------       ------------       ------------

           Net increase (decrease) in cash and cash equivalents ...........           433,690            970,949         (1,045,742)

Cash and due from banks, beginning of year ................................         2,575,157          1,604,208          2,649,950
                                                                                 ------------       ------------       ------------

Cash and due from banks, end of year ......................................      $  3,008,847       $  2,575,157       $  1,604,208
                                                                                 ============       ============       ============

Cash paid for:
     Interest .............................................................       $ 1,246,900       $  1,193,619       $  1,251,165
                                                                                 ============       ============       ============

     Income taxes .........................................................      $    388,991       $     42,679       $      2,740
                                                                                 ============       ============       ============
</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  obtained
regulatory  approval  to acquire  the 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  regulation  by the Board of
Governors of the Federal Reserve ("FRB") and to limited  regulation by the South
Carolina State Board of Financial Institutions.

   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.  As of December 31,
     2004,  the Bank has  concentrations  of credit in real  estate  rental  and
     leasing, construction, retail trade, professional, scientific and technical
     services,  manufacturing,  health  care and  social  assistance,  and other
     services,  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.

     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.


                                                                     (Continued)



                                       22
<PAGE>



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

     Other  investments  include the Bank's stock investments in the 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.

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

     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 per common share
     Basic  earnings  per common  share is computed on the basis of the weighted
     average  number of common shares  outstanding  in accordance  with SFAS No.
     128, "Earnings per Share". The treasury stock method is used to compute the
     effect of stock  options on the weighted  average  number of common  shares
     outstanding for diluted  earnings per common share. As of December 31, 2004
     there were 21,598  common stock  equivalents,  all of which were related to
     options  issued by the  Company.  The  Company  declared  10 percent  stock
     dividends to shareholders of record as of May 11, 2004,  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 due from banks 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 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.

Stock Based Compensation
     The  Company  has  issued  stock  options  to  certain  directors  who were
     organizers  of and the  Company  and the Bank,  and also has a  stock-based
     director  and  employee  compensation  plan (the  "2003  Plan") as  further
     described  in Note 16. The Company  accounts  for stock  options  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 had an exercise price equal to the
     market value of the underlying common stock on the date of grant. Under the
     2003 Plan, 18,000 options were granted during 2004. Subsequent to the grant
     date, a 10% stock  dividend was  declared,  which  converted  the number of
     options  granted to 19,800 and decreased the exercise price by 10% as well.
     See Note 16 for additional information.






                                                                     (Continued)




                                       25
<PAGE>


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

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 compensation.

<TABLE>
<CAPTION>
                                                                                                    Year ended December 31,
                                                                                                    -----------------------
                                                                                          2004              2003             2002
                                                                                          ----              ----             ----
Net income:
<S>                                                                                     <C>               <C>               <C>
As reported ..................................................................          $664,057          $356,048          $247,285
Deduct:  Total stock-based compensation expense determined
under fair value based method for all awards,  net of related tax
effects ......................................................................             5,844                 -                 -
                                                                                        --------          --------          --------
Pro forma ....................................................................          $658,213          $356,048          $247,285
                                                                                        ========          ========          ========

Basic earnings per common share
As reported ..................................................................          $    .62          $    .33          $    .23
Pro forma ....................................................................          $    .62          $    .33          $    .23

Diluted earnings per common share
As reported ..................................................................          $    .61          $    .33          $    .23
Pro forma ....................................................................          $    .61          $    .33          $    .23
</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 4.15
percent, which was the 10 Year Constant Maturity Rate on US Treasury  Securities
during the month in which the options were  granted.  The assumed  dividend rate
was zero and the expected  option life was 10 years.  Volatility is difficult to
measure  accurately due to the low volume of trading of the Company's stock. The
above estimates were calculated assuming 6% volatility.

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 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  The  disclosure  requirements  of EITF  No.  03-1  are
effective for annual financial statements for fiscal years ending after June 15,
2004. The effective date for the measurement  and  recognition  guidance of EITF
No. 03-1 has been delayed.  The FASB staff has issued a proposed  Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a,  "Implementation  Guidance for the
Application  of Paragraph 16 of Issue No.  03-1." The proposed FSP would provide
implementation guidance with respect to debt securities that are impaired solely
due   to   interest    rates   and/or   sector    spreads   and   analyzed   for
other-than-temporary   impairment   under  the   measurement   and   recognition
requirements  of  EITF  No.  03-1.  The  delay  of the  effective  date  for the
measurement  and  recognition  requirements  of EITF No. 03-1 will be superseded
concurrent  with the final issuance of FSP EITF 03-1-a.  Adopting the disclosure
provisions of EITF No. 03-1 did not have any impact on the  Company's  financial
position or results of operations.

                                                                     (Continued)



                                       26
<PAGE>




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

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

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

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


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

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


NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

         The Bank is required to maintain average reserve balances,  computed by
applying prescribed percentages to its various types of deposits,  either at the
Bank or on deposit  with the FRB. At December  31, 2004 and 2003 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, 2004 and 2003  federal  funds sold  amounted to  $4,130,595  and  $3,158,508
respectively.




                                       27
<PAGE>


NOTE 4 - INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                                             December 31, 2004
                                                                                             -----------------
                                                                                              Gross unrealized
                                                                        Amortized             ----------------              Fair
                                                                           cost            Gains           Losses           value
                                                                           ----            -----           ------           -----
<S>                                                                    <C>              <C>              <C>              <C>
Federal agencies ...............................................       $7,500,000       $    5,156       $   29,687       $7,475,469
Mortgage-backed securities .....................................          886,633            4,313           11,342          879,604
Corporate bonds ................................................          215,198            2,126                -          217,324
Municipal bonds ................................................          404,241              980            2,090          403,131
                                                                       ----------       ----------       ----------       ----------
        Total investment securities available-for-sale .........       $9,006,072       $   12,575       $   43,119       $8,975,528
                                                                       ==========       ==========       ==========       ==========

<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>

         While eight individual U.S. Government agency bonds, one municipal bond
and one U.S.  government  agency  mortgage-backed  security are in an unrealized
loss position as of December 31, 2004,  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, 2004 and 2003 are  summarized  in the table
below.

<TABLE>
<CAPTION>
                                                                                             December 31, 2004
                                                                                             -----------------
                                                                                              Gross unrealized
                                                                        Amortized             ----------------              Fair
                                                                           cost            Gains           Losses           value
                                                                           ----            -----           ------           -----
<S>                                                                    <C>              <C>              <C>              <C>
Federal agencies held-to-maturity ..............................       $3,713,645       $   98,792       $        -       $3,812,437
                                                                       ==========       ==========       ==========       ==========

<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>


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



                                       28
<PAGE>

NOTE 4 - INVESTMENT SECURITIES, Continued

         The  amortized  cost and fair value of securities at December 31, 2004,
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, 2004
                                                                                                           -----------------
                                                                                                     Amortized              Fair
                                                                                                       Cost                 Value
                                                                                                       ----                 -----
<S>                                                                                               <C>                    <C>
Within one year ......................................................................            $   715,198            $   713,261
Due after one through five years .....................................................             10,713,645             10,791,969
Due after five through ten years .....................................................              1,290,874              1,282,735
Federal Reserve and Federal Home Loan Bank stock (no maturity) .......................                532,100                532,100
                                                                                                  -----------            -----------

    Total investment securities ......................................................            $13,251,817            $13,320,065
                                                                                                  ===========            ===========
</TABLE>

         At  December  31,  2004 and  2003,  securities  with a fair  value of $
9,259,147 and $9,109,898,  respectively,  were pledged to  collateralize  public
deposits, sweep accounts, and repurchase agreements.

NOTE 5 - LOANS

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

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                          ------------
                                                                                                 2004                        2003
                                                                                                 ----                        ----
<S>                                                                                          <C>                         <C>
Commercial .................................................................                 $13,355,098                 $11,242,095
Real estate - construction .................................................                  16,011,109                  12,018,222
Real estate - mortgage .....................................................                  42,932,263                  33,427,094
Consumer ...................................................................                   2,859,683                   2,721,694
                                                                                             -----------                 -----------

Loans, gross ...............................................................                  75,158,153                  59,409,105

Less allowance for possible loan losses ....................................                     919,384                     727,971
                                                                                             -----------                 -----------

Loans, net .................................................................                 $74,238,769                 $58,681,134
                                                                                             ===========
</TABLE>

         At  December  31, 2004 and 2003 there were no  nonaccruing  or impaired
loans.  Activity in the  allowance  for possible loan losses for the years ended
December 31, 2004, 2003, and 2002 is summarized in the table below.

<TABLE>
<CAPTION>
                                                                                                 Year ended December 31,
                                                                                                 -----------------------
                                                                                      2004                2003               2002
                                                                                      ----                ----               ----
<S>                                                                                <C>                 <C>                <C>
Allowance for possible loan losses, beginning of year ...................          $ 727,971           $ 553,372          $ 384,320
Provision for loan losses ...............................................            197,010             173,574            182,842
Charge-offs .............................................................             (5,597)                  -            (13,790)
Recoveries ..............................................................                  -               1,025                  -
                                                                                   ---------           ---------          ---------

Allowance for possible loan losses, end of year .........................          $ 919,384           $ 727,971          $ 553,372
                                                                                   =========           =========          =========
</TABLE>

         As of December 31, 2004,  approximately $46.7 million or 62.1% of total
gross loans were variable rate loans.  As of December 31, 2004,  the FHLB held a
lien on loans  identified  by the Bank to the FHLB as  eligible  collateral  for
borrowings.

                                       29
<PAGE>


NOTE 6 - PROPERTY AND EQUIPMENT

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

                                                             December 31,
                                                             ------------
                                                        2004              2003
                                                        ----              ----
Land and improvements ........................       $1,419,662       $1,066,952
Bank premises ................................        2,165,975        2,063,345
Furniture, equipment and software ............          907,805          869,424
Vehicles .....................................           66,065           60,869
                                                     ----------       ----------
                                                      4,559,507        4,060,590
Accumulated depreciation .....................          780,524          585,738
                                                     ----------       ----------

    Total property and equipment .............       $3,778,983       $3,474,852
                                                     ==========       ==========

         See Note 10 for a discussion of commitments related to the construction
of a branch in 2005.

         Depreciation  expense for the years ended December 31, 2004,  2003, and
2002 amounted to $212,605, $203,841, and $170,829, 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:

     Type of Asset                   Life in Years        Depreciation Method
-----------------------------      -----------------     ---------------------
Furniture, equipment and software       3 to 7             Straight-line
Improvements                            5 to 40            Straight-line
Vehicles                                5                  Straight-line


NOTE 7 - DEPOSITS

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

                                                             December 31,
                                                             ------------
                                                      2004                2003
                                                      ----                ----

Noninterest bearing ......................        $ 9,405,078        $ 9,202,362
Interest bearing:
     NOW accounts ........................         13,416,502          9,999,335
     Money market accounts ...............         15,372,975         11,424,959
     Savings .............................          4,005,567          3,763,669
     Time,less than $100,000 .............         23,306,873         19,093,476
     Time, $100,000 and over .............         17,011,949         11,802,418
                                                  -----------        -----------

     Total deposits ......................        $82,518,944        $65,286,219
                                                  ===========        ===========

         Interest expense on time deposits greater than $100,000 was $374,435 in
2004, $345,564 in 2003, and $324,001 in 2002.

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

         2005                                         $17,048,739
         2006                                           8,391,862
         2007                                           6,745,776
         2008                                           5,198,313
         2009                                           2,934,132
                                                      -----------
                                                      $40,318,822
                                                      ===========


                                       30
<PAGE>

NOTE 8 - CUSTOMER REPURCHASE AGREEMENTS

         Customer repurchase agreements consist of the following:

                                                             December 31,
                                                             ------------
                                                        2004             2003
                                                        ----             ----
Sweep accounts .............................        $4,483,993        $4,772,192
Retail repurchase agreements ...............         1,000,000         1,000,000
                                                    ----------        ----------
                                                    $5,483,993        $5,772,192
                                                    ==========        ==========


         The Bank enters into sweep and retail  repurchase  agreements  with its
customers.  The sweep  agreements  generally mature  overnight.  At December 31,
2004, the Bank had one retail repurchase  agreement that matures in April, 2005.
U. S. Government  securities with an amortized cost of $6,509,823 and $7,276,027
(fair value of $6,547,000 and $7,437,547)  were used as collateral for the sweep
accounts and repurchase agreements, at December 31, 2004 and 2003, respectively.


NOTE 9 -BORROWINGS FROM FEDERAL HOME LOAN BANK OF ATLANTA

         At December  31,  2004,  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.  At December 31, 2004 the
Bank had advances outstanding as follows:

        Amount       Interest Rate      Maturity Date             Terms
        ------       -------------      -------------             -----
      $1,500,000         2.91%          10/20/2006              Fixed rate
       1,500,000         3.60           10/20/2008              Fixed rate
         400,000         4.49           12/01/2013        Fixed rate, amortizing
      ----------
      $3,400,000
      ==========

         The highest  balance as of any month end for  borrowings  from the FHLB
was $5.0  million.  The average  rate paid on the  advances  during the year was
1.88%. The average balance of FHLB advances for 2004 was $2.5 million.

         At December  31, 2003,  the Company had  overnight  borrowings  of $5.0
million from the FHLB. The Company  borrowed for the first time from the FHLB in
December 2003.  Therefore,  the highest balance outstanding at any month end was
$5.0  million.  The average  balance for the only month of 2003 during  which an
advance was  outstanding  was $1.6  million.  The average  interest rate paid on
advances in 2003 was 1.46%.


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,  2004,  there was no  litigation
pending.

         The Company has approximately five years remaining on its contract with
a data processing service. Monthly costs are currently approximately $9,100.

         Subsequent  to December  31,  2004,  the Bank signed a contract  with a
design-build  firm to build a new branch  location.  The Bank expects to spend a
total of $1.0 million for the branch,  including the cost of construction and of
land  purchased  in 2004.  The  purchase  price of the land is  included  in the
accompanying Consolidated Balance Sheet.

         From time to time the Bank may guarantee  merchant credit card accounts
on behalf of certain customers. At December 31, 2004 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.



                                       31
<PAGE>


NOTE 11 - UNUSED LINES OF CREDIT

         At December 31,  2004,  the Bank had unused lines of credit to purchase
federal funds totaling  $4,350,000 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.


NOTE 12 - INCOME TAXES

         The  provision  for income taxes is  reconciled to the amount of income
tax  computed at the federal  statutory  rate on income  before  income taxes as
follows:

<TABLE>
<CAPTION>
                                                                                    Year ended December 31,
                                                                                    -----------------------
                                                                  2004                      2003                        2002
                                                                  ----                      ----                        ----

<S>                                                      <C>               <C>       <C>             <C>        <C>             <C>
Tax expense at statutory rate .......................    $357,800          34%       $183,400        34%        $104,650        34%
Increase (decrease) in taxes resulting from:
     Valuation allowance adjustment .................           -           -               -         -          (52,641)      (17)
     State income taxes, net of federal
     benefit ........................................      20,800           2          10,600         2            8,491         3
     Other ..........................................      10,298           1         (10,582)       (2)               -         -
                                                         --------          --        --------        --        ---------        --
Income tax provision ................................    $388,898          37%       $183,418        34%         $60,500        20%
                                                         ========          ==        ========        ==        =========        ==
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                                      2004                   2003
                                                                                                      ----                   ----

Deferred tax asset:
<S>                                                                                                 <C>                    <C>
        Allowance for loan losses ....................................................              $311,000               $243,000
        Unrealized net gains on securities available for sale ........................                10,400                (16,300)
        Depreciation .................................................................              (107,000)              (111,500)

                                                                                                   ---------              ---------
               Net deferred tax assets ...............................................              $214,400               $115,200
                                                                                                   =========              =========
</TABLE>

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

         The following  summary of the  provision for income taxes  includes tax
deferrals  that arise from temporary  differences in the  recognition of certain
items of revenue and expense for tax and financial reporting purposes:

<TABLE>
<CAPTION>
                                                                                                    Year ended
                                                                                                   December 31,
                                                                                                   ------------
                                                                                  2004                 2003                   2002
                                                                                  ----                 ----                   ----

<S>                                                                             <C>                   <C>                    <C>
Income taxes currently payable ....................................             $461,398              $222,618               $39,929

Deferred income tax provision (benefit) ...........................              (72,500)              (39,200)               20,571
                                                                                --------              --------               -------
        Income tax provision ......................................             $388,898              $183,418               $60,500
                                                                                ========              ========               =======
</TABLE>





                                       32
<PAGE>


NOTE 13 - RELATED PARTY TRANSACTIONS

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

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

                                               Year ended December 31,
                                               -----------------------
                                           2004           2003            2002
                                           ----           ----            ----
Balance, beginning of year ........     $3,725,723     $1,461,682     $1,896,689
New loans or lines of credit ......      3,627,940      3,830,800        880,647
Less loan payments ................      2,876,671      1,566,759      1,315,654
                                        ----------     ----------     ----------
Balance, end of year ..............     $4,476,992     $3,725,723     $1,461,682
                                        ==========     ==========     ==========


         Deposits by directors, executive officers, and their related interests,
at December 31, 2004 and 2003 were $1,538,693 and $1,647,139, respectively.


NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

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

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

         Commitments  to extend  credit are  agreements to lend to a customer as
long as there is no  violation  of any  material  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may  require  the  payment of a fee. At December  31, 2004 and 2003,
unfunded   commitments  to  extend  credit  were  $14,897,187  and  $14,054,616,
respectively,  and  outstanding  letters of credit were  $464,308 and  $158,709,
respectively.  At December 31, 2004, the unfunded commitments consisted of $11.3
million at variable  rates and  approximately  $3.6  million at fixed rates with
$9.8 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 2004 and 2003.


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 2004, 2003, and 2002
amounted to $31,822, $29,831, and $25,142, respectively.




                                       33
<PAGE>


NOTE 16 - STOCK OPTION PLANS

         In 1999,  the Board of  Directors  awarded  options  (the  "Organizers'
Options") to purchase 4,000 shares of the Company's  common stock to each of the
organizing  directors  of the  Company  and the Bank  (an  aggregate  of  40,000
shares).  These  options  had an  exercise  price of $10.00 per share and became
exercisable  in one-third  increments  each year beginning on December 14, 2000.
The  Organizers'  Options  expire ten years from the date of grant,  unless they
terminate sooner as a result of the holder ceasing to be a director. Pursuant to
the option  agreements,  the total number of such options  outstanding  has been
adjusted to 53,240,  and the exercise price has been adjusted to $7.51 per share
as a result of the stock dividends discussed in Note 17 below.

         In 2003, the Company's  shareholders  approved the Cornerstone  Bancorp
2003 Stock Option Plan (the "2003 Plan"),  which reserved  125,000 shares of the
Company's  common stock for issuance upon  exercise of options.  Pursuant to the
2003 Plan,  the number of shares  reserved for  issuance  has been  increased to
137,500 shares as a result of the 10% stock dividend  declared in 2004, which is
discussed in Note 17 below.  Employees and Directors are eligible to participate
in the 2003 Plan, which has a term of 10 years.  Awards under the 2003 Plan must
be made by the Board of Directors or by a Committee of Directors  designated  by
the Board at an exercise  price equal to the fair market value of the  Company's
common  stock on the date of grant.  A summary of the  activity  in the plans is
presented below:

<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                                              -----------------------
                                                            2004                         2003                         2002
                                                            ----                         ----                         ----
                                                                  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 ............        47,916        $ 7.51           51,465         7.51           53,240      7.51
Granted (1) .................................        19,800         11.36                -            -                -
Exercised ...................................             -             -                -            -                -
Forfeited or expired ........................             -             -           (3,549)        7.51           (1,775)     7.51
                                                    -------                        -------                        ------

Outstanding at end of year ..................        67,716        $ 8.64           47,916         7.51           51,465      7.51
                                                    =======                        =======                        ======

Options exercisable at end of year ..........        47,916          7.51           47,916         7.51           51,465
Shares available for grant ..................       117,700                        137,500                             -
</TABLE>
(1) Options  granted  during 2004 vest over a three year period,  with one third
vesting on each anniversary of the grant date.

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


NOTE 17 - DIVIDENDS

         The Company has never paid cash dividends. The Company's ability to pay
cash  dividends  is within  the  discretion  of its Board of  Directors,  and is
dependent on the  Company's  receiving  cash  dividends  from the Bank.  Federal
banking  regulations  restrict the amount of dividends  that the Bank can pay to
the Company.  Furthermore,  because of its current growth plans, the Company has
no current plans to pay cash dividends even if it would be able to do so. Future
dividend  policy will depend on the Company's  earnings,  capital  requirements,
financial condition and other factors considered relevant by the Company's Board
of  Directors.  The  Company's  Board of  Directors  declared  10 percent  stock
dividends to shareholders of record on May 11, 2004, March 17, 2003 and on April
30, 2002.  After  giving  effect to these stock  dividends,  the total number of
common shares outstanding as of December 31, 2004 is 1,064,656.



                                       34
<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, 2004,
that the Bank meets all capital adequacy requirements to which it is subject.

         As of December 31, 2004,  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, 2004
<S>                                                         <C>            <C>        <C>            <C>       <C>            <C>
   Total Capital (to risk weighted assets) .........        $8,850         11.1%      $6,395         8.0%      $7,994         10.0%
   Tier 1 Capital (to risk weighted assets) ........         7,930          9.9        3,198         4.0        4,797          6.0
   Tier 1 Capital (to average assets) ..............         7,930          8.4        3,778         4.0        4,723          5.0

As of December 31, 2003
   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
</TABLE>


The Company is also subject to capital  adequacy  guidelines  established by the
FRB,  but for  holding  companies  with  total  assets of $150  million or less,
capital adequacy is measured by the Bank's capital adequacy.



                                       35
<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,
                                                                                               ------------
                                                                                    2004                             2003
                                                                                    ----                             ----
                                                                         Carrying         Fair            Carrying           Fair
                                                                          Amount          Value            Amount            Value
                                                                          ------          -----            ------            -----
FINANCIAL ASSETS
<S>                                                                    <C>              <C>              <C>              <C>
      Cash and due from banks ..................................       $3,008,847       $3,008,847       $2,575,157       $2,575,157
      Federal funds sold .......................................        4,130,595        4,130,595        3,158,508        3,158,508
      Investment securities ....................................       13,221,273       13,221,273       15,052,303       15,284,953
      Loans, gross .............................................       75,158,153       75,178,968       59,409,105       60,235,361
      Cash surrender value of life insurance policies ..........        1,515,172        1,515,172        1,088,338        1,088,338

FINANCIAL LIABILITIES
      Deposits .................................................       82,518,944       80,057,167       65,286,219       65,932,064
      Customer repurchase agreements ...........................        5,483,993        5,483,993        5,772,192        5,772,192
      Borrowings from Federal Home Loan Bank of Atlanta ........        3,400,000        3,366,174        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,
                                                                                                              ------------
                                                                                                       2004                  2003
                                                                                                       ----                  ----
ASSETS
<S>                                                                                                <C>                    <C>
     Cash and interest bearing deposits ..............................................             $  836,037             $  870,019
     Investment in subsidiary ........................................................              7,909,750              7,262,623
     Other assets ....................................................................                 40,000                 40,000
                                                                                                   ----------             ----------

                                 Total Assets ........................................             $8,785,787             $8,172,642
                                                                                                   ==========             ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
     Accrued expenses ................................................................             $    8,327             $    5,990
     Shareholders' equity ............................................................              8,777,460              8,166,652
                                                                                                   ----------             ----------

                  Total Liabilities and shareholders' equity .........................             $8,785,787             $8,172,642
                                                                                                   ==========             ==========
</TABLE>











                                                                     (Continued)


                                       36
<PAGE>


NOTE 20 - PARENT COMPANY INFORMATION, Continued

                         CONDENSED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                               -----------------------
                                                                                      2004               2003                2002
                                                                                      ----               ----                ----
<S>                                                                                 <C>                 <C>                 <C>
INCOME
   Interest .............................................................           $  9,469            $ 11,839            $ 35,877

EXPENSES
   Sundry ...............................................................             44,428              54,794              30,564
                                                                                    --------            --------            --------
      Income  (loss)  before  equity in  undistributed ..................            (34,959)            (42,955)              5,313
       net income of bank subsidiary

   Equity in undistributed net income of subsidiary .....................            699,016             399,003             241,972
                                                                                    --------            --------            --------
      Net income ........................................................           $664,057            $356,048            $247,285
                                                                                    ========            ========            ========
</TABLE>



                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                               -----------------------
                                                                                   2004                 2003                 2002
                                                                                   ----                 ----                 ----
OPERATING ACTIVITIES
<S>                                                                              <C>                  <C>                <C>
    Net income ......................................................            $664,057             $356,048           $  247,285
       Adjustments to reconcile net income to net
       cash provided by (used for) operating activities
       Equity in undistributed net income of subsidiary .............            (699,016)            (399,003)            (241,972)
       Increase (decrease) in accrued expenses ......................               2,337                5,732                 (578)
                                                                                 --------             --------           ----------
          Net cash provided by (used for) operating activities ......             (32,622)             (37,223)               4,735
                                                                                 --------             --------           ----------
INVESTING ACTIVITIES
    Investment in bank subsidiary ...................................                   -                    -           (1,000,000)
                                                                                 --------             --------           ----------
FINANCING ACTIVITIES
          Cash paid in lieu of fractional shares ....................              (1,360)                (317)                 (75)
                                                                                 --------             --------           ----------
          Net increase (decrease) in cash ...........................             (33,982)             (37,540)            (995,340)

Cash, beginning of year .............................................             870,019              907,559            1,902,899
                                                                                 --------             --------           ----------
Cash, end of year ...................................................            $836,037             $870,019           $  907,559
                                                                                 ========             ========           ==========
</TABLE>


                                       37