SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB


                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2001                File Number 333-79543

                               CORNERSTONE BANCORP
                 (Name of Small Business Issuer in its Charter)

         South Carolina                                57-1077978
(State or Other Jurisdiction of          (IRS Employer Identification Number)
 Incorporation or Organization)

               1670 East Main Street, Easley, South Carolina 29640
                (Address of Principal Executive Office, Zip Code)

         Issuer's Telephone Number, Including Area Code: (864) 306-1444

        Securities Registered Pursuant to Section 12(b) of the Act: None

        Securities Registered Pursuant to Section 12(g) of the Act: None

         Check whether the issuer (1) filed all reports  required to be filed by
Section  13 or 15(d) of the  Exchange  Act  during  the past 12  months  (or for
shorter period that the  Registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days.

         Yes [X] No [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

         The issuer's revenues for its most recent fiscal year were $3,118,253.

         The aggregate  market value of the Common Stock held by  non-affiliates
on March 1, 2002, was approximately  $6,067,875. As of March 1, 2002, there were
800,000 shares of the Registrant's Common Stock, no par value, outstanding.  For
purposes of the foregoing calculation only, all directors and executive officers
of the Registrant have been deemed affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE
(1)      None

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


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                                     PART I

            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,
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.


Item 1.  Description of Business.

General

         Cornerstone  Bancorp (the  "Company") is a South  Carolina  corporation
incorporated  in 1999. The Company is a bank holding  company with no operations
other than those carried on by its wholly owned subsidiary, Cornerstone National
Bank (the "Bank"). The Bank conducts a general banking business under a national
bank  charter  granted by the Office of the  Comptroller  of the Currency of the
United  States  (the  "OCC")  pursuant to the  National  Bank Act.  The Bank was
organized in 1999. The Bank conducts its activities  from its main office opened
in September of 1999, located in Easley, South Carolina.

         The Bank's  primary  market area is the City of Easley,  South Carolina
and the immediately surrounding areas of Pickens County. Pickens County and four
neighboring counties make up the Greenville-Spartanburg-Anderson, South Carolina
Metropolitan  Statistical  Area (the  "Greenville  MSA").  The population of the
Greenville MSA is over 900,000 with approximately 470,000 employed in 1997. Over
90% of those employed were in non-agricultural employment with over 50% of those
employed in manufacturing and trades, in roughly equal numbers.

         The Bank's business primarily consists of accepting deposits and making
loans.  The Bank seeks deposit  accounts from  households  and businesses in its
primary  market areas by offering a full range of savings  accounts,  retirement
accounts (including Individual Retirement  Accounts),  checking accounts,  money
market accounts,  and time  certificates of deposit.  It also makes  commercial,
real estate and installment loans, primarily on a secured basis, to borrowers in
and around Easley, South Carolina and makes other authorized  investments.  Both
in-house and conventional residential mortgage loans are offered at the Bank. As
of December 31, 2001, the Bank employed 20 people.

         On March 19, 2001,  Ben Garvin,  was hired as President of  Cornerstone
National Bank. Mr. Garvin's  responsibilities  include business  development for
the Easley headquarters and branch  development.  Prior to joining the Bank, Mr.
Garvin was senior vice  president  of Central  Carolina  Bank (CCB) and his most
recent responsibilities  included managing the western region of the Upstate for
CCB  including  Pickens,  Anderson,  Oconee,  Greenwood,  Saluda  and  McCormick
counties. Mr. Garvin was with CCB 17 years in various management capacities.  J.
Rodger  Anthony,  Cornerstone  National  Bank's  chairman of the board and chief
executive  officer,  will  retain  those  titles  and  continue  to act in those
capacities.

         On October 19, 2001,  Cornerstone National Bank acquired 6.772 acres of
land  on  Farrs  Bridge  Road  in  Berea,  South  Carolina  to be  used  for the
construction  of a fully  staffed  conventional  bank branch.  The  construction
process was  initiated in late January of 2002 and is slated for  completion  in
August 2002. The branch will initially  maintain a staff of  approximately  five
experienced individuals and will be a full service location.

Competition

         South Carolina law permits statewide branching by banks and savings and
loan  associations.  Consequently,  many  financial  institutions  have branches
located in several communities. Currently, in addition to the Bank, 8 commercial
banks  and 1  savings  institution  operate  branches  in  Pickens  County.  The


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principal  areas and  methods of  competition  in the banking  industry  are the
services offered, pricing of those services, the convenience and availability of
the services,  and the degree of expertise and personal  manner with which those
services are offered.

         The Bank  encounters  strong  competition  from  most of the  financial
institutions in its extended market area. In the conduct of certain areas of its
business, the Bank also competes with credit unions, insurance companies,  money
market  mutual  funds and other  financial  institutions,  some of which are not
subject to the same degree of regulation and  restrictions  as the Bank. Most of
these  competitors have  substantially  greater  resources and lending abilities
than  the  Bank and  offer  certain  services,  such as  international  banking,
investment  banking,  and  trust  services,  that  the Bank  does not  presently
provide.

                              SERVICES OF THE BANK

Deposits

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

Lending Activities

         The Bank  offers a range of  lending  services,  including,  commercial
loans,  consumer loans,  and real estate mortgage loans.  Consumer loans include
both installment and term loans,  and include loans for  automobiles,  household
goods, education,  boats and general personal expenses. During the third quarter
of 2001, the Bank opened a residential  mortgage loan  department  with a highly
experienced  staff qualified to make virtually any type of residential  mortgage
loan. These loans are sold by the Bank upon origination in most cases.

         To address the risks inherent in making loans,  management maintains an
allowance  for loan losses based on, among other  things,  an  evaluation of the
Bank's  loan  loss  experience,   management's  experience  at  other  financial
institutions in the market area, the amount of past due and nonperforming loans,
current  and  anticipated  economic  changes  and the  values  of  certain  loan
collateral.  Based upon such factors,  management makes various  assumptions and
judgments about the ultimate  collectibility  of the loan portfolio and provides
an  allowance  for  potential  loan  losses  based  upon  a  percentage  of  the
outstanding  balances and specific  loans.  However,  because  there are certain
risks  that  cannot  be  precisely  quantified,  management's  judgment  of  the
allowance is necessarily approximate and imprecise. The adequacy and methodology
of the  allowance  for loan  losses is subject  to  regulatory  examination  and
compared to a peer group of financial institutions identified by the regulators.

Real Estate Loans

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

         The principal  economic risk associated with all loans,  including real
estate loans, is the creditworthiness of the Bank's borrowers.  The ability of a
borrower to repay a real estate loan depends upon a number of economic  factors,
including employment levels and fluctuations in the value of real estate. In the


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case of a real estate  construction  loan, there is generally no income from the
underlying property during the construction period, and the developer's personal
obligations  under  the  loan  are  typically  limited.  Each of  these  factors
increases the risk of  nonpayment by the borrower.  In the case of a real estate
purchase  loan,  the  borrower may be unable to repay the loan at the end of the
loan  term and thus may be  forced to  refinance  the loan at a higher  interest
rate,  or,  in  certain  cases,  the  borrower  may  default  as a result of its
inability to refinance the loan.  In either case,  the risk of nonpayment by the
borrower is increased.

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

Commercial Loans

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

         The risks  associated  with  commercial  loans vary with many  economic
factors,   including  the  economy  in  the  Easley/Pickens   County  area.  The
well-established  banks in the Easley/Pickens  County area make  proportionately
more loans to  medium-  to  large-sized  businesses  than the Bank.  Many of the
Bank's commercial loans are made to small- to medium-sized businesses, which are
typically  smaller,  have shorter operating  histories,  and less  sophisticated
record keeping systems than larger entities. As a result, these smaller entities
may be less  able to  withstand  adverse  competitive,  economic  and  financial
conditions than larger borrowers. In addition, because payments on loans secured
by  commercial  property  generally  depend to a large  degree on the results of
operations  and  management  of the  properties,  repayment of such loans may be
subject, to a greater extent than other loans, to adverse conditions in the real
estate market or the economy.

Consumer Loans

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

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

Other Services

         The  Bank  participates  in a  regional  network  of  automated  teller
machines  that may be used by Bank  customers  in major  cities  throughout  the
Southeast. The Bank offers both VISA and MasterCard brands of bankcards together
with  related  lines of credit.  The lines of credit  may be used for  overdraft
protection as well as pre-authorized credit for personal purchases and expenses.


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The Bank also provides  travelers  checks,  direct deposit of payroll and social
security  checks,  and  automatic  drafts  for  various  accounts,  but does not
currently provide  international or trust banking  services.  The Bank offers an
Internet   banking   product   accessible  via  the  Bank's  custom  website  at
www.cornerstonenationalbank.com.  The interactive  banking  product  includes an
electronic bill payment service that allows  customers to make scheduled  and/or
recurring bill payments electronically.

Asset and Liability Management

         The primary  earning  assets of the Bank consist of the loan  portfolio
and investment  portfolio.  Efforts are made  generally to match  maturities and
rates of loans and the  investment  portfolio  with those of deposits,  although
exact  matching  is  not  possible.   The  majority  of  the  Bank's  securities
investments  are in  marketable  obligations  of the United  States  government,
federal  agencies and state and  municipal  governments,  generally  with varied
maturities.

         Long-term loans are priced primarily to be interest-rate sensitive with
only a small portion of the Bank's  portfolio of long-term loans at fixed rates.
In the near term, such fixed-rate loans generally do not have maturities  longer
than fifteen years, except in exceptional cases.

         Deposit accounts represent the majority of the liabilities of the Bank.
These include transaction  accounts,  time deposits and certificates of deposit.
The maturities of the majority of  interest-sensitive  accounts are 12 months or
less.

                           SUPERVISION AND REGULATION

         Bank  holding  companies  and banks  are  extensively  regulated  under
federal and state law. To the extent that the  following  information  describes
statutory  and  regulatory  provisions,  it is  qualified  in  its  entirety  by
reference to such  statutes and  regulations.  Any change in  applicable  law or
regulation  may have a material  effect on the  business  of the Company and the
Bank.

General

         As a bank holding  company under the Bank Holding Company Act ("BHCA"),
the  Company  obtained  the  approval of the Board of  Governors  of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the
regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing  services to or performing  services for its subsidiaries or engaging
in any other  activity  which the Federal  Reserve  determines  to be so closely
related to banking or managing or controlling  banks as to be a proper  incident
thereto. The Company may engage in a broader range of activities if it becomes a
"financial  holding company"  pursuant to the  Gramm-Leach-Bliley  Act, which is
described below under the caption "Recent  Legislation."  The BHCA prohibits the
Company  from  acquiring  direct  or  indirect  control  of more  than 5% of the
outstanding  voting stock or substantially all of the assets of any bank or from
merging or  consolidating  with  another  bank  holding  company  without  prior
approval of the Federal  Reserve.  Additionally,  the BHCA prohibits the Company
from engaging in or from  acquiring  ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal  Reserve to be so closely  related to
banking as to be properly  incident  thereto.  The BHCA generally does not place
territorial   restrictions  on  the  activities  of  such  non-banking   related
activities.

         The Company is also subject to limited  regulation  and  supervision by
the South Carolina State Board of Financial Institutions.

Obligations of the Company to its Subsidiary Bank

         A number of obligations  and  restrictions  are imposed on bank holding
companies  and their  depository  institution  subsidiaries  by Federal  law and
regulatory  policy that are designed to reduce  potential  loss  exposure to the
depositors of such  depository  institutions  and to the FDIC insurance funds in
the event the depository  institution  is in danger of becoming  insolvent or is
insolvent.  For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository  institutions and to commit resources to support such institutions in
circumstances  where it might not do so absent such  policy.  In  addition,  the
"cross-guarantee"  provisions of the Federal  Deposit  Insurance Act, as amended


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("FDIA"),  require  insured  depository  institutions  under  common  control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings  Association  Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the  FDIC  as a  result  of the  default  of a  commonly  controlled  insured
depository  institution or for any assistance provided by the FDIC to a commonly
controlled  insured  depository  institution in danger of default.  The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best  interest  of the SAIF or the BIF or both.  The FDIC's  claim for
damages  is  superior  to  claims  of  shareholders  of the  insured  depository
institution  or its holding  company but is subordinate to claims of depositors,
secured  creditors and holders of subordinated  debt (other than  affiliates) of
the commonly controlled insured depository institutions.

         The FDIA also provides that amounts  received from the  liquidation  or
other resolution of any insured  depository  institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit  liabilities of
the  institution  prior to payment  of any other  general  or  unsecured  senior
liability,   subordinated  liability,  general  creditor  or  shareholder.  This
provision  would give  depositors  a preference  over  general and  subordinated
creditors  and  shareholders  in the event a receiver is appointed to distribute
the assets of the Bank.

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank
regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

Capital Adequacy Guidelines for Bank Holding Companies and National Banks

         The various federal bank regulators,  including the Federal Reserve and
the OCC have adopted  risk-based and leverage  capital  adequacy  guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and  off-balance  sheet  exposures,  as  adjusted  for credit  risks.  In
addition,  the OCC may establish  individual minimum capital  requirements for a
national bank that are different from the general requirements.

         Failure  to meet  capital  requirements  could  subject  the  Bank to a
variety of enforcement remedies,  including the termination of deposit insurance
by the FDIC and a prohibition on the taking of brokered deposits.

         The risk-based  capital standards of both the Federal Reserve Board and
the OCC explicitly  identify  concentrations of credit risk and the risk arising
from non-traditional  activities,  as well as an institution's ability to manage
these risks,  as  important  factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates should be considered by the agencies as
a factor in evaluating a bank's capital  adequacy.  The Federal Reserve also has
recently issued  additional  capital  guidelines for bank holding companies that
engage in certain trading activities.

         The Company and the Bank exceeded all applicable  capital  requirements
at December 31, 2001.

Certain Transactions by the Company with its Affiliates

         Federal  law   regulates   transactions   among  the  Company  and  its
affiliates,  including  the  amount of bank loans to or  investments  in nonbank
affiliates  and the  amount  of  advances  to third  parties  collateralized  by
securities of an affiliate.  Further,  a bank holding company and its affiliates
are prohibited  from engaging in certain tie-in  arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.

FDIC Insurance Assessments

         Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits,  depending on the institution's
capital position and other supervisory  factors.  However,  because  legislation
enacted in 1996  requires  that  insured  deposits pay a pro rata portion of the
interest due on the obligations  issued by the Financing  Corporation  ("FICO"),
the FDIC is currently  assessing  BIF-insured  deposits an additional 1.26 basis
points per $100 of deposits,  and SAIF-insured deposits an additional 6.30 basis
points per $100 of deposits,  to cover those  obligations.  The FICO  assessment
will  continue to be adjusted  quarterly  to reflect  changes in the  assessment
bases of the  respective  funds  based  on  quarterly  Call  Report  and  Thrift
Financial Report submissions.


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Regulation of the Bank

         The Bank is subject to the limitations of the National Bank Act and the
regulations  of the OCC as well as to  examination  by the OCC. The Bank is also
subject to various other state and federal laws and regulations, including state
usury laws, laws relating to  fiduciaries,  consumer credit and laws relating to
branch  banking.  The Bank's  loan  operations  are  subject to certain  federal
consumer credit laws and regulations promulgated thereunder,  including, but not
limited to: the federal  Truth-In-Lending  Act, governing  disclosures of credit
terms  to  consumer  borrowers;  the Home  Mortgage  Disclosure  Act,  requiring
financial  institutions to provide certain information concerning their mortgage
lending;  the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting
discrimination on the basis of certain  prohibited  factors in extending credit;
the Fair Credit Reporting Act, governing the use and provision of information to
credit  reporting  agencies;  the Bank Secrecy Act,  dealing  with,  among other
things,  the  reporting  of  certain  currency  transactions;  and the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected by
collection agencies. The deposit operations of the Bank are subject to the Truth
in  Savings  Act,  requiring  certain  disclosures  about  rates paid on savings
accounts;  the Expedited Funds  Availability Act, which deals with disclosure of
the availability of funds deposited in accounts and the collection and return of
checks by banks;  the Right to Financial  Privacy Act,  which  imposes a duty to
maintain  certain   confidentiality  of  consumer  financial  records,  and  the
Electronic  Funds Transfer Act and  regulations  promulgated  thereunder,  which
govern  automatic   deposits  to  and  withdrawals  from  deposit  accounts  and
customers'  rights and  liabilities  arising  from the use of  automated  teller
machines and other electronic banking services.

         The  Bank  is  also  subject  to  the  requirements  of  the  Community
Reinvestment  Act (the  "CRA").  The CRA imposes on  financial  institutions  an
affirmative  and  ongoing  obligation  to meet the credit  needs of their  local
communities,  including low- and moderate-income neighborhoods,  consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers,  acquisitions
and applications to open a branch or facility.

Other Safety and Soundness Regulations

         Prompt  Corrective  Action.  The federal  banking  agencies  have broad
powers under  current  federal law to take prompt  corrective  action to resolve
problems of insured depository institutions.  The extent of these powers depends
upon whether the  institutions in question are "well  capitalized,"  "adequately
capitalized,"    "undercapitalized,"    "significantly    undercapitalized"   or
"critically undercapitalized."

         A bank that is "undercapitalized"  becomes subject to provisions of the
FDIA:   restricting  payment  of  capital  distributions  and  management  fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital  restoration  plan;  restricting  the growth of the bank's
assets and requiring prior approval of certain expansion proposals.  A bank that
is  "significantly   undercapitalized"   is  also  subject  to  restrictions  on
compensation  paid  to  senior  management  of  the  bank,  and a bank  that  is
"critically   undercapitalized"  is  further  subject  to  restrictions  on  the
activities of the bank and restrictions on payments of subordinated  debt of the
bank.  The  purpose  of these  provisions  is to  require  banks  with less than
adequate  capital to act quickly to restore  their  capital and to have the FDIC
move  promptly  to take over  banks  that are  unwilling  or unable to take such
steps.

         Brokered Deposits.  Under current FDIC regulations,  "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept  brokered  deposits  with a waiver  from the FDIC  (subject  to
certain  restrictions on payment of rates), while  "undercapitalized"  banks may
not accept brokered deposits.

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 the Company and any other  adequately  capitalized  bank holding company
located in South  Carolina can acquire a bank located in any other state,  and a
bank  holding  company  located  outside  South  Carolina  can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and
other restrictions.  Unless prohibited by state law, adequately  capitalized and
managed bank holding  companies are permitted to  consolidate  their  multistate
bank operations into a single bank subsidiary and to branch  interstate  through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate  branches within a state continue to be subject to applicable  state
branching  laws.  South  Carolina law was amended,  effective  July 1, 1996,  to
permit such  interstate  branching but not de novo branching by an  out-of-state
bank.


                                       7
<Page>

Recent Legislation

         The  Gramm-Leach-Bliley  Act,  which  makes it easier for  affiliations
between  banks,  securities  firms and  insurance  companies  to take  place was
adopted on November 12, 1999. The Act removes  Depression-era  barriers that had
separated  banks and  securities  firms,  and seeks to  protect  the  privacy of
consumers' financial information.  Most of the provisions of the Act require the
applicable   regulators  to  adopt  regulations  in  order  to  implement  these
provisions, and significant numbers of regulations have been adopted.

         Under  provisions  of the act,  banks,  securities  firms and insurance
companies  are able to  structure  new  affiliations  through a holding  company
structure or through a financial subsidiary.  The legislation creates a new type
of bank holding  company called a "financial  holding  company" which has powers
much more extensive  than those of standard  holding  companies.  These expanded
powers  include  authority  to  engage  in  "financial  activities,"  which  are
activities  that are (1) financial in nature;  (2) incidental to activities that
are financial in nature; or (3)  complementary to a financial  activity and that
do not  impose  a  safety  and  soundness  risk.  Significantly,  the  permitted
financial activities for financial holding companies include authority to engage
in merchant  banking and insurance  activities,  including  insurance  portfolio
investing. A bank holding company can qualify as a financial holding company and
expand  the  services  it  offers  only  if  all of  its  subsidiary  depository
institutions  are well managed,  well  capitalized and have received a rating of
"satisfactory" on their last Community Reinvestment Act examination.

         The  legislation  also  creates  another  new type of  entity  called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities,  including real
estate development or investment,  insurance or annuity underwriting,  insurance
portfolio  investing and merchant  banking,  are reserved for financial  holding
companies.  A bank's  investment  in a financial  subsidiary  affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial  subsidiaries  may not be consolidated  with those of the bank. The
bank must also be certain that its risk  management  procedures  are adequate to
protect it from  financial and  operational  risks created both by itself and by
any financial subsidiary.  Further, the bank must establish policies to maintain
the separate corporate  identities of the bank and its financial  subsidiary and
to prevent each from becoming liable for the obligations of the other.

         The Act also  establishes  the  concept  of  "functional  supervision,"
meaning that  similar  activities  should be  regulated  by the same  regulator.
Accordingly,  the Act spells out the regulatory authority of the bank regulatory
agencies,  the Securities and Exchange Commission and state insurance regulators
so that each type of activity is  supervised by a regulator  with  corresponding
expertise.  The Federal  Reserve Board is intended to be an umbrella  supervisor
with the  authority  to  require a bank  holding  company or  financial  holding
company  or any  subsidiary  of  either  to  file  reports  as to its  financial
condition,  risk management  systems,  transactions with depository  institution
subsidiaries  and  affiliates,  and compliance  with any federal law that it has
authority to enforce.

         Although the Act reaffirms that states are the regulators for insurance
activities  of  all  persons,  including  federally  chartered  banks,  the  Act
prohibits  states from preventing  depository  institutions and their affiliates
from conducting insurance activities.

         The Act also  establishes  a minimum  federal  standard  of  privacy to
protect the confidentiality of a consumer's  personal financial  information and
gives the consumer the power to choose how personal financial information may be
used by financial  institutions.  The privacy  provisions of the Act will not go
into effect until after adoption of implementing  regulations by various federal
agencies.

         The Company  anticipates that the Act and the regulations  which are to
be adopted pursuant to the Act will be likely to create new opportunities for it
to offer  expanded  services to customers in the future,  though the Company has
not yet determined what the nature of the expanded services might be or when the
Company might find it feasible to offer them. The Company  further  expects that
the Act will increase  competition from larger financial  institutions  that are
currently more capable than the Company of taking  advantage of the  opportunity
to provide a broader  range of  services.  However,  the  Company  continues  to
believe that its commitment to providing high quality,  personalized  service to
customers will permit it to remain competitive in its market area.


                                       8
<Page>

Legislative Proposals

         New proposed legislation, which could significantly affect the business
of banking,  has been  introduced  or may be introduced in Congress from time to
time.  Management  of the  Company  cannot  predict  the  future  course of such
legislative proposals or their impact on the Company and the Bank should they be
adopted.

Fiscal and Monetary Policy

         Banking  is  a  business   that  depends   largely  on  interest   rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other  borrowings,  and the interest  received by a bank on
its loans and  securities  holdings,  constitutes  the major portion of a bank's
earnings.  Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic  conditions  generally,  both domestic and foreign,
and also to the  monetary  and  fiscal  policies  of the  United  States and its
agencies,  particularly the Federal Reserve.  The Federal Reserve  regulates the
supply of money through various means,  including open-market dealings in United
States government  securities,  the discount rate at which banks may borrow from
the Federal Reserve,  and the reserve  requirements on deposits.  The nature and
timing of any changes in such  policies  and their impact on the Company and the
Bank cannot be predicted.

Item 2.  Description of Property.

         The Company owns 1.83 acres of land at 1670 East Main Street in Easley,
South Carolina.  The Company had a temporary office facility on the property and
during 2000 constructed a main office on this site. The new main office building
was occupied on January 16, 2001. The Company  purchased  6.772 acres of land on
the 40 block of Farrs Bridge Road in Berea, South Carolina and is constructing a
permanent branch office with an anticipated  opening during the third quarter of
2002.  Both  properties  are  considered  to be well  suited  for the  Company's
purposes.

Item 3.  Legal Proceedings.

         The  Company  may  from  time  to  time be a  party  to  various  legal
proceedings  arising in the ordinary  course of business,  but management of the
Company  is not aware of any  pending or  threatened  litigation  or  unasserted
claims or assessments that are expected to result in losses,  if any, that would
be material to the Company's business and operations.

Item 4.  Submission of Matters to Vote of Security Holders.

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 2001.

                                     PART II

Item 5.  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 2001,  the Company
did not sell any shares of its  common  stock in a public  offering.  During the
past calendar year,  management was aware of a number of  transactions  in which
the Company's  common stock traded between  $10.70 - $12.50 per share.  However,
management has not ascertained  that these  transactions are 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, 2002, there were  approximately 486 holders of record of
the  Company's  common  stock,  excluding  individual  participants  in security
position listings.

         The Company  has never 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


                                       9
<Page>

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.

Item 6.  Management's Discussion and Analysis or Plan of Operation.

         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  commenced  business on September 15, 1999.  It conducts a general  banking
business in Easley, South Carolina, out of one office.

         The following  information  describes  various financial aspects of the
Bank's  business.  This  information  should  be read in  conjunction  with  the
financial  statements of the Company,  which appear  elsewhere in this document.
References in the discussion  below to the "period ended December 31, 1999" mean
the period from  September  15, 1999 (the  opening date of the Bank) to December
31, 1999. 2000 was the Bank's first full year of operation. Because of the short
period of operations during the year ended December 31,  1999,comparisons of the
operating  results for that period with the results for the year ended  December
31, 2000, would not be meaningful and are not presented.

Critical Accounting Policies

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

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

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

Earnings Performance

         The Company had a net loss from  operations for the year ended December
31, 2001 of $138 thousand or $.17 per basic common share, compared to net income
for the year ended  December  31, 2000 of $84  thousand or $.11 per basic common
share.  The Company had net interest  income (the  difference  between  interest


                                       10
<Page>

earned  on  interest  earning  assets  and  interest  paid on  interest  bearing
liabilities)  of $1.5 million for 2001 as compared to $1.2 million for 2000. The
Company also had other operating income  (principally  service fees on deposits)
of $191  thousand in 2001 and $73 thousand in 2000.  The Company  provided  $181
thousand  and $102  thousand  to its  reserve  for loan losses in 2001 and 2000,
respectively,  and  had  other  operating  expenses  (principally  salaries  and
benefits and  occupancy  and  equipment  expenses) of $1.66  million in 2001 and
$1.07 million in 2000.

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 interest bearing
liabilities and the relative funding of these assets.

         For the year ended  December  31, 2001,  net  interest  income was $1.5
million.  For the year ended  December  31, 2000,  net interest  income was $1.2
million.  This increase was primarily  attributable to an increase in the volume
of loans and  investments.  The average  interest  earning  assets  increased to
$40,973,000  in 2001 from  $25,692,000  in 2000.  The average  yield on interest
earning  assets  decreased  from  8.00% to 7.14%  from  2000 to 2001,  while the
average cost of interest bearing liabilities  decreased from 4.92% to 4.44%. The
net yield on average  interest  earning  assets  decreased from 4.75% in 2000 to
3.67% in 2001.



                                       11
<Page>


         The table,  "Average Balances,  Yields and Rates",  provides a detailed
analysis of the effective yields and rates on the categories of interest earning
assets and  interest  bearing  liabilities  for the  Company for the years ended
December 31, 2001 and 2000.

                       Average Balances, Yields and Rates
                             (Dollars in thousands)
<Table>
<Caption>
                                                            Year Ended December 31, 2001          Year Ended December 31, 2000
                                                            ----------------------------          ----------------------------
                                                                        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 ...........................................       $10,497       $   647     6.17%       $ 8,650      $  563      6.51%
Federal Funds Sold ...................................         6,789           266     3.92%         3,820         239      6.25%
Loans(3) .............................................        23,618         2,009     8.51%        13,164       1,249      9.49%
Interest Bearing Balances ............................            69             5     7.25%            58           4      7.25%
                                                             -------       -------                 -------      ------
       Total interest earning assets .................        40,973         2,927     7.14%        25,692        2055      8.00%
Cash and due from banks ..............................         1,251                                 1,006
Allowance for loan losses ............................         (294)                                 (155)
Premises and equipment ...............................         2,473                                 1,186
Other assets .........................................           375                                   340
                                                             -------                               -------
       Total assets ..................................       $44,778                               $28,069
                                                             =======                               =======

Liabilities and shareholders' equity
Interest bearing liabilities
       Interest bearing transaction accounts .........       $ 6,021       $  163     2.71%        $ 4,870      $  194      3.97%
       Savings .......................................         6,676          229     3.43%          2,436         102      4.18%
       Time deposits $100,000 and over ...............         5,740          334     5.81%          3,028         180      5.93%
       Other time deposits ...........................         9,806          544     5.55%          3,708         216      5.84%
                                                             -------       ------                  -------      ------
         Total interest bearing deposits .............        28,243        1,270     4.50%         14,042         692      4.93%
Federal Funds purchased & repurchase agreements ......         3,801          152     4.02%          2,912         142      4.89%
                                                             -------       ------                  -------      ------
Total interest bearing liabilities ...................        32,044        1,422     4.44%         16,954         834      4.92%
Noninterest bearing demand deposits ..................         4,894                                 3,297
Other liabilities ....................................           184                                   220
Shareholders' equity .................................         7,656                                 7,598
                                                             -------                               -------
       Total liabilities and shareholders' equity ....       $44,778                               $28,069
                                                             =======                               =======
Interest rate spread(4)                                                               2.70%                                  3.08%
Net interest income and net yield on earning assets(5)                     $1,505     3.67%                     $1,221       4.75%
Interest free funds supporting earning assets(6) .....        $8,929                               $ 8,738
</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.

Rate/Volume Analysis of Net Interest Income

         The  effect  of  changes  in  average  balances  (volume)  and rates on
interest  income,  interest  expense  and net  interest  income  for  the  years
indicated,  is shown 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.



                                       12
<Page>

                             Year Ended December 31,
                              2001 compared to 2000
                           Increase (Decrease) Due to
                           --------------------------
                             (Dollars in Thousands)

<Table>
<Caption>
                                                                                                             Volume/
                                                                          Volume            Rate              Rate            Change
                                                                          ------            ----              ----            ------

Interest earned on:

<S>                                                                      <C>              <C>               <C>               <C>
     Securities ..............................................           $  120           $  (29)           $   (6)           $   85
     Federal Funds Sold ......................................              185              (89)              (69)               27
     Loans ...................................................              992             (129)             (103)              760
          Interest Bearing Balances ..........................                1                -                 -                 1
                                                                         ------           ------            ------            ------
Total Interest Income ........................................            1,298             (247)             (178)              873
                                                                         ------           ------            ------            ------
Interest paid on:
     Deposits ................................................              700              (60)              (61)              579
     Federal Funds Purchased & REPOs .........................               43              (25)               (8)               10
                                                                         ------           ------            ------            ------
          Total Interest Expense .............................              743              (85)              (69)              589
                                                                         ------           ------            ------            ------
Change in Net Interest Income ................................              555             (162)             (109)              284
                                                                         ------           ------            ------            ------
</Table>


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 timely made.

         The  table,  "Interest  Sensitivity  Analysis",  indicates  that,  on a
cumulative  basis,  rate sensitive  assets exceeded rate sensitive  liabilities,
resulting in an asset sensitive position at the end of 2001 of $6.2 million, for
a cumulative  gap ratio of 1.16.  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 2001
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 and securities sold under
agreements  to  repurchase  is  presented  in the 1-3 month  repricing  interval
because their rates are adjustable at their contractual maturity dates.


                                       13
<Page>




                          Interest Sensitivity Analysis
                            Cornerstone National Bank

<Table>
<Caption>
                                                                   December 31, 2001
                                                                   -----------------
                                                                   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 ...................................     4,867     1,376        942      5,624         -         -         -    12,808
    Federal funds sold ...........................       970         -          -          -         -         -         -       970
    Loans ........................................    12,950     3,019      5,863      5,425     2,590     1,623         3    31,473
                                                     -------   -------    -------    -------   -------   -------   -------   -------
        Total interest earning assets ............    18,787     4,395      6,805     11,048     2,590     1,623         3    45,251
                                                     -------   -------    -------    -------   -------   -------   -------   -------

Interest bearing deposits
    Interest bearing transaction accounts ........     3,406         -          -      3,406         -         -         -     6,812
    MMDA's & Savings .............................     5,423         -          -      5,423         -         -         -    10,846
    Time deposits $100M and over .................         -     1,505      5,250          -       479         -         -     7,234
    Other time deposits ..........................         -     3,572      6,607        499       184         -         -    10,862
    Federal funds purchased and
    securities sold under agreements to
    repurchase ...................................         -     3,293          -          -         -         -         -     3,293
                                                               -------                                                       -------
        Total interest bearing liabilities .......     8,829     8,370     11,857      9,328       663         -         -    39,047
                                                     =======   =======    =======    =======   =======   =======   =======   =======

Interest sensitivity gap .........................     9,958    (3,975)    (5,052)     1,720     1,927     1,623         3     6,204
Cumulative interest sensitivity gap ..............     9,958     5,983        931      2,651     4,578     6,201     6,204     6,204
Gap ratio ........................................      2.13       .53        .57       1.18      3.91         -         -      1.16
Cumulative gap ratio .............................      2.13      1.35       1.03       1.07      1.12      1.16      1.16      1.16
</Table>

(1)  There were no nonaccruing loans or unamortized  deferred loan fees, both of
     which would normally be subtracted from loans for purposes of this table.



                                       14
<Page>


                          Interest Sensitivity Analysis
                            Cornerstone National Bank

<Table>
<Caption>
                                                                   December 31, 2000
                                                                   -----------------
                                                                   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 ....................................         -       399     2,141     7,301          -         -         -     9,841
    Federal funds sold ............................     3,330         -         -         -          -         -         -     3,330
    Interest bearing deposits in banks ............         -       100         -         -          -         -         -       100
    Loans .........................................     2,796     4,872     4,771     2,851      1,609     1,539         -    18,438
                                                      -------   -------   -------   -------    -------   -------   -------   -------
        Total interest earning assets .............     6,126     5,371     6,912    10,152      1,609     1,539         -    31,709
                                                      -------   -------   -------   -------    -------   -------   -------   -------

Interest bearing deposits
    Interest bearing transaction accounts .........     1,459         -         -     4,376          -         -         -     5,835
    MMDA's & Savings ..............................       754         -         -     2,915          -         -         -     3,669
    Time deposits $100M and over ..................         -       411     2,693     1,706          -         -               4,810
    Other time deposits ...........................         -     1,241     2,577     2,963         29         -         -     6,810
    Federal funds purchased and
      securities sold under agreements to
      repurchase ..................................         -     2,779         -         -          -         -         -     2,779
                                                                -------                                                      -------
        Total interest bearing liabilities ........     2,213     4,431     5,270    11,960         29         -         -    23,903
                                                      =======   =======   =======   =======    =======   =======   =======   =======


Interest sensitivity gap ..........................     3,913       940     1,642    (1,808)     1,580     1,539         -     7,806
Cumulative interest sensitivity gap ...............     3,913     4,853     6,495     4,687      6,267     7,806     7,806     7,806
Gap ratio .........................................      2.77      1.21      1.31       .85      55.48         -         -      1.33
Cumulative gap ratio ..............................      2.77      1.73      1.55      1.20       1.26      1.33      1.33      1.33
</Table>


(1)  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.  Provisions  for loan losses were $181  thousand  and $102
thousand for the years ended December 31, 2001 and 2000,  respectively.  For the
year ended  December  31, 2001 the Bank had  charge-offs  totaling $3  thousand.
There were no charge-offs or non-accrual loans in 2000. 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 service  charges on deposit
accounts,  mortgage loan  origination  fees, and other fee income,  increased by
$118 thousand or 161% to $191 thousand for the year ended December 31, 2001. The
increase  is  primarily  the result of  increases  in deposit  accounts  and the
implementation of a mortgage loan origination  department.  Other income totaled
$73 thousand for the year ended December 31, 2000.



                                       15
<Page>


Other Expenses

         Other  expenses,  which  consist  primarily  of salaries  and  employee
benefits, net occupancy,  and data processing totaled $1.66 million for the year
ended December 31, 2001 as compared to $1.07 million for the year ended December
31, 2000.  Salaries and employee  benefits  increased by $284 thousand or 50% to
$850 thousand for the year ended December 31, 2001. This increase was due to the
hiring of  additional  staff to support the opening of the new main office.  Net
occupancy  increased by $134 thousand or 95% to $275 thousand for the year ended
December 31, 2001.  This increase was largely a result of the Bank's  relocation
into  a  newly  constructed  permanent  headquarters.  Data  processing  expense
increased  by $26 thousand or 34% to $102  thousand for the year ended  December
31,  2001.  The  increase  is  primarily  the  result of  increases  in  banking
transactions due to the Bank's growing customer base. The Bank plans to increase
its loan and deposit relationships to support these increases in expenses.

Income Taxes

         During  the year  ended  December  31,  2001,  the Bank  recorded a tax
benefit of $7 thousand  compared to a tax provision of $34 thousand for the year
ended  December 31, 2000. The Bank accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." Certain items of income and expense  (principally
provision for loan losses, depreciation,  and pre-opening expenses) are included
in one reporting period for financial accounting purposes and another for income
tax purposes.

Investment Securities

         As of December  31, 2001,  the Bank's  investment  portfolio  comprised
approximately  25.50% of its total assets.  The following  table  summarizes the
carrying  amounts of securities  held by the Bank at December 31, 2001 and 2000.
Available-for-sale  securities are stated at estimated fair value.  The Bank had
no securities that were held-for-investment at December 31, 2001 or 2000.

                   Investment Securities Portfolio Composition

<Table>
<Caption>
                                                                                   December 31, 2001         December 31, 2000
                                                                                   -----------------         ------------------
                                                                                   Available for sale        Available for sale
                                                                                   ------------------        ------------------
                                                                                 (Dollars in thousands)    (Dollars in thousands)

<S>                                                                                        <C>                         <C>
U.S. Government Agencies ...................................................               $12,807                     $ 9,841
Federal Reserve Bank Stock .................................................                   180                         180
                                                                                           -------                     -------

Total ......................................................................               $12,987                     $10,021
                                                                                           =======                     =======
</Table>

         The following table presents  maturities and weighted average yields of
securities at December 31, 2001 and 2000.

              Investment Securities Portfolio Maturities and Yields

<Table>
<Caption>
                                                                             December 31, 2001                December 31, 2000
                                                                             -----------------                -----------------
                                                                     Available-for-sale       Yield    Available-for-sale    Yield
                                                                     ------------------       -----    ------------------    -----
                                                                           (Dollars in thousands)           (Dollars in thousands)
U.S. Government Agencies
<S>                                                                       <C>                 <C>           <C>                <C>
      Within one year ......................................              2,748               6.74%           2,540            6.49%
      After one through five years .........................              9,070               4.41%           7,301            6.75%
      After five through ten years .........................                  -                  -%               -               -%
      After ten years ......................................                989               4.01%               -               -%
      No Maturity ..........................................                180               6.00%             180            6.00%
                                                                        -------               ----          -------            ----

      Total ................................................            $12,987               4.88%         $10,021            6.67%
                                                                        =======               ----          =======            ====
</Table>

         Management  assigns securities upon purchase into one of the categories
(trading,  available-for-sale  and held-to-maturity)  designated by Statement of


                                       16
<Page>

Financial  Accounting  Standards  ("SFAS") No. 115 based on intent,  taking into
consideration  other factors including  expectations for changes in market rates
of interest, liquidity needs, asset/liability management strategies, and capital
requirements. The Bank has never held securities for trading purposes.

Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no  significant  concentrations  of loans in any  particular  individuals or
industry or group of related individuals or industries which management believes
pose a material risk to the Bank, and there are no foreign loans.

         The amount of loans outstanding at December 31, 2001 and 2000 are shown
in the following table according to type of loan:

                           Loan Portfolio Composition
                             (Dollars in thousands)

<Table>
<Caption>
                                                                           December 31, 2001                   December 31, 2000
                                                                           -----------------                   -----------------
                                                                                          % of                                  % of
                                                                      Amount              Loans           Amount               Loans
                                                                      ------              -----           ------               -----

<S>                                                                <C>                    <C>            <C>                   <C>
Commercial and industrial ................................         $ 11,923               37.9%          $  6,808              36.9%
Real Estate - construction ...............................            1,697                5.4%             1,930              10.5%
Real Estate - mortgage
      Farmland ...........................................                -                -                    -                 -
      1-4 family residential .............................            9,126               29.0%             5,130              27.8%
      Nonfarm, nonresidential ............................            4,626               14.7%             1,909              10.4%
      Multifamily (5 or more) residential ................              902                2.9%               299               1.6%
Consumer installment .....................................            3,199               10.1%             2,362              12.8%
                                                                   --------          ---------           --------         ---------
      Total loans ........................................           31,473                100%            18,438             100.0%
      Less allowance for loan losses .....................             (384)                                 (207)
                                                                   --------                             ---------
      Net loans ..........................................         $ 31,089                             $  18,231
                                                                   ========                             =========
</Table>

Maturity Distribution of Loans

         The following table sets forth the maturity  distribution of the Bank's
loans,  by type,  as of  December  31,  2001,  as well as the  type of  interest
requirement on such loans.

                         Maturity Distribution on Loans
                             (Dollars in Thousands)
<Table>
<Caption>
                                                                                              December 31, 2001
                                                                                              -----------------
                                                                              1 Year            1-5         5 Years
                                                                             or Less           Years        or More           Total
                                                                             -------           -----        -------           -----

<S>                                                                          <C>             <C>             <C>             <C>
Commercial and industrial ..........................................         $ 5,749         $ 5,077         $ 1,097         $11,923
Real Estate-construction ...........................................           1,697               0               0           1,697
Real Estate-mortgage ...............................................           4,624           5,753           4,277          14,654
Consumer installment ...............................................           1,597           1,602               0           3,199
                                                                             -------         -------         -------         -------
      Total ........................................................         $13,667         $12,432         $ 5,374         $31,473
                                                                             -------         -------         -------         -------

Predetermined rate, maturity greater than one year .................         $     0         $ 9,732         $ 2,994         $12,726
                                                                             -------         -------         -------         -------

Variable rate or maturity within one year ..........................         $13,667         $ 2,700         $ 2,380         $18,747
                                                                             =======         =======         =======         =======
</Table>


                                       17
<Page>

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,  2001 and 2000,  the Bank had no  nonaccrual  loans or loans 90 days or more
past due.

         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. There
were 9 loans determined by management to be potential  problem loans at December
31, 2001.

Real Estate Owned

         The  Bank  had  no  real  estate  owned   pursuant  to  foreclosure  or
in-substance  foreclosure  at December 31, 2001.  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.

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 more likely than not such loans
have become  uncollectible.  Recoveries of previously  charged off loans will be
credited  to the  allowance.  The  table,  "Summary  of Loan  Loss  Experience",
summarizes loan balances at the end of each period indicated,  averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category and additions to the allowance  which have been charged to expense.  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, 2001.

         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,  as well as
considering  other  off-balance-sheet  credit risks such as loan commitments and
standby  letters of credit.  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.


                                       18
<Page>


                         Summary of Loan Loss Experience

<Table>
<Caption>
                                                                                                       Year Ended December 31,
                                                                                                       -----------------------
                                                                                                       2001                 2000
                                                                                                       ----                 ----
                                                                                                        (Dollars in thousands)

<S>                                                                                                   <C>                   <C>
Total loans outstanding at end of period,
      net of deferred net loan fees ....................................................              $31,473               $18,438
Average amount of loans outstanding ....................................................              $23,618               $13,164

Balance of allowance for loan losses-beginning .........................................              $   207               $   105
                                                                                                      -------               -------
Loans charged off
      Commercial and industrial ........................................................              $     0               $     0
      Consumer installment .............................................................              $     3               $     0
                                                                                                      -------               -------
      Total charge offs ................................................................              $     3               $     0
Recoveries of loans previously charged-off
      Commercial and industrial ........................................................              $     0               $     0
      Consumer installment .............................................................              $     0               $     0
                                                                                                      -------               -------
      Total recoveries .................................................................              $     0               $     0
Net charge-offs (recoveries) ...........................................................              $     3               $     0
                                                                                                      -------               -------
Additions to allowance charged to expense ..............................................              $   180               $   102
                                                                                                      -------               -------


Balance of allowance for loan losses-ending ............................................              $   384               $   207
                                                                                                      -------               -------

Ratios
      Net charge-offs to average loans outstanding .....................................                 0.01%                  0.0%
      Net charge-offs to loans at end of period ........................................                 0.01%                  0.0%
      Allowance for loan losses to average loans .......................................                 1.63%                 1.57%
      Allowance for loan losses to loans at end of period ..............................                 1.22%                 1.12%
      Net charge-offs to allowance for loan losses .....................................                 0.78%                  0.0%
      Net charge-offs to provision for loan losses .....................................                 1.67%                  0.0%
</Table>


The following  table presents the allocation of the allowance for loan losses at
the end of the years ended December 31, 2001 and 2000, 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,
                                                                                     -----------------------
                                                                              2001                                  2000
                                                                              ----                                  ----
                                                                                       % of                                   % of
                                                                      Amount           Loans              Amount              Loans
                                                                      ------           -----              ------              -----
                                                                                        (Dollars in thousands)
<S>                                                                   <C>               <C>                <C>                 <C>
Commercial and industrial ..............................              $146              38.0%              $  76               36.9%
Real Estate - construction .............................              $ 19               5.0%              $  22               10.5%
Real Estate - mortgage .................................              $181              47.1%              $  82               39.8%
Consumer installment ...................................              $ 38               9.9%              $  27               12.8%
                                                                      ----              ----                ----               ----

      Total ............................................              $384               100%               $207                100%
</Table>





                                       19
<Page>




Deposits

         The average amounts and percentage  composition of deposits held by the
Bank for the years ended December 31, 2001 and 2000, are summarized below:

                                Average Deposits

<Table>
<Caption>
                                                                                          Year Ended December 31,
                                                                                          -----------------------
                                                                                    2001                           2000
                                                                                    ----                           ----
                                                                           Amount         Rate               Amount         Rate
                                                                           ------         ----               ------         ----
                                                                                            (Dollars in thousands)

<S>                                                                      <C>             <C>                <C>              <C>
Noninterest bearing demand ...................................           $ 4,894          13.9%             $ 5,198           27.0%
Interest bearing transaction accounts ........................             6,021          17.2%               4,870           25.3%
Savings ......................................................             8,601          24.5%               2,436           12.7%
Time deposits $100,000 and over ..............................             5,740          16.4%               3,028           15.7%
Other time ...................................................             9,806          28.0%               3,708           19.3%
                                                                         -------         -----              -------          -----
      Total ..................................................           $35,062         100.0%             $19,240          100.0%
                                                                         =======         =====              =======          =====
</Table>

         As of December 31, 2001,  the Bank held  $7,234,000 in time deposits of
$100,000 or more with  approximately  $1,505,000  maturing  within three months,
$4,118,000 maturing over three through six months,  $1,132,000 maturing over six
through twelve months,  and $479,000  maturing over twelve months.  Average time
deposits  $100,000  and over  comprised  approximately  16.4%  of total  average
deposits  during 2001 and 15.7% during 2000.  The vast majority of time deposits
$100,000 and over are acquired from customers  within the Bank's service area in
the ordinary course of business.  The Bank does not purchase brokered  deposits.
While most of the large time deposits are acquired from  customers with standing
relationships  with the Bank, it is a common  industry  practice not to consider
these types of deposits as core deposits because their retention can be expected
to be heavily influenced by rates offered,  and therefore such deposits may have
the characteristics of shorter-term  purchased funds. Time deposits $100,000 and
over involve the maintenance of an appropriate matching of maturity distribution
and a diversification of sources to achieve an appropriate level of liquidity.

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 year ended December 31, 2001.

                                               Year Ended 2001   Year Ended 2000
                                               ---------------   ---------------

Return on assets ............................       (.31%)             .30%
Return on equity ............................      (1.80%)            1.11%
Dividend payout ratio .......................       0.00%             0.00%
Equity to assets ratio ......................      17.10%            27.07%

         The  return on assets  and  equity  declined  in 2001 due  largely to a
significant  drop in interest  rates during a relatively  short time frame.  The
Bank  also  incurred   additional   occupancy   related  expenses  and  staffing
expenditures  associated  with  the  moving  of  the  Bank's  headquarters  from
temporary to permanent facilities.

         During  2002,  the Bank's plan of  operation  is to seek to attract new
deposit and loan  customers.  The Bank plans to open its first branch  office in
the third quarter of 2002.  Deposit accounts will be sought from individuals and
businesses in the Easley and Berea, South Carolina markets.  The Bank will offer
competitive  rates for such accounts and may seek new accounts by offering rates
slightly above those  prevailing in the market.  Loan business will be sought by
offering competitive rates and terms to credit worthy customers. Management will
emphasize  personal  service and  accessibility  as reasons for  customers to do


                                       20
<Page>

business with the Bank.  Personal  contacts by management as well as advertising
and  competitive  prices and  services  will be the Bank's  principal  marketing
tools.

Securities Sold under Repurchase Agreements

         Securities  sold under  repurchase  agreements  totaled  $3,293,000 and
$2,779,000  at  December  31,  2001 and  2000,  respectively.  U. S.  Government
securities  with an amortized cost of $4,738,000  and $2,880,000  (fair value of
$5,317,000  and  $2,892,000)  are used as collateral  for the sweep accounts and
repurchase  agreements,  at December 31, 2001 and 2000,  respectively.  The Bank
enters  into  sales  of  securities  under   agreements  to  repurchase.   These
obligations  to repurchase  securities  sold are reflected as liabilities in the
balance  sheets.  The dollar amount of securities  underlying the agreements are
book entry securities  maintained by a safekeeping  agent. The  weighted-average
interest  rate for sweep  accounts  was 3.4 and 4.5 percent at December 31, 2001
and 2000 and 5.75 and 6.43 percent at December 31, 2001 and 2000 for  repurchase
agreements.  The maximum  amount  outstanding at any month-end was $4,042,000 in
2001 and  $2,869,000 in 2000 for sweep  accounts and $1,000,000 in 2001 and 2000
for repurchase agreements.

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 which 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 wholesale time deposits) provide a relatively stable funding base, and were
equal to 67.87%  of total  assets at  December  31,  2001.  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 $3.6 million in
cash and liquid  assets at December  31,  2001.  The Bank also has $1.5  million
available  through a line of credit with another bank as an additional source of
liquidity funding. Management believes that the Bank's overall liquidity sources
are adequate to meet its operating needs in the ordinary course of its business.
Accordingly,  the Company does not expect to have to raise  additional  funds in
2002.

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, 2001,  the Bank had issued  commitments  to extend  credit of $6.5
million through various types of lending  arrangements.  63%, or $4.1 million in
commitments,  expire  within one year and 37%, or $2.4  million in  commitments,
expire  in one  year or  more.  Past  experience  indicates  that  many of these
commitments to extend credit will expire  unused.  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 $496 thousand at December 31, 2001.  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  noncancelable  operating  lease  agreements at
December 31,  2001.  The Company  does have a  three-year  contract  with a data
processing  service.  The annual costs are approximately $90 thousand.  Refer to
notes  9  and  13  to  the  Company's   consolidated  financial  statements  for
discussions on commitments and contingencies and financial  instruments with off
balance sheet risk.


                                       21
<Page>



Capital Resources

         At  December  31,  2001,  shareholders'  equity  decreased  from 2000's
balance of $7,692,000 to $7,615,000 as a result of an earnings deficit partially
offset by an unrealized gain on investment securities.

         The  Company  made  capital   expenditures  for  land,  bank  premises,
furniture and equipment  and vehicles in 2001 totaling  $626,540.  It expects to
make additional such expenditures in 2002 of about $1,600,000. Such expenditures
were made or are expected to be made from cash on hand.

         The Bank is subject to regulatory  capital  adequacy  standards.  Under
these standards, financial institutions are required to maintain certain minimum
ratios of capital to  risk-weighted  assets and average total assets.  Under the
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991,
federal financial institution  regulatory  authorities are required to implement
prescribed  "prompt  corrective  actions" 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  December  31,  2001  capital  ratios are  presented  in the
following table,  compared with the "well  capitalized" and minimum ratios under
the FDIC regulatory definitions and guidelines:

<Table>
<Caption>
                             (Dollars in Thousands)
                                                                                                To be well
                                                                                               capitalized
                                                                                               under prompt
                                                                      For capital               corrective
                                                                   adequacy purposes        action provisions
                                                                  ---------------------    ---------------------
                                            Actual                      Minimum                  Minimum
                                  ----------------------------    ---------------------    ---------------------
                                     Amount         Ratio          Amount      Ratio         Amount     Ratio
                                     ------         -----          ------      -----         ------     -----
                                                             (Dollars in thousands)
As of December 31, 2001
<S>                                      <C>           <C>           <C>          <C>          <C>        <C>
   Total Capital (to risk
      Weighted assets)                   $5,975        17.18%        $2,782       8.0%         $3,479     10.0%
   Tier 1 Capital (to risk
      Weighted assets)                   $5,590        16.07%        $1,391       4.0%         $2,087      6.0%
   Tier 1 Capital (to average
      Assets)(leverage)                  $5,590        11.08%        $2,018       4.0%         $2,522      5.0%
</Table>

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  which 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.

Item 7.  Financial Statements.



                                       22
<Page>














               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
Cornerstone Bancorp and Subsidiary
Easley, South Carolina


           We have  audited  the  accompanying  consolidated  balance  sheets of
Cornerstone  Bancorp and Subsidiary  (the "Company") as of December 31, 2001 and
2000 and the related consolidated statements of operations, shareholders' equity
and comprehensive  income,  and cash flows for the years ended December 31, 2001
and 2000 and for the period from  January 11, 1999  (inception)  to December 31,
1999. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

           In our opinion,  the consolidated  financial  statements  referred to
above  present  fairly,  in all material  respects,  the  financial  position of
Cornerstone Bancorp and Subsidiary at December 31, 2001 and 2000 and the results
of their  operations  and cash flows for the years ended  December  31, 2001 and
2000 and for the period from January 11, 1999  (inception) to December 31, 1999,
in conformity with accounting principles generally accepted in the United States
of America.



                                            \S\Elliott Davis, LLP



January 25, 2002
Greenville, South Carolina




                                       23
<Page>




                       CORNERSTONE BANCORP AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                                                             December 31,
                                                                                                             ------------
                                                                                                     2001                   2000
                                                                                                     ----                   ----
                                     ASSETS

<S>                                                                                            <C>                     <C>
CASH AND DUE FROM BANKS ............................................................           $  2,649,950            $  1,109,001

FEDERAL FUNDS SOLD .................................................................                970,000               3,330,000

INVESTMENT SECURITIES ..............................................................             12,987,333              10,021,055

LOANS, NET .........................................................................             31,088,547              18,230,770

PROPERTY AND EQUIPMENT, NET ........................................................              2,761,261               2,285,755

OTHER ASSETS .......................................................................                492,971                 405,858
                                                                                               ------------            ------------
         Total assets ..............................................................           $ 50,950,062            $ 35,382,439
                                                                                               ============            ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
     Deposits
         Noninterest bearing .......................................................           $  6,058,740            $  3,666,474
         Interest bearing ..........................................................             33,850,944              21,124,387
                                                                                               ------------            ------------
         Total deposits ............................................................             39,909,684              24,790,861
     Securities sold under repurchase agreements ...................................              3,292,960               2,779,254
     Other liabilities .............................................................                132,455                 120,441
                                                                                               ------------            ------------

         Total liabilities .........................................................             43,335,099              27,690,556

COMMITMENTS AND CONTINGENCIES - Notes 9 and 13

SHAREHOLDERS' EQUITY
     Preferred stock, 10,000 shares authorized, no shares issued ...................                      -                       -
     Common stock, no par value, 20,000,000 shares authorized,
         800,000 shares issued .....................................................              7,985,000               7,985,000
     Retained deficit ..............................................................               (453,019)               (315,426)
     Accumulated other comprehensive income ........................................                 82,982                  22,309
                                                                                               ------------            ------------

         Total shareholders' equity ................................................              7,614,963               7,691,883
                                                                                               ------------            ------------
         Total liabilities and shareholders' equity ................................           $ 50,950,062            $ 35,382,439
                                                                                               ============            ============
</Table>

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


                                       24
<Page>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                                                                        For the
                                                                                                                      period from
                                                                                                                    January 11, 1999
                                                                                    For the years ended              (inception) to
                                                                                       December 31,                    December 31,
                                                                                       ------------                    ------------
                                                                                 2001                 2000                  1999
                                                                                 ----                 ----                  ----
INTEREST INCOME
<S>                                                                          <C>                   <C>                  <C>
     Loans and fees on loans ......................................          $ 2,009,424           $ 1,248,908          $    82,459
     Investment securities ........................................              918,040               803,955              192,834
     Escrow and interest bearing accounts .........................                    -                 2,096               34,612
                                                                             -----------           -----------          -----------
         Total interest income ....................................            2,927,464             2,054,959              309,905

INTEREST EXPENSE
     Deposits and repurchase agreements ...........................            1,422,855               833,915               88,993
                                                                             -----------           -----------          -----------
         Net interest income ......................................            1,504,609             1,221,044              220,912

PROVISION FOR POSSIBLE LOAN LOSSES ................................              180,500               102,000              105,000
                                                                             -----------           -----------          -----------
         Net interest income after provision for
            loan losses ...........................................            1,324,109             1,119,044              115,912

NONINTEREST INCOME
     Mortgage loan origination fees ...............................               47,278                     -                    -
     Service fees on deposit accounts .............................               68,818                34,972                    -
     Other ........................................................               74,693                38,102                8,000
                                                                             -----------           -----------          -----------
        Total noninterest income ..................................              190,789                73,074                8,000
                                                                             -----------           -----------          -----------
NONINTEREST EXPENSES
     Salaries and benefits ........................................              849,796               566,222              154,327
     Advertising ..................................................               51,459                34,005               21,016
     Supplies .....................................................               83,253                32,886               31,041
     Data processing ..............................................              102,779                76,558               20,073
     Occupancy and equipment ......................................              275,292               141,344               53,806
     Professional fees ............................................               67,212                55,982               32,677
     Directors fees ...............................................               33,500                13,800               13,800
     Organizational and pre-opening expenses ......................                    -                     -              249,678
     Other operating ..............................................              195,985               153,247               34,130
                                                                             -----------           -----------          -----------
         Total noninterest expenses ...............................            1,659,276             1,074,044              610,548
                                                                             -----------           -----------          -----------
         Income (loss) before income taxes ........................             (144,378)              118,074             (486,636)

INCOME TAX PROVISION (BENEFIT) ....................................               (6,785)               33,657              (86,793)
         Net income (loss) ........................................          $  (137,593)          $    84,417          $  (399,843)
                                                                             -----------           -----------          -----------
BASIC NET INCOME (LOSS) PER COMMON SHARE ..........................          $      (.17)          $      0.11          $     (0.50)
                                                                             ===========           ===========          ===========
DILUTED NET INCOME (LOSS) PER
     COMMON SHARE .................................................          $      (.17)          $      0.10          $     (0.50)
                                                                             ===========           ===========          ===========
BASIC WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING ....................................              800,000               800,000              800,000
                                                                             ===========           ===========          ===========
DILUTED WEIGHTED AVERAGE NUMBER OF
     COMMON SHARES OUTSTANDING ....................................              800,000               808,000              800,000
                                                                             ===========           ===========          ===========
</Table>


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


                                       25
<Page>



                       CORNERSTONE BANCORP AND SUBSIDIARY
     CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME


<Table>
<Caption>
                                                                                                        Accumulated
                                                                      Common stock                         other           Total
                                                                      ------------           Retained   comprehensive  shareholders'
                                                                  Shares         Amount      deficit    (loss) income     equity
                                                                  ------         ------      -------    -------------     ------

<S>                                                              <C>        <C>           <C>            <C>            <C>
BALANCE, JANUARY 11, 1999 (inception) ....................             -    $         -   $         -    $         -    $         -
   Net loss ..............................................             -              -      (399,843)             -       (399,843)
   Other comprehensive loss, net of taxes
     Unrealized loss on investment securities ............             -              -             -         (8,663)        (8,663)
                                                                                                                        -----------
   Comprehensive loss ....................................                                                                 (408,506)

   Sale of stock (net of offering expenses of $15,000) ...       800,000      7,985,000             -              -      7,985,000
                                                             -----------    -----------   -----------    -----------    -----------

BALANCE, DECEMBER 31, 1999 ...............................       800,000      7,985,000      (399,843)        (8,663)     7,576,494
                                                                                                                        -----------
   Net income ............................................             -              -        84,417              -         84,417
   Other comprehensive income, net of taxes
     Unrealized gain on investment securities ............             -              -             -         30,972         30,972
                                                                                                                        -----------
   Comprehensive income ..................................             -              -             -              -        115,389
                                                             -----------    -----------   -----------    -----------    -----------

BALANCE, DECEMBER 31, 2000 ...............................       800,000      7,985,000      (315,426)        22,309      7,691,883
   Net loss ..............................................             -              -      (137,593)             -       (137,593)
   Other comprehensive income, net of income taxes:
     Unrealized gain on investment securities ............             -              -             -         60,673         60,673
                                                                                                                        -----------
   Comprehensive loss ....................................             -              -             -              -        (76,920)
                                                             -----------    -----------   -----------    -----------    -----------

BALANCE, DECEMBER 31, 2001 ...............................       800,000    $ 7,985,000   $  (453,019)   $    82,982    $ 7,614,963
                                                             ===========    ===========   ===========    ===========    ===========
</Table>














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

                                       26
<Page>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                                                                        For the
                                                                                                                       period from
                                                                                                                    January 11, 1999
                                                                                          For the years ended         (inception) to
                                                                                             December 31,               December 31,
                                                                                             ------------               ------------
                                                                                        2001              2000                 1999
                                                                                        ----              ----                 ----
OPERATING ACTIVITIES
<S>                                                                              <C>                <C>                <C>
     Net income (loss) ....................................................      $   (137,593)      $     84,417       $   (399,843)
     Adjustments to reconcile net income (loss) to net cash
        provided by (used for) operating activities
        Depreciation ......................................................           151,035             71,150             20,296
        Deferred income tax provision (benefit) ...........................            (6,785)            33,657            (86,793)
        Provision for possible loan losses ................................           180,500            102,000            105,000
        Increase in other assets ..........................................          (111,583)          (160,984)          (194,306)
        Increase in other liabilities .....................................            12,014            108,855             11,585
                                                                                 ------------       ------------       ------------
           Net cash provided by (used for) operating activities ...........            87,588            239,095           (544,061)
                                                                                 ------------       ------------       ------------
INVESTING ACTIVITIES
     Decrease (increase) in federal funds sold ............................         2,360,000         (1,420,001)        (1,910,000)
     Proceeds from maturities of investment securities ....................         6,616,892          4,801,644                  -
     Purchase of investment securities ....................................        (9,491,242)        (5,395,732)        (9,402,083)
     Increase in loans, net ...............................................       (13,038,277)       (11,701,539)        (6,736,232)
     Purchase of property and equipment ...................................          (626,541)        (1,485,205)          (892,000)
                                                                                 ------------       ------------       ------------
           Net cash used for investing activities .........................       (14,179,168)       (15,200,833)       (18,940,315)
                                                                                 ------------       ------------       ------------
FINANCING ACTIVITIES
     Sale of stock, net ...................................................                 -                  -          7,985,000
     Net increase in deposits .............................................        15,118,823         14,869,524          9,921,337
     Net increase in securities sold under
        repurchase agreements .............................................           513,706            489,976          2,289,278
                                                                                 ------------       ------------       ------------
           Net cash provided by financing activities ......................        15,632,529         15,359,500         20,195,615
                                                                                 ------------       ------------       ------------
           Net increase in cash and cash equivalents ......................         1,540,949            397,762            711,239

CASH AND DUE FROM BANKS, BEGINNING OF PERIOD ..............................         1,109,001            711,239                  -
                                                                                 ------------       ------------       ------------
CASH AND DUE FROM BANKS, END OF PERIOD ....................................      $  2,649,950       $  1,109,001       $    711,239
                                                                                 ============       ============       ============
CASH PAID FOR
     Interest .............................................................      $  1,424,848       $    755,024       $     77,993
                                                                                 ============       ============       ============
     Income taxes .........................................................      $     47,951       $          - $                -
                                                                                 ============       ============       ============
</Table>

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


                                       27
<Page>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

           Cornerstone Bancorp,  (the "Company") was incorporated under the laws
of the State of South  Carolina  for the purpose of  operating as a bank holding
company for  Cornerstone  National  Bank (the "Bank").  The Company  offered its
common stock for sale to the public at an initial  public  offering price of $10
per share and  raised  approximately  $8  million in  capital,  net of  offering
expenses.  The Company obtained  regulatory  approval to operate a national bank
and  opened  the  Bank  for  business  on  September  15,  1999,  with  a  total
capitalization of $6 million. The Bank provides full commercial banking services
to customers and is subject to regulation by the Office of the Controller of the
Currency (OCC) and the Federal  Deposit  Insurance  Corporation.  The Company is
subject to the regulation of the Federal Reserve Board.

           Prior to September 15, 1999,  the Company  devoted all of its efforts
to  establishing  the Bank  and  accordingly  operated  as a  development  stage
enterprise as defined by Statement of Financial Accounting Standard ("SFAS") No.
7, "Accounting and Reporting by Development Stage Enterprises".

   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.

   Concentrations of credit risk
     The Company makes loans to individuals and businesses in and around Upstate
     South Carolina for various personal and commercial purposes. The Bank has a
     diversified loan portfolio and the borrowers'  ability to repay their loans
     is  not  dependent  upon  any  specific  economic  sector.   The  Bank  has
     concentrations  of  credit in  services,  construction,  manufacturing  and
     health care industries,  which by category comprise over 25 percent of Tier
     1 Capital adjusted for allowance for loan losses.

   Investment securities
     The Company accounts for investment  securities in accordance with 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.  The Company has no held to maturity
          securities.



                                                                     (Continued)

                                       28
<Page>

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

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

     The Bank, as a member institution,  is required to own stock in the Federal
     Reserve Bank. The stock is generally  pledged  against any borrowings  from
     this institution. No ready market exists for the stock and it has no quoted
     market value.  However,  redemption of this stock 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,
     unamortized  loan fees 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.  Points on real  estate  loans are  taken  into  income to the
     extent they  represent the direct cost of initiating a loan.  The amount in
     excess of direct costs is deferred and amortized  over the expected life of
     the loan.

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

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

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

     The Bank  accounts  for  impaired  loans in  accordance  with SFAS No. 114,
     "Accounting by Creditors for Impairment of a Loan".  This standard requires
     that all  lenders  value  loans at the loan's  fair value if it is probable
     that the lender will be unable to collect all amounts due  according to the
     terms of the loan  agreement.  Fair value may be determined  based upon the
     present  value  of  expected  cash  flows,  market  price of the  loan,  if
     available,  or value of the underlying collateral.  Expected cash flows are
     required to be discounted at the loan's effective interest rate.

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

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

                                                                     (Continued)


                                       29
<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.

   Organizational costs
     In accordance  with Statement of Position 98-5,  "Reporting on the Costs of
     Start-up   Activities,"  the  Company  expensed  all   organizational   and
     pre-opening costs as incurred.

   Income taxes
     The  financial  statements  have been prepared on the accrual  basis.  When
     income and  expenses are  recognized  in  different  periods for  financial
     reporting  purposes versus for purposes of computing income taxes currently
     payable,  deferred  taxes are provided on such temporary  differences.  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.

    Net income (loss) per common share
     Basic net income  (loss) per common  share is  computed on the basis of the
     weighted  average number of common shares  outstanding  in accordance  with
     SFAS No. 128,  "Earnings per Share".  For purposes of calculating per share
     amounts for the period ended December 31, 1999, the calculation assumed the
     stock was  outstanding  all of 1999.  The treasury  stock method is used to
     compute  the effect of stock  options  on the  weighted  average  number of
     common shares outstanding for the diluted method.

    Statement of cash flows
     For purposes of reporting cash flows, cash and cash equivalents are defined
     as those  amounts  included in the balance sheet caption "Cash and Due From
     Banks". Cash and cash equivalents have an original maturity of three months
     or less.

    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  which 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.



                                                                     (Continued)



                                       30
<Page>

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

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

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

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

          Investment  securities  - Fair  values for federal  agency  investment
          securities are based on quoted market prices.  The carrying amounts of
          Federal Reserve Bank stock approximates its fair value.

          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.

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

          Off balance  sheet  instruments  - 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.

   Recently issued accounting standards
      SFAS No. 140,  "Accounting for Transfers and Servicing of Financial Assets
      and  Extinguishments  of Liabilities - a replacement of SFAS No. 125," was
      issued in September  2000.  It revises the standards  for  accounting  for
      securitizations and other transfers of financial assets and collateral and
      requires  certain  disclosures  but will carry over most of SFAS No. 125's
      provisions  without  reconsideration.   SFAS  No.  140  is  effective  for
      transfers  and  servicing  of  financial  assets  and   extinguishment  of
      liabilities  occurring  after March 31, 2001.  This statement is effective
      for  recognition  and  reclassification  of collateral and for disclosures
      related to  securitization  transactions  and  collateral for fiscal years
      ending after December 15, 2000. The adoption of the provisions of SFAS No.
      140 in 2001 did not have any effect on the Company.

      In July 2001, the Financial  Accounting  Standards  Board ("FASB")  issued
      SFAS No. 141,  "Business  Combinations",  and SFAS No. 142,  "Goodwill and
      Other  Intangible  Assets." SFAS No. 141 requires that the purchase method
      of accounting be used for all business  combinations  initiated after June
      30, 2001. SFAS No. 141 also specifies criteria  intangible assets acquired
      in a purchase method business  combination  must meet to be recognized and
      reported apart from goodwill,  noting that any purchase price allocable to
      an assembled  workforce may not be accounted for separately.  SFAS No. 142
      requires that goodwill and intangible  assets with indefinite useful lives
      no longer  be  amortized,  but  instead  tested  for  impairment  at least
      annually in accordance  with the  provisions of SFAS No. 142. As required,
      the Company adopted the provisions of SFAS No. 141 immediately and adopted
      SFAS No. 142 effective  January 1, 2002. The adoption of the provisions of
      SFAS No. 141 in 2001 did not have any effect on the Company.  The adoption
      of SFAS No. 142 is not expected to have any effect on the Company.


                                                                     (Continued)



                                       31
<Page>

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

      In  August  2001,  the  FASB  issued  SFAS  No.  144  "Accounting  for the
      Impairment or Disposal of Long-Lived  Assets".  This SFAS supercedes prior
      pronouncements  associated  with  impairment  or  disposal  of  long-lived
      assets.  The SFAS establishes  methodologies  for assessing  impairment of
      long-lived assets,  including assets to be disposed of by sale or by other
      means.  This statement is effective for all fiscal years  beginning  after
      December  15,  2001.  This SFAS is not  expected to have any impact on the
      Company's financial position.

      On July 2, 2001,  The Securities  and Exchange  Commission  ("SEC") issued
      Staff  Accounting  Bulletin  ("SAB") No. 102 "Selected Loan Loss Allowance
      Methodology  and  Documentation  Issues".  SAB No. 102 expresses the SEC's
      views on the  development,  documentation  and application of a systematic
      methodology  for  determining  the  allowance for loan and lease losses in
      accordance with  accounting  principles  generally  accepted in the United
      States of America.  A concurrent  statement was also issued by the Federal
      Financial Institutions Examination Council ("FFIEC"). The Company believes
      that it is currently in compliance with the requirements of SAB No. 102.

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

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


NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

           The Bank is required to maintain average reserve  balances,  computed
by applying prescribed  percentages to its various types of deposits,  either at
the bank or on deposit with the Federal  Reserve  Bank. At December 31, 2001 and
2000 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 excess to other banks on a daily basis.  As of December 31,
2001  and  2000  federal  funds  sold  amounted  to  $970,000  and   $3,330,000,
respectively.




                                       32
<Page>

NOTE 4 - INVESTMENT SECURITIES

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

<Table>
<Caption>
                                                                                            December 31, 2001
                                                                                            -----------------
                                                                                            Gross unrealized
                                                                 Amortized                  ----------------                 Fair
                                                                   cost                Gains               Losses           value
                                                                   ----                -----               ------           -----

<S>                                                             <C>                <C>                <C>                <C>
Federal agencies .......................................        $12,681,602        $   131,079        $     5,348        $12,807,333
Federal Reserve Bank stock - restricted ................            180,000                  -                  -            180,000
                                                                -----------        -----------        -----------        -----------
           Total investment securities .................        $12,861,602        $   131,079        $     5,348        $12,987,333
                                                                ===========        ===========        ===========        ===========

<Caption>
                                                                                            December 31, 2000
                                                                                            -----------------

<S>                                                             <C>                <C>            <C>                    <C>
Federal agencies .......................................        $ 9,807,254        $    33,801    $             -        $ 9,841,055
Federal Reserve Bank stock - restricted ................            180,000                  -                  -            180,000
                                                                -----------        -----------        -----------        -----------
           Total investment securities .................        $ 9,987,254        $    33,801    $             -        $10,021,055
                                                                ===========        ===========        ===========        ===========
</Table>



           The Bank,  as a member  institution,  is required to own stock in the
Federal  Reserve Bank. No ready market exists for the stock and it has no quoted
market  value.  However,  redemption of the stock has  historically  been at par
value.

           The amortized  cost and fair value of securities at December 31, 2001
by contractual  maturity,  are shown in the following chart. Expected maturities
may differ from contractual  maturities  because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

                                                           December 31, 2001
                                                           -----------------
                                                       Amortized           Fair
                                                          Cost             Value
                                                          ----             -----

Within one year ................................     $ 2,697,806     $ 2,747,941
Due after one through five years ...............       8,990,320       9,069,717
Due in over ten years ..........................         993,476         989,675
Federal Reserve Bank stock (no maturity) .......         180,000         180,000
                                                     -----------     -----------

    Total investment securities ................     $12,861,602     $12,987,333
                                                     ===========     ===========

           At  December   31,  2001  and  2000,   $1,338,222   and   $1,361,536,
respectively, of securities were pledged to collateralize public deposits.


                                       33
<Page>


NOTE 5 - LOANS

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


                                                              December 31,
                                                              ------------
                                                          2001           2000
                                                          ----           ----

Commercial .....................................     $11,922,442     $ 6,808,319
Real estate - construction .....................       1,697,155       1,929,782
Real estate - mortgage .........................      14,654,300       7,337,868
Consumer .......................................       3,198,970       2,361,801
                                                     -----------     -----------

Loans, gross ...................................      31,472,867      18,437,770

Less allowance for possible loan losses ........         384,320         207,000

                                                     -----------     -----------
Loans, net .....................................     $31,088,547     $18,230,770
                                                     ===========     ===========


           At December 31, 2001 and 2000 there were no  nonaccruing  or impaired
loans.  During the periods ended  December 31, 2001,  2000 and 1999,  there were
$3,180, $0 and $0 loans charged off and no recoveries.


NOTE 6 - PROPERTY AND EQUIPMENT
           Components  of property and  equipment  included in the balance sheet
are as follows:

                                                             December 31,
                                                             ------------
                                                         2001            2000
                                                         ----            ----
Land and improvements ........................       $1,033,527       $  570,981
Bank premises ................................        1,338,323                -
Furniture and equipment ......................          549,452          298,367
Vehicles .....................................           50,129           25,265
Construction in progress .....................           32,310        1,482,588
                                                     ----------       ----------
                                                      3,003,741        2,377,201
Accumulated depreciation .....................          242,480           91,446
                                                     ----------       ----------

    Total property and equipment .............       $2,761,261       $2,285,755
                                                     ==========       ==========

         Construction   in   progress  at  December   31,  2001   consisted   of
architectural drawings for another branch location in Berea, South Carolina. The
Company constructed a main office that was completed in January, 2001.

         Depreciation  expense for the periods ended December 31, 2001, 2000 and
1999 amounted to $151,035,  $71,150 and $20,296  respectively.  Depreciation  is
charged  to  operations  over the  estimated  useful  lives of the  assets.  The
estimated  useful  lives and methods of  depreciation  for the  principal  items
follow:
<Table>
<Caption>

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



                                       34
<Page>


NOTE 7 - DEPOSITS

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

                                                           December 31,
                                                           ------------
                                                     2001                2000
                                                     ----                ----

Noninterest bearing ........................       $ 6,058,740       $ 3,666,474
Interest bearing:
     NOW accounts ..........................         6,811,894         5,835,386
     Money market accounts .................         7,943,109         3,017,532
     Savings ...............................         1,000,191           651,830
     Time, less than $100,000 ..............        10,861,969         6,809,775
     Time, $100,000 and over ...............         7,233,781         4,809,864
                                                   -----------       -----------

     Total deposits ........................       $39,909,684       $24,790,861
                                                   ===========       ===========

           Interest  expense on time deposits greater than $100,000 was $366,797
in 2001, $179,667 in 2000 and $19,983 in 1999.

           At December 31, 2001 the  scheduled  maturities  of  certificates  of
deposit are as follows:

         2002                                                        $16,930,796
         2003                                                            482,005
         2004                                                             20,001
         2005                                                            270,582
         2006                                                            392,366
                                                                     -----------
                                                                     $18,095,750
                                                                     ===========

NOTE 8 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS


         Securities sold under repurchase agreements consist of the following:

                                                            December 31,
                                                            ------------
                                                     2001                 2000
                                                     ----                 ----
Sweep accounts .........................          $2,292,960          $1,779,254
Repurchase agreements ..................           1,000,000           1,000,000
                                                  ----------          ----------
                                                  $3,292,960          $2,779,254
                                                  ==========          ==========


         U. S.  Government  securities  with an amortized cost of $4,737,928 and
$2,879,950  (fair value of $5,317,303 and $2,891,787) are used as collateral for
the sweep  accounts and  repurchase  agreements,  at December 31, 2001 and 2000,
respectively.

         The  Bank  enters  into  sales  of  securities   under   agreements  to
repurchase.  These  obligations to repurchase  securities  sold are reflected as
liabilities in the balance  sheets.  The dollar amount of securities  underlying
the agreements are book entry securities  maintained by a safekeeping agent. The
weighted-average  interest  rate for sweep  accounts  was 3.4 and 4.5 percent at
December  31, 2001 and 2000 and 5.75 and 6.43  percent at December  31, 2001 and
2000 for repurchase agreements.  The maximum amount outstanding at any month-end
was  $4,042,293 in 2001 and $2,868,892 in 2000 for sweep accounts and $1,000,000
in 2001 and 2000 for repurchase agreements.


                                       35
<Page>

NOTE 9 - COMMITMENTS AND CONTINGENCIES

           The Bank may become  party to  litigation  and claims  arising in the
normal  course of  business.  As of December 31,  2001,  there is no  litigation
pending.

           Subsequent  to year end, the Bank entered into  commitments  totaling
$846,000 for the construction of a branch location.

           The Company has three years  remaining  on its  contract  with a data
processing service. Monthly costs are approximately $7,500.

           The Company  purchased and is the  beneficiary  of life insurance for
its chief financial officer.

           Refer to Note 13 concerning  financial  instruments  with off balance
sheet risk.

NOTE 10 - UNUSED LINES OF CREDIT

            At  December  31,  2001,  the Bank had an  unused  line of credit to
purchase federal funds totaling  $1,500,000 from an unrelated bank. This line of
credit  is  available  on a one to  fourteen-day  basis  for  general  corporate
purposes of the Bank.  The lender has reserved the right to withdraw the line at
its option.


NOTE 11 - INCOME TAXES

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

<Table>
<Caption>
                                                                             For the periods ended December 31,
                                                                             ----------------------------------
                                                                  2001                      2000                      1999
                                                      -----------------------    ----------------------     ------------------------

<S>                                                   <C>            <C>         <C>            <C>         <C>            <C>
Tax expense (benefit) at statutory rate ...........   $ (49,089)          34%    $  40,145           34%    $(165,456)          34%
Increase (decrease) in taxes resulting from:
     Valuation allowance adjustment ...............      42,304          (29)       (6,488)          (5)       78,663          (16)
                                                      ---------      -------     ---------      -------     ---------    ---------
Income tax provision (benefit) ....................      (6,785)           5%    $  33,657           29%    $ (86,793)          18%
                                                      =========      =======     =========      =======     =========    =========
</Table>

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

<Table>
<Caption>
                                                                                                       2001                2000
                                                                                                       ----                ----
Deferred tax asset (liability):

<S>                                                                                                <C>                    <C>
        Allowance for loan losses ....................................................             $ 147,250              $  70,380
        Unrealized net gains on securities available for sale ........................               (42,748)               (11,493)
        Depreciation .................................................................               (57,283)               (62,772)
        Net operating loss carryforward ..............................................                91,685                 91,983
                                                                                                   ---------              ---------

               Net deferred tax assets ...............................................               138,904                 88,098
               Less valuation allowance ..............................................               121,732                 46,456
                                                                                                   ---------              ---------

               Deferred tax assets ...................................................             $  17,172              $  41,642
                                                                                                   =========              =========
</Table>

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

                                                                     (Continued)

                                       36
<Page>

NOTE 11 - INCOME TAXES, Continued

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

<Table>
<Caption>
                                                                                               For the periods ended
                                                                                                    December 31,
                                                                                                    ------------
                                                                                   2001                 2000                1999
                                                                                   ----                 ----                ----

<S>                                                                             <C>                   <C>                  <C>
Income taxes currently payable ....................................             $      -              $      -             $      -

Deferred income tax provision (benefit) ...........................               (6,785)               33,657              (86,793)
                                                                                --------              --------             --------

        Income tax provision (benefit) ............................             $ (6,785)             $ 33,657             $(86,793)
                                                                                ========              ========             ========
</Table>


NOTE 12 - RELATED PARTY TRANSACTIONS

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

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

<Table>
<Caption>
                                                                                           For the periods ended
                                                                                                December 31,
                                                                                                ------------
                                                                           2001                     2000                     1999
                                                                           ----                     ----                     ----
<S>                                                                     <C>                      <C>                      <C>
Balance, beginning of period ............................               $1,540,130               $1,838,334               $        -
New loans ...............................................                1,115,409                  782,900                1,857,067
Less loan payments ......................................                  758,850                1,081,104                   18,733
                                                                        ----------               ----------               ----------
Balance, end of period ..................................               $1,896,689               $1,540,130               $1,838,334
                                                                        ==========               ==========               ==========
</Table>

         Deposits by directors and their related interests, at December 31, 2001
and 2000 approximated $2,480,101 and $4,348,000, respectively.

         For a portion of 1999, the Company leased  temporary  office space from
one of the directors. Rent expense charged to operations was $4,500.

         During 1999, the Company  purchased the land for its main office from a
director at a cost of $450,000 which was less than the appraised value.

NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

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

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

                                                                     (Continued)


                                       37
<Page>

NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK, Continued

           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, 2001 and 2000,
unfunded   commitments  to  extend  credit  were   $6,469,735  and   $2,562,111,
respectively,  and  outstanding  letters of credit were  $495,519  and  $94,225,
respectively.  At December  31,  2001,  the  unfunded  commitments  consisted of
$5,184,413  at variable  rates and  $1,285,322  at fixed  rates with  $4,071,965
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.


NOTE 14 - EMPLOYEE BENEFIT PLAN

         On September  27, 1999,  the Company  adopted 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 2001,
2000 and 1999 amounted to $21,023, $13,739, and $7,230, respectively.


NOTE 15 - STOCK OPTION PLAN

         During 1999, the Board of Directors adopted a stock option plan for the
benefit of the directors. The Board granted 40,000 options at an option price of
$10 per share.  All options vest 33 percent each year for three years and expire
10  years  from  the  grant  date.  The Bank  has  adopted  the  disclosure-only
provisions of Statement of Financial  Accounting  Standards No. 123, "Accounting
for  Stock-Based  Compensation".  Accordingly,  no  compensation  cost  has been
recognized  for the stock option plan.  Had  compensation  cost been  determined
based on the fair  value at the grant  date for the above  stock  option  awards
consistent with the provisions of SFAS 123, the Bank's net income (loss) and net
income (loss) per common share would have been the pro forma  amounts  indicated
below:
<Table>
<Caption>
                                                                                             For the periods ended
                                                                                                  December 31,
                                                                                                  ------------
                                                                                  2001               2000                    1999
                                                                                  ----               ----                    ----
Net income (loss)
<S>                                                                        <C>                   <C>                   <C>
As reported .....................................................          $   (137,593)         $     84,417          $   (399,843)
Pro forma .......................................................              (154,793)               67,217              (417,043)
Basic net income (loss) per common share
As reported .....................................................                  (.17)                  .11                  (.50)
Pro forma .......................................................                  (.19)                  .08                  (.52)
Diluted net income (loss) per common share
As reported .....................................................                  (.17)                  .10                  (.50)
Pro forma .......................................................                  (.19)                  .08                  (.52)
</Table>

         The fair value of the option  grant is  estimated  on the date of grant
using the  Black-Scholes  option pricing model. The risk free interest rate used
was 5.89 percent,  the expected option life was 3 years and the assumed dividend
rate was zero.




                                                                     (Continued)


                                       38
<Page>

NOTE 15 - STOCK OPTION PLAN, Continued

         A summary of the plan is presented below:


<Table>
<Caption>
                                                                             For the periods ended December 31,
                                                                             ----------------------------------
                                                               2001                       2000                         1999
                                                               ----                       ----                         ----
                                                                    Weighted                    Weighted                   Weighted
                                                                     average                     average                    average
                                                        Shares      exercise      Shares        exercise       Shares      exercise
                                                                      price                       price                      price
                                                        ------        -----       ------          -----        ------        -----

<S>                                                     <C>          <C>           <C>          <C>                         <C>
Outstanding at beginning of period .............        40,000       $   10.00     40,000       $   10.00          -        $      -
Granted ........................................             -            -             -            -        40,000           10.00
Exercised ......................................             -            -             -            -             -               -
Forfeited or expired ...........................             -            -             -            -             -               -
                                                        ------                     ------                     ------

Outstanding at end of period ...................        40,000           10.00     40,000           10.00     40,000           10.00
                                                        ======                     ======                     ======

Options exercisable at end of period ...........        26,667           10.00     13,333           10.00          -               -
Shares available for grant .....................          None                       None                       None
</Table>


NOTE 16 - DIVIDENDS

           There are no current plans to initiate  payment of cash dividends and
future  dividend  policy  will  depend  on  the  Company's   earnings,   capital
requirements,  financial  condition and other factors considered relevant by the
Company's Board of Directors. Federal banking regulations restrict the amount of
dividends  that the Bank can pay to the  Company.  At December 31, 2001 the Bank
has no retained earnings from which to pay dividends.


NOTE 17 - REGULATORY MATTERS

           The  Bank is  subject  to  various  regulatory  capital  requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory,   and  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, 2001,
that the Bank meets all capital adequacy requirements to which it is subject.



                                                                     (Continued)


                                       39
<Page>

NOTE 17 - REGULATORY MATTERS, Continued

           As of December 31, 2001, 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
                                         ----------    ---------   -------------    ------------   ---------------    --------------
                                                                      (amounts in thousands)
As of December 31, 2001
<S>                                      <C>            <C>        <C>                     <C>     <C>                        <C>
   Total Capital (to risk weighted
        assets) ......................   $   5,975      17.2%      $     2,782             8.0%    $         3,479            10.0%
   Tier 1 Capital (to risk weighted
        assets) ......................       5,590      16.1             1,391             4.0               2,087             6.0
   Tier 1 Capital (to average ........       5,590      11.1             2,018             4.0               2,522             5.0
   assets)

As of December 31, 2000
   Total Capital (to risk weighted
        assets) ......................   $   5,974      27.1%      $     1,760             8.0%    $         2,200            10.0%
   Tier 1 Capital (to risk weighted
        assets) ......................       5,767      26.2               880             4.0               1,320             6.0
   Tier 1 Capital (to average ........       5,767      16.9             1,367             4.0               1,709             5.0
   assets)
</Table>


NOTE 18 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<Table>
<Caption>
                                                                                  December 31,
                                                       --------------------------------------------------------------------
                                                                    2001                               2000
                                                       ----------------------------------  --------------------------------
                                                          Carrying            Fair           Carrying           Fair
                                                           Amount             Value           Amount            Value
                                                       ------------------  --------------  ----------------  --------------
FINANCIAL ASSETS
<S>                                                   <C>                 <C>             <C>               <C>
     Cash and due from banks .......................  $      2,649,950    $   2,649,950   $     1,109,001   $   1,109,001
     Federal funds sold ............................           970,000          970,000         3,330,000       3,330,000
     Investment securities .........................        12,987,333       12,987,333        10,021,055      10,021,055
     Loans .........................................        31,472,867       31,516,556        18,437,770      16,587,347
FINANCIAL LIABILITIES
     Deposits ......................................        39,909,684       40,189,945        24,790,861      21,865,539
     Securities sold under repurchase agreements ...         3,292,960        3,292,960         2,779,254       2,779,254
OFF BALANCE SHEET INSTRUMENTS
     Commitments to extend credit ..................         6,469,735        6,469,735         2,562,111       2,562,111
     Standby letters of credit .....................           495,519          495,519            94,225          94,225
</Table>


                                       40
<Page>

NOTE 19 - PARENT COMPANY INFORMATION

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


                            CONDENSED BALANCE SHEETS

                                                              December 31,
                                                              ------------
                                                         2001             2000
                                                         ----             ----
ASSETS
     Cash and interest bearing deposits ........      $1,902,899      $1,800,523
     Certificate of deposit ....................               -         100,000
     Investment in subsidiary ..................       5,672,900       5,788,732
     Other assets ..............................          40,000           4,528
                                                      ----------      ----------

                                                      $7,615,799      $7,693,783
                                                      ==========      ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
     Accrued expenses ..........................      $      836      $    1,900
     Shareholders' equity ......................       7,614,963       7,691,883
                                                      ----------      ----------

                                                      $7,615,799      $7,693,783
                                                      ==========      ==========

                         CONDENSED STATEMENTS OF INCOME

<Table>
<Caption>
                                                                                            For the year ended       For the period
                                                                                               December 31,         January 11, 1999
                                                                                               ------------          (inception) to
                                                                                           2001            2000    December 31, 1999
                                                                                           ----            ----    -----------------
INCOME
<S>                                                                                     <C>              <C>              <C>
   Interest .....................................................................       $  71,725        $   2,096        $  34,613

EXPENSES
   Sundry .......................................................................          32,813           35,257           83,301
                                                                                        ---------        ---------        ---------
     Income (loss) before equity in undistributed net income (loss)
       of bank subsidiary .......................................................          38,912          (33,161)         (48,688)
EQUITY IN UNDISTRIBUTED NET INCOME (LOSS) OF
   SUBSIDIARY ...................................................................        (176,505)         117,578         (351,155)
                                                                                        ---------        ---------        ---------
      Net income (loss) .........................................................       $(137,593)       $  84,417        $(399,843)
                                                                                        =========        =========        =========
</Table>



                                                                     (Continued)



                                       41
<Page>

NOTE 19 - PARENT COMPANY INFORMATION, Continued


                       CONDENSED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                                       For the year ended            For the period
                                                                                          December 31,             January 11, 1999
                                                                                          ------------              (inception) to
                                                                                     2001                 2000     December 31, 1999
                                                                                     ----                 ----     -----------------
OPERATING ACTIVITIES
<S>                                                                               <C>                <C>                <C>
    Net income (loss) .....................................................       $  (137,593)       $    84,417        $  (399,843)
       Adjustment to reconcile net income (loss) to net
       cash provided by (used for) operating activities ...................                 -
       Equity  in undistributed net (income) loss of subsidiary ...........           176,505           (117,578)           351,155
       Increase in other assets ...........................................           (35,472)            (4,528)                 -
       Increase (decrease) in accrued expenses ............................            (1,064)             1,900                  -
                                                                                  -----------        -----------        -----------

          Net cash provided by (used for) operating .......................             2,376            (35,789)           (48,688)
          activities
                                                                                  -----------        -----------        -----------

INVESTING ACTIVITIES
    Investment in bank subsidiary .........................................                 -                  -         (6,000,000)
    Purchase of certificate of deposit ....................................                 -           (100,000)                 -
    Proceeds from maturity of certificate of deposit ......................           100,000                  -                  -
                                                                                  -----------        -----------        -----------

          Net cash provided by(used for) investing activities .............           100,000           (100,000)        (6,000,000)
                                                                                  -----------        -----------        -----------
FINANCING ACTIVITIES
          Proceeds from sale of stock, net ................................                 -                  -          7,985,000
                                                                                  -----------        -----------        -----------

          Net increase (decrease) in cash .................................           102,376           (135,789)         1,936,312

CASH, BEGINNING OF PERIOD .................................................         1,800,523          1,936,312                  -
                                                                                  -----------        -----------        -----------

CASH, END OF PERIOD .......................................................       $ 1,902,899        $ 1,800,523        $ 1,936,312
                                                                                  ===========        ===========        ===========
</Table>


                                       42
<Page>


Item  8. Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         Not Applicable.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.

Directors

         The table shows,  as to each director,  his name,  age,  positions held
with the Company and principal occupation for the past five years and the period
during  which he served as a director of the  Company.  Directors of the Company
serve until the annual meeting of shareholders in 2002 or until their successors
are elected and qualify.

<Table>
<Caption>

NAME                           AGE                  PRINCIPAL OCCUPATION                    DIRECTOR SINCE
----                           ---                  --------------------                    --------------


<S>                            <C>   <C>                                                       <C>
J. Rodger Anthony              56    President and Chief Executive Officer of the                1999
                                     Company, since 1999; Chief Executive Officer,
                                     First National Bank of Pickens County, Easley, SC,
                                     1996 to 1998

Walter L. Brooks               74    President, G&B Enterprises, Liberty, SC (egg                1999
                                     production)

T. Edward Childress, III       56    Registered Pharmacist and Long-term care facility           1999
                                     owner

Nicholas S. Clark              34    Vice President, Secretary, Treasurer and Chief
                                     Financial Officer of the Company, since 1999;               1999
                                     Chief Financial Officer, First National Bank of
                                     Pickens County, Easley, SC, 1997 to 1998

Ben L. Garvin                  57    President of Cornerstone National Bank, Since
                                     2001; Senior Vice President Central Carolina Bank,          2001
                                     1983 - 2001
                                                                                                 1999
J. Bruce Gaston                45    Certified Public Accountant
                                                                                                 1999
S. Ervin Hendricks, Jr.        59    President, Nu-Life Environmental, Inc., Easley, SC

Joe E. Hooper                  63    President, Pride Mechanical & Fabrication Company,          1999
                                     Inc.
                                                                                                 1999
Robert R. Spearman             62    Surveyor/Retired
                                                                                                 1999
John M. Warren, Jr., M.D.      51    Physician
                                                                                                 1999
George I. Wike, Jr.            57    Investor
</Table>

         None the  principal  executive  officers nor  directors  are related by
blood, marriage or adoption in the degree of first cousin or closer.



                                       43
<Page>


Executive Officers

         The names and positions with the Company of each  executive  officer of
the Company are as follows:

J. Rodger Anthony              President and Chief Executive Officer

Nicholas S. Clark              Chief Financial Officer

         The age and business  experience  of Messrs.  Anthony and Clark are set
forth above under "-Directors." Neither the principal executive officers nor any
directors  are  related by blood,  marriage  or  adoption in the degree of first
cousin or closer.

Item 10. Executive Compensation.

         The following  table sets forth the  remuneration  paid during the year
ended December 31, 2001 to the Chief Executive  Officer and President.  No other
principal  officer of the Company or the Bank was paid remuneration in excess of
$100,000.

                           SUMMARY COMPENSATION TABLE

<Table>
<Caption>
                                                                                   Number of
                                                                                   Securities
                                                   Annual Compensation(1)          Underlying
                                                   ----------------------           Options          All Other
Name and Principal Position                  Year        Salary          Bonus      Awarded       Compensation(2)
                                             ----        ------          -----      -------       ---------------

<S>                                          <C>       <C>                <C>            <C>           <C>
J. Rodger Anthony                            2001      $115,000           $3,779             0         $3,563
Chief Executive Officer                      2000      $105,000                0             0         $3,150
                                             1999      $100,000                0         4,000         $2,520

Ben L. Garvin                                2001      $100,000                0             0         $2,319
President
</Table>

---------------------
(1)  Perquisites  and personal  benefits did not exceed the lesser of $50,000 or
     10% of salary plus bonus payments.
(2)  Contributions  by the Bank to the  Bank's  Simple IRA Plan on behalf of Mr.
     Anthony and Mr. Garvin.

                            ORGANIZERS' STOCK OPTIONS

         On  December  14,  1999,  the Board of  Directors  of the  Company,  in
consideration  of the  time and  efforts  of the  directors  of the  Company  in
organizing the Company and its subsidiary  bank and each  director's  personally
guaranteeing a portion of the organizational  expenses,  granted options to each
director to purchase up to 4,000 shares of the common stock of the Company for a
purchase  price of $10.00  per  share,  which was the price at which the  common
stock was sold to the public in 1999.  The options become  exercisable  for each
director  one-third  each year  beginning  on  December  14,  2000 and expire on
December 14, 2009 unless they  terminate  sooner as the result of the director's
ceasing to be a director of the  Company,  in which case the options  expire six
months after the holder ceases to be a director.


                                       44
<Page>


          OPTION EXERCISES AND YEAR END OPTIONS OUTSTANDING AND VALUES

         The  following  table  presents  information  about options held by the
persons named in the Summary Compensation Table at December 31, 2001. No options
were granted to or exercised by Mr.  Anthony or Mr. Garvin during the year ended
December 31, 2001.

<Table>
<Caption>
                                                          Number of Securities                Value of Unexercised
                                                         Underlying Unexercised                   In-the-Money
                                                            Options 12/31/01                   Options 12/31/01(1)
                        Shares Acquired     Value           ----------------                   -------------------
Name                      on Exercise     Realized     Exercisable    Unexercisable      Exercisable       Unexercisable
                          -----------     --------     -----------    -------------      -----------       -------------

<S>                            <C>            <C>         <C>             <C>              <C>                 <C>
J. Rodger Anthony              0              0           2,667           1,333            $6,668              $3,332
Ben L. Garvin                  0              0             0               0                 0                  0
</Table>

---------------
(1)  Based on  exercise  prices of $10.00 per share and  assuming  that the fair
     market value of the Company's  common stock on December 31, 2001 was $12.50
     per share.

Compensation of Directors

         In 1999,  each director was granted options to purchase 4,000 shares of
common stock.  The exercise price of the options is $10.00 per share,  which was
the fair market  value of the options on the date of grant.  The options  become
exercisable  one-third  annually beginning December 14, 2000 and expire December
14, 2009.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

       The number of shares owned and the percentage of outstanding common stock
such  number  represents  at March 1,  2002,  for all  directors  and  executive
officers of the Company and for all persons who are currently  beneficial owners
of 5% or more of the Company's common stock is set forth below.

<Table>
<Caption>
Name (and Address of 5% Owners)                       Number of Shares                   % of Outstanding
                                                    Beneficially Owned(3)                  Common Stock
-------------------------------------------    --------------------------------   -------------------------------
<S>                                                    <C>                                   <C>
J. Rodger Anthony                                       32,667                                3.95
Walter L. Brooks (1)                                     8,067                                0.98
T. Edward Childress, III                                77,667                                9.40
    101 McAlister Lake Drive
    Easley, South Carolina 29642
Nicholas S. Clark                                       13,167                                1.59
Ben L. Garvin                                           15,640                                1.96
J. Bruce Gaston                                         17,667                                2.14
S. Ervin Hendricks, Jr.                                 31,167                                3.77
Joe E. Hooper                                           37,667                                4.56
Robert R. Spearman                                       5,667                                0.69
John M. Warren, Jr., M.D. (2)                           13,167                                1.59
George I. Wike, Jr.                                     77,667                                9.40
    28 Mandarin Circle
    Taylors, SC
All directors and executive                            _______                               _____
officers as a group (11 persons)                       314,570                               38.05
</Table>
--------------------
(1)  Includes  5,000  shares  owned by a  partnership  in which Mr.  Brooks is a
     partner.
(2)  Includes 500 shares  owned by a trust of which Dr.  Warren is trustee as to
     which Dr. Warren disclaims beneficial ownership.
(3)  Includes for each  director  except Mr.  Garvin 2,667 vested stock  options
     that are currently exercisable.

                                       45
<Page>

Except as otherwise  indicated,  to the knowledge of management,  all shares are
owned directly with sole voting power.

Item 12. Certain Relationships and Related Transactions.

         Extensions  of  Credit.  The  Company,  in the  ordinary  course of its
business,  makes loans to and has other  transactions with directors,  officers,
principal  shareholders,  and their associates.  Loans are made on substantially
the same terms, including rates and collateral,  as those prevailing at the time
for comparable  transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features. The Company
expects  to  continue  to enter  into  transactions  in the  ordinary  course of
business on similar terms with directors,  officers, principal stockholders, and
their  associates.  The  aggregate  dollar amount of such loans  outstanding  at
December 31, 2001 was $1.9 million.  During 2001, $1.1 million of new loans were
made and repayments totaled $759 thousand.

         Organizers  Options.  See the  discussion  in Item 10 under the caption
"ORGANIZERS' OPTIONS."

         Real Estate.  During 1999, the Company  purchased the land for its main
office from one of its directors, Mr. Hendicks, at a cost of $450,000, which was
less than the appraised  value.  For a portion of 1999,  the Company also leased
temporary office space from Mr. Hendricks. Total rental payments were $4,500.

Item 13. Exhibits and Reports on Form 8-K.

(a)      Description of Exhibits.

Exhibit No.                Description

3.1                       Articles of Incorporation of Registrant (1)
3.2                       Bylaws of Registrant (1)
10.1                      Form of Option Agreements (2)
21                        Subsidiaries of Registrant (2)

     (1)  Incorporated by reference to Registration  Statement on Form SB-2 (No.
          333-79543).
     (2)  Incorporated by reference to Annual Report on Form 10-KSB for the year
          ended December 31, 1999.

(b)      Reports on Form 8-K.

         No reports on Form 8-K were filed during the fourth quarter of 2001.



                                       46
<Page>


                                   SIGNATURES

         In accordance  with Section 13 or 15(d) of the Securities  Exchange Act
of 1934,  the  registrant  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                               Cornerstone Bancorp


March 25, 2002                 By:  s/J. Rodger Anthony
                                  ----------------------------------------------
                                     J. Rodger Anthony
                                     President and Chief Executive Officer

                               By:  s/Nicholas S. Clark
                                  ----------------------------------------------
                                     Nicholas S. Clark
                                     Chief Financial Officer
                                     (Principal Financial and Principal
                                      Accounting Officer)

         In  accordance  with the Exchange Act this Report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated:

<Table>
<Caption>
Signature                                Title                                              Date
---------                                -----                                              ----

<S>                                      <C>                                                <C>
s/J.  Rodger Anthony
__________________________               President, Chief Executive Officer, Director       March 25, 2002
J.  Rodger Anthony

s/Walter L. Brooks
__________________________               Director                                           March 25, 2002
Walter L. Brooks

s/T. Edward Childress, III
__________________________               Director                                           March 25, 2002
T. Edward Childress, III

s/Nicholas S. Clark
__________________________               Chief  Financial  Officer,  Principal  Accounting  March 25, 2002
Nicholas S. Clark                        Officer, Director

s/Ben L. Garvin
__________________________               Director                                           March 25, 2002
Ben L. Garvin

s/J. Bruce Gaston
__________________________               Director                                           March 25, 2002
J. Bruce Gaston

s/S. Ervin Hendricks, Jr.
__________________________               Director                                           March 25, 2002
S. Ervin Hendricks, Jr.

s/Joe E. Hooper
__________________________               Director                                           March 25, 2002
Joe E. Hooper

s/Robert R. Spearman
__________________________               Director                                           March 25, 2002
Robert R. Spearman

s/John M. Warren, Jr., M.D.
__________________________               Director                                           March 25, 2002
John M. Warren, Jr., M.D.

s/George I. Wike, Jr.
__________________________               Director                                           March 25, 2002
George I. Wike, Jr.
</Table>


                                       47
<Page>

      SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
          TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

         The Registrant  will furnish an annual report and proxy material to its
security  holders  after the  filing of this  report and  furnish  copies to the
Commission when they are sent to security holders.


                                  EXHIBIT INDEX

Exhibit No.             Description                                         Page

3.1                  Articles of Incorporation of Registrant (1)
3.2                  Bylaws of Registrant (1)
10.1                 Form of Option Agreements (2)
21                   Subsidiaries of Registrant (2)
-------------
     (1)  Incorporated by reference to Registration  Statement on Form SB-2 (No.
          333-79543).
     (2)  Incorporated by reference to Annual Report on Form 10-KSB for the year
          ended December 31, 1999.


                                       48