EXHIBIT 13

                       CORNERSTONE BANCORP AND SUBSIDIARY
                            Portions of Registrant's
                              2009 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2009 Form 10-K













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          CAUTIONARY NOTICE WITH RESPECT TO FORWARD LOOKING STATEMENTS

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

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

          o    future economic and business conditions;
          o    the Company's growth and ability to maintain growth;
          o    governmental monetary and fiscal policies;
          o    legislative and regulatory changes;
          o    the effect of  interest  rate  changes  on our  level,  costs and
               composition of deposits,  loan demand, and the values of our loan
               collateral,   securities,   and  interest  sensitive  assets  and
               liabilities;
          o    the  effects  of  competition  from  a  wide  variety  of  local,
               regional,  national and other providers of financial,  investment
               and insurance services, as well as competitors that offer banking
               products and services by mail,  telephone,  computer,  and/or the
               Internet;
          o    credit risks;
          o    higher than anticipated levels of defaults on loans;
          o    perceptions by depositors about the safety of deposits;
          o    failure of our customers to repay loans;
          o    failure  of  assumptions  underlying  the  establishment  of  the
               allowance  for loan  losses,  including  the value of  collateral
               securing loans;
          o    the risks of opening new offices, including,  without limitation,
               the related costs and time of building customer relationships and
               integrating  operations,  and the  risk  of  failure  to  achieve
               expected gains, revenue growth and/or expense savings;
          o    changes in accounting policies, rules, and practices;
          o    cost and  difficulty  of  implementing  changes in  technology or
               products;
          o    loss of consumer  confidence and economic  disruptions  resulting
               from terrorist activities;
          o    ability to weather the current economic downturn;
          o    loss of consumer or investor confidence; and
          o    other factors and information described in this report and in any
               of the other  reports we file with the  Securities  and  Exchange
               Commission under the Securities Act of 1934.

         All  forward-looking   statements  are  expressly  qualified  in  their
entirety by this  cautionary  notice.  The Company  undertakes  no obligation to
publicly update or revise any forward-looking statements, whether as a result of


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new  information,   future  events  or  otherwise.  In  light  of  these  risks,
uncertainties,  and assumptions,  the  forward-looking  events discussed in this
report might not occur.

                               WEBSITE REFERENCES

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

                             BUSINESS OF THE COMPANY

         Cornerstone  Bancorp (the  "Company") is a bank holding company and has
no  operations  other than those  carried  on by its  wholly  owned  subsidiary,
Cornerstone National Bank (the "Bank"). The Bank commenced business in 1999, and
conducts a general  banking  business  from three  offices in the Easley area of
Pickens County, in the Berea area of Greenville  County, and in the Powdersville
area of Anderson County, South Carolina.  In 2004, the Bank established a wholly
owned subsidiary,  Crescent Financial Services,  Inc. ("Crescent"),  which is an
insurance agency that has not yet engaged in any significant operations.


Services of the Bank

Deposits

         The Bank offers the full range of deposit services typically  available
in most banks and savings and loan  associations,  including  checking accounts,
NOW accounts,  retirement accounts (including  Individual  Retirement Accounts),
and savings and other time deposits of various  types,  ranging from daily money
market accounts to longer-term certificates of deposit. The transaction accounts
and  time  certificates  are  tailored  to the  principal  market  area at rates
competitive  with those offered in the area. All deposit accounts are insured by
the Federal  Deposit  Insurance  Corporation  ("FDIC") up to the maximum  amount
permitted by law. The Bank solicits these accounts from individuals, businesses,
associations and organizations, and government authorities.

Lending Activities

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

Real Estate Loans

         One of the primary  components  of the Bank's loan  portfolio  is loans
secured by first or second  mortgages on residential and commercial real estate.
These loans generally consist of short to mid-term commercial real estate loans,
construction and development  loans and residential real estate loans (including
home  equity  and  second  mortgage  loans).  Interest  rates  may be  fixed  or
adjustable and the Bank frequently charges an origination fee. The Bank seeks to
manage credit risk in the commercial real estate portfolio by emphasizing  loans
on owner-occupied  office and retail buildings where the loan-to-value  ratio at
origination,  established  by  independent  appraisals,  does not exceed 80%. In
addition,  the Bank  generally  requires  personal  guarantees  of the principal
owners of the property.  The  loan-to-value  ratio at origination  for first and
second mortgage loans generally does not exceed 80%, and for construction loans,
generally does not exceed 75% of cost. The Bank employs a reappraisal  policy to
routinely  monitor real estate  collateral values on real estate loans where the
repayment is dependent on sale of the collateral.  In addition,  in an effort to
control interest rate risk, long term  residential  mortgages are not originated
for the Bank's portfolio.

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         The principal  economic risk associated with all loans,  including real
estate  loans,  is the  creditworthiness  of the  borrowers.  The  ability  of a
borrower to repay a real estate loan depends upon a number of economic  factors,
including employment levels and fluctuations in the value of real estate. In the
case of a real estate  construction  loan, there is generally no income from the
underlying property during the construction period, and the developer's personal
obligations under the loan are typically  limited.  In the case of a real estate
purchase loan that is not fully  amortized,  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.  Each of these  factors
increases the risk of nonpayment by the borrower.

         In  2007,  the  Company  increased  real  estate   construction   loans
approximately  60%.  This segment of the Bank's  business is managed in specific
ways in order to  minimize  the  risks  normally  associated  with  construction
lending.  Management  requires  lending  personnel to visit job sites,  maintain
frequent  contact with  borrowers  and arrange for  third-party  inspections  of
completed work prior to issuing additional  construction loan draws. As a result
of the real  estate  crisis in the  Bank's  markets  throughout  2009,  the Bank
tightened underwriting  standards.  The Bank's loan policy now contains specific
minimum net worth requirements for borrowers,  minimum debt coverage ratios, and
for loans to construct single family residential  properties,  written contracts
with the end purchaser that contain  significant  consequences  to the purchaser
for terminating the contract.

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

Commercial Loans

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

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

Consumer Loans

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

         Consumer  loans  generally  involve  more credit risks than other loans
because of the type and nature of the  underlying  collateral  or because of the
absence  of any  collateral.  Consumer  loan  repayments  are  dependent  on the
borrower's  continuing  financial  stability  and  are  likely  to be  adversely
affected by job loss,  divorce and  illness.  Furthermore,  the  application  of


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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 credit and debit
cards 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.  Credit cards are  underwritten  and funded by a third party provider.
The Bank also provides stored value cards,  direct deposit of payroll and social
security  checks,  and  automatic  drafts  for  various  accounts,  but does not
currently provide  international or trust banking  services,  other than foreign
currency  exchange  through a  correspondent  bank.  The Bank offers an Internet
banking    product    accessible    via   the   Bank's    custom    website   at
www.cornerstonenationalbank.com.  The interactive  banking  product  includes an
electronic bill payment service that allows  customers to make scheduled  and/or
recurring  bill  payments  electronically.  The Bank also  offers  remote  check
deposit  services to commercial  and small business  customers.  The Bank offers
merchant and other business related services to its commercial customers.


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

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

Critical Accounting Policies

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

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

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

         Management  also believes that current  economic  conditions have added
complexity to the process involved in evaluating other-than temporary-impairment
("OTTI") of the Company's debt  securities.  The process of determining  OTTI is
inherently  judgmental,  involving the weighing of positive and negative factors
and evidence that may be objective or  subjective.  In the current  environment,
the factors that must be evaluated are numerous,  and changing  rapidly,  making
the evaluation more difficult.


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Effect of Economic Trends

         Problems in the economy over the last  eighteen  months have  adversely
impacted  the ability of some  borrowers  to repay  their  loans.  Although  the
Company's  market area has not experienced the negative effects of the recession
and declines in real estate  markets to the same extent as some other markets in
the country,  these factors have had a significant  effect on our  operations as
evidenced  by  the  increases  in  our  potential  problem  loans,  charge-offs,
nonaccrual  loans and real estate  owned.  The majority of problem loans in 2009
were  real  estate  loans.  These  loans  were  often  collateralized  by  newly
constructed  homes  and  were  foreclosed  on  after  real  estate  sales in the
Company's market area decreased  significantly in the summer of 2008.  Borrowers
were  generally  builders and developers who did not have the cash flow required
to support  the level of  inventory  financed  with area  banks.  The process of
foreclosure in South  Carolina is lengthy and expensive.  The impact of foregone
interest  on  nonaccruing  loans in the  process of  foreclosure  combined  with
attorney's  fees,  property  taxes,  and  costs  to  sell  repossessed  property
negatively  impacted the Company's  income in 2009.  The Bank had two commercial
relationships  that were not  collateralized by real estate.  The collateral for
these loans was converted  back to cash more quickly than the real estate loans,
but non-real estate collateral  brought a significantly  lower recovery of funds
and resulted in higher charge-off percentages or losses on disposal.

         The  current  outlook  for the  national  economy in the United  States
("U.S.") is cautiously  optimistic.  Late in 2009 the economy began to show some
signs of recovery, although high unemployment levels persist. Real estate prices
in the single  family home segment of our local  markets  appear to have leveled
and sales are occurring  again. The number of loans past due has declined in the
fourth quarter of 2009. As of December 31, 2009, the Company owned 37 properties
that were acquired through foreclosure.  As of March 30, 2010, twelve properties
had been sold or were under contract.


Governmental Response to the Financial Crisis

         During the fourth  quarter of 2008 and continuing  throughout  2009 the
FDIC,  the Federal  Reserve,  the Department of the Treasury and Congress took a
number of actions  designed to  alleviate  or correct  mounting  problems in the
financial  services  industry.  A number  of  these  initiatives  were  directly
applicable to community banks.

         Congress  enacted  the  Emergency  Economic  Stabilization  Act of 2008
which,  among other things,  temporarily  increased  the maximum  amount of FDIC
deposit insurance from $100,000 to $250,000 and created a Troubled Assets Relief
Program ("TARP") administered by Treasury. In October,  2008, Treasury announced
a Capital Purchase Program ("CPP") under TARP to increase the capital of healthy
banks. Under the CPP, Treasury would purchase preferred stock with warrants from
qualified banks and bank holding companies in an amount up to 3% of the seller's
risk-weighted  assets  as  of  September  30,  2008.   Institutions  wishing  to
participate in the CPP were required to file an application with their principal
federal  regulators.   The  Company  filed  such  an  application  and  received
preliminary  approval to sell  preferred  stock to the Treasury,  but ultimately
elected not to  participate  in the CPP because of (i) the cost of the preferred
stock, (ii) the open-ended  administrative burdens associated with the preferred
stock,  including  having to agree to allow Treasury to amend  unilaterally  the
stock purchase agreement to comply with subsequent changes in applicable federal
statutes,  (iii)  the fact  that the  Company  and the Bank  were  already  well
capitalized  under regulatory  guidelines and expected to continue to be so, and
(iv) management's  belief that other sources of capital were, and would continue
to be, available should additional capital be needed.

         The FDIC  also  implemented  in  October,  2008 a  Temporary  Liquidity
Guarantee Program consisting of a deposit insurance  component pursuant to which
it  undertook  to  provide  deposit   insurance  in  an  unlimited   amount  for
non-interest  bearing  transaction  accounts,  and a  debt  guarantee  component
pursuant to which it undertook to fully guarantee senior,  unsecured debt issued
by banks or bank holding  companies.  Coverage of both  components was automatic
until December 5, 2008, at which time covered  institutions could opt out of one
or both of the components. Institutions not opting out would be charged fees for
their  participation  in the  components.  The  Bank  did not opt out of  either
component.

         An  unfortunate  consequence  of the  difficulties  that have beset the
banking  industry in the last eighteen  months has been a large increase in bank
failures,  which has led to  substantial  claims  being made  against the FDIC's
Deposit Insurance Fund. In order to increase the amount in the Deposit Insurance


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Fund to reflect the  increased  risk of  additional  bank failures and insurance
claims,  the FDIC  raised its  assessments  on banks for 2009,  and  collected a
special assessment from the Bank totaling $80,894,  which was paid in September,
2009 based on deposits at June 30, 2009. The FDIC also required  institutions to
pay three years of deposit insurance  premiums in advance.  On December 30, 2009
the FDIC collected $997,152 from the Company for deposit insurance premiums.  Of
that amount,  $63,002 related to the regular quarterly assessment,  and $934,150
related to the  prepayment  of premiums for the years 2010,  2011 and 2012.  The
amount of the prepayment portion is included in other assets in the accompanying
consolidated  balance  sheets as of December 31, 2009. In 2010 and the following
two years,  on a  quarterly  basis,  the FDIC will  continue  to  calculate  the
assessment amount with then current financial  information,  and will deduct the
quarterly  assessment amount from the prepaid balance. The Bank will expense the
current  portion as calculated  by the FDIC.  The Bank does not earn interest on
the prepaid amount.

         Additional  governmental  efforts to ameliorate the problems afflicting
the banking  industry have been adopted or proposed,  or are being considered by
Congress and various governmental  entities.  The Company is presently unable to
predict the impact of any such changes, although it appears that they are likely
to increase  operating  expenses in the near term  without  creating  completely
offsetting benefits.

Earnings Performance

         The Company  reported a loss of  $1,361,274,  or $.65 per common share,
for the year ended December 31, 2009.  The Company  earned  $225,316 in 2008, or
$.11 per basic and diluted  common  share  compared to $1.6  million or $.78 per
basic common share and $.76 per diluted common share for the year ended December
31, 2007. The Company's earnings in 2009 were  significantly  lower than in 2008
and 2007 due to four specific factors.  First, the level of nonperforming  loans
and other assets in our portfolio  during the year was the single largest reason
for the decline in revenues  for 2009.  Second,  our  provision  for loan losses
increased  significantly  in  comparison  to  previous  years  as  a  result  of
increasing pressure on borrowers due to economic conditions.  Third, foreclosure
costs associated with repossession of the underlying collateral on nonperforming
loans  were  significant.  Fourth,  continued  turmoil  in the  housing  markets
decreased our ability to broker  mortgage loans for our local  customers,  which
further decreased  noninterest income in 2009. The Company's net interest income
(the difference  between interest earned on interest earning assets and interest
paid on interest bearing liabilities)  decreased to $4.6 million, down from $5.3
million in 2008 and $5.8 million for 2007. The Company had noninterest income of
$982,000  in 2009  compared  to  $64,000  in 2008.  Noninterest  income for 2008
included an  other-than-temporary-loss on an investment in FNMA preferred stock.
Noninterest  income was $1.075  million in 2007.  The  Company  provided  $2.955
million,  $815,000, and $197,000 to the allowance for loan losses in 2009, 2008,
and 2007,  respectively,  and had other  operating  expenses of $4.8  million in
2009, and $4.3 million in 2008 and 2007.

Net Interest Income

         Net  interest  income is the  amount  of  interest  earned on  interest
earning assets (loans,  investment securities,  time deposits in other banks and
federal funds sold),  less the interest  expenses  incurred on interest  bearing
liabilities (interest bearing deposits and borrowed money), and is the principal
source of the Bank's  earnings.  Net interest income is affected by the level of
interest  rates,  volume and mix of  interest  earning  assets and the  relative
funding of these  assets.  Due to the fact that the Bank's  and  therefore,  the
Company's,  assets are largely monetary in nature,  material changes in interest
rates can have a material impact on the Bank's net interest income.  The Company
and the  Bank  monitor  the  Bank's  assets  and  liabilities  and the  interest
sensitivity  of these assets and  liabilities  using  various  tools,  including
models which attempt to calculate  the impact on the Bank's net interest  margin
as interest rates change.  However, these models, as well as the tables included
here,  employ  assumptions  about  the  Bank's  interest  sensitive  assets  and
liabilities which may or may not prove to be accurate. Such assumptions include,
but are not limited to,  repayment  patterns of borrowers,  calls of securities,
and  unscheduled  redemptions  of  certificates  of  deposit.  The tables on the
following pages include  historical  analyses of yields earned and rates paid on
interest sensitive assets and liabilities,  the effects of changes in the volume
and relative mix of interest  sensitive  assets and  liabilities,  the effect of
changes in interest  rates,  and the ratio of assets and  liabilities  repricing
over specific  time  horizons.  While the  Company's  and the Bank's  management
cannot  predict  the timing and extent of  changes in  interest  rates,  they do
attempt to manage the Bank's interest rate  sensitivity to enable the Company to
react to protect the Company's  earnings stream throughout various interest rate
cycles.

         For the years ended  December 31, 2009,  2008,  and 2007,  net interest
income was $4.6 million,  $5.3  million,  and $5.8  million,  respectively.  The
decrease in 2009 from 2008 is  attributable  to higher  levels of  nonperforming


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loans and lower interest rates,  partially  offset by increases in the volume of
loans (see "Rate/Volume  Analysis of Net Interest Income" below). In 2009, total
average  interest earning assets increased to $171.7 million from $141.2 million
in 2008. The average yield on interest earning assets decreased 177 basis points
to 4.68% in 2009 compared to 6.45% in 2008. The average cost of interest bearing
liabilities  decreased  87 basis  points to 2.25% from  3.12% in 2008.  Rates on
interest earning assets and interest bearing  liabilities have adjusted downward
since the third quarter of 2007. The Company's  loan portfolio  adjusted to rate
movements more quickly than the interest  bearing  deposit  portfolio.  However,
nonperforming  assets also had an impact on overall  yields.  The effect of both
trends was narrowed interest margins.  The net yield on average interest earning
assets  decreased in 2009 to 2.69% from 3.76% in 2008.  The interest rate spread
in 2009 was 2.43% compared to 3.33% in 2008.



                                       8
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         The tables,  "Average Balances,  Yields and Rates",  provide 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, 2009, 2008, and 2007.

                       Average Balances, Yields and Rates
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                              Year ended December 31, 2009       Year ended December 31, 2008
                                                              ----------------------------       ----------------------------
                                                                         Interest    Average                  Interest    Average
                                                           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 ...........................................      $ 23,652      $1,026     4.34%       $ 22,607      $1,161      5.14%
Federal Funds Sold ...................................         9,994          16      .16%          3,429          92      2.68%
Loans (3), (4) .......................................       138,066       6,998     5.07%        115,162       7,849      6.82%
                                                            --------      ------                 --------      ------
       Total interest earning assets .................       171,712       8,040     4.68%        141,198       9,102      6.45%
Cash and due from banks ..............................         1,187                                3,624
Allowance for loan losses ............................        (1,982)                              (1,394)
Premises and equipment ...............................         5,424                                5,687
Cash surrender value of life insurance policies ......         1,801                                1,731
Other real estate owned ..............................         2,402                                  372
Other assets .........................................         2,308                                1,489
                                                            --------                             --------
       Total assets ..................................      $182,852                             $152,707
                                                            ========                             ========

Liabilities and shareholders' equity
Interest bearing liabilities:
     Interest bearing transaction accounts ...........      $ 13,169          75      .57%       $ 13,502         125       .92%
     Savings and money market ........................        34,936         657     1.88%         14,994         296      1.98%
     Time deposits ...................................        86,435       2,199     2.54%         76,234       2,808      3.68%
                                                            --------      ------                 --------      ------

       Total interest bearing deposits ...............       134,540       2,931     2.18%        104,730       3,229      3.08%
Federal Funds purchased and
    customer repurchase agreements ...................         3,842          78     2.04%          5,351         170      3.18%
FHLB advances ........................................         8,559         238     2.78%          6,955         228      3.28%
Broker repurchase agreements .........................         5,000         177     3.53%          4,836         171      3.53%
                                                            --------      ------                 --------      ------
       Total interest bearing liabilities ............       151,941       3,424     2.25%        121,872       3,798      3.12%
                                                            --------      ------                 --------      ------
Noninterest bearing demand deposits and other
    liabilities ......................................        11,941                               11,466
Shareholders' equity .................................        18,970                               19,369
                                                            --------                             --------
       Total liabilities and shareholders' equity ....      $182,852                             $152,707
                                                            ========                             ========
Interest rate spread (5) .............................                               2.43%                                 3.33%
                                                                                     -----                                 -----
Net interest income and net yield on earning
  assets(6) ..........................................                    $4,616     2.69%                     $5,304      3.76%
                                                                          ======     -----                     ======      -----
Interest free funds supporting earning assets (7) ....      $ 19,771                             $ 19,326
</TABLE>
(1) Average balances calculated based on a daily basis.
(2) Calculated  based on the  number of days in the year that each type of asset
    or liability was in existence.  Yield  calculated  on a pre-tax  basis.  The
    estimated tax equivalent  yield on securities was 4.81% in 2009 and 5.63% in
    2008.
(3) Nonaccruing  loans are included in the average  loan  balances and income on
    such loans is recognized on a cash basis.
(4) Interest  income  on loans  includes  loan fee  income  as well as  interest
    income. The amount of loan fees included is $236,777 in 2009 and $401,297 in
    2008.
(5) Total yield on interest  earning assets less the rate paid on total interest
    bearing  liabilities.
(6) Net interest income divided by total interest earning assets.
(7) Total interest earning assets less total interest bearing liabilities.

                                       9
<PAGE>

                       Average Balances, Yields and Rates
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                              Year ended December 31, 2008       Year ended December 31, 2007
                                                              ----------------------------       ----------------------------
                                                                         Interest    Average                  Interest    Average
                                                           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 ..........................................      $ 22,607       $1,161      5.14%      $ 17,978      $   944     5.25%
Federal Funds Sold ..................................         3,429           92      2.68%         4,538          228     5.02%
Loans (3), (4) ......................................       115,162        7,849      6.82%       102,917        8,835     8.58%
                                                           --------       ------                 --------      -------
       Total interest earning assets ................       141,198        9,102      6.45%       125,433       10,007     7.98%
Cash and due from banks .............................         3,624                                 2,468
Allowance for loan losses ...........................        (1,394)                               (1,263)
Premises and equipment ..............................         5,687                                 5,214
Cash surrender value of life insurance policies .....         1,731                                 1,660
Other real estate owned .............................           372                                    44
Other assets ........................................         1,489                                 1,442
                                                           --------                              --------
       Total assets .................................      $152,707                              $134,998
                                                           ========                              ========

Liabilities and shareholders' equity
Interest bearing liabilities:
     Interest bearing transaction accounts ..........      $ 13,502          125       .92%      $ 13,708          157     1.15%
     Savings and money market .......................        14,994          296      1.98%        10,461          222     2.12%
     Time deposits ..................................        76,234        2,808      3.68%        71,613        3,444     4.81%
                                                           --------       ------                 --------      -------

       Total interest bearing deposits ..............       104,730        3,229      3.08%        95,782        3,823     3.99%
Federal Funds purchased and
    customer repurchase agreements ..................         5,351          170      3.18%         5,335          238     4.47%
FHLB advances .......................................         6,955          228      3.28%         2,805          116     4.13%
                                                                                                 --------      -------
Broker repurchase agreements ........................         4,836          171      3.53%
                                                           --------       ------
       Total interest bearing liabilities ...........       121,872        3,798      3.12%       103,922        4,177     4.02%
                                                           --------       ------                 --------      -------
Noninterest bearing demand deposits and other
    liabilities .....................................        11,466                                12,577
Shareholders' equity ................................        19,369                                18,499
                                                           --------                              --------
       Total liabilities and shareholders' equity ...      $152,707                              $134,998
                                                           ========                              ========
Interest rate spread (5) ............................                                 3.33%                                3.96%
                                                                                      -----                                -----
Net interest income and net yield on earning
  assets(6) .........................................                     $5,304      3.76%                    $ 5,830     4.65%
                                                                          ======      -----                    =======     -----
Interest free funds supporting earning assets (7) ...      $ 19,326                              $ 21,511
</TABLE>

(1) Average balances calculated based on a daily basis.
(2) Calculated  based on the  number of days in the year that each type of asset
    or liability was in existence.  Yield  calculated  on a pre-tax  basis.  The
    estimated tax equivalent  yield on securities was 5.63% in 2008 and 5.53% in
    2007.
(3) Nonaccruing  loans are included in the average  loan  balances and income on
    such loans is recognized on a cash basis.
(4) Interest  income  on loans  includes  loan fee  income  as well as  interest
    income.  The amount of loan fees  included is $401,297  and $371,754 in 2008
    and 2007, respectively.
(5) Total yield on interest  earning assets less the rate paid on total interest
    bearing  liabilities.
(6) Net interest income divided by total interest earning assets.
(7) Total interest earning assets less total interest bearing liabilities.


                                       10
<PAGE>

                   Rate/Volume Analysis of Net Interest Income

         As discussed  under the caption "Net  Interest  Income," the Bank's net
income is largely  dependent on net interest income.  The table below calculates
the  relative  impact on net  interest  income  caused by changes in the average
balances  (volume) of interest  sensitive  assets and liabilities and the impact
caused by changes in interest  rates  earned or paid.  Each table  compares  two
years as  indicated  below.  The effect of a change in average  balance has been
determined  by applying  the average  rate in the earlier  year to the change in
average balance in the later year, as compared with the earlier year. The effect
of a change in the average  rate has been  determined  by  applying  the average
balance in the earlier year to the change in the average rate in the later year,
as compared with the earlier  year.  In 2009 and 2008 changes in interest  rates
had the most significant impact on interest income.

                  Year ended December 31, 2009 compared to 2008

<TABLE>
<CAPTION>
                                                                                      Increase (Decrease) Due to
                                                                                      --------------------------
                                                                          Rate           Volume        Rate/Volume(1)        Change
                                                                          ----           ------        --------------        ------
Interest earned on:                                                                      (Dollars in thousands)
<S>                                                                   <C>               <C>               <C>               <C>
     Securities (2) ........................................          $  (181)          $    54           $    (9)          $  (136)
     Federal Funds sold ....................................              (86)              176              (165)              (75)
     Loans .................................................           (2,012)            1,561              (400)             (851)
                                                                      -------           -------           -------           -------
         Total interest income .............................           (2,279)            1,791              (574)           (1,062)

Interest paid on:
     Deposits ..............................................             (931)              767              (134)             (298)
     Federal Funds purchased and customer
             repurchase agreements .........................              (61)              (48)               17               (92)
     FHLB advances .........................................              (35)               53                (8)               10
     Broker repurchase agreements ..........................                -                 6                 -                 6
                                                                      -------           -------           -------           -------
              Total interest expense .......................           (1,027)              778              (125)             (374)
                                                                      -------           -------           -------           -------

Change in Net Interest Income ..............................          $(1,252)          $ 1,013           $  (449)          $  (688)
                                                                      =======           =======           =======           =======
</TABLE>
(1)  Rate/ Volume is calculated as the difference  between the average  balances
     for the periods  multiplied by the difference between the average rates for
     the periods.
(2)  Income calculated on a pre-tax basis.

                  Year ended December 31, 2008 compared to 2007

<TABLE>
<CAPTION>
                                                                                       Increase (Decrease) Due to
                                                                                       --------------------------
                                                                        Rate            Volume        Rate/Volume(1)        Change
                                                                        ----            ------        --------------        ------
Interest earned on:                                                                      (Dollars in thousands)
<S>                                                                   <C>               <C>               <C>               <C>
     Securities (2) ........................................          $   (20)          $   243           $    (5)          $   218
     Federal Funds sold ....................................             (107)              (56)               26              (137)
     Loans .................................................           (1,821)            1,051              (216)             (986)
                                                                      -------           -------           -------           -------
         Total interest income .............................           (1,948)            1,238              (195)             (905)

Interest paid on:
     Deposits ..............................................             (851)              316               (58)             (593)
     Federal Funds purchased and customer
             repurchase agreements .........................              (69)                1                 -               (68)
     FHLB advances .........................................              (24)              171               (35)              112
     Broker repurchase agreements ..........................                -                 -               171               171
                                                                      -------           -------           -------           -------
              Total interest expense .......................             (944)              488                78              (378)
                                                                      -------           -------           -------           -------

Change in Net Interest Income ..............................          $(1,004)          $   750           $  (273)          $  (527)
                                                                      =======           =======           =======           =======
</TABLE>
(1)  Rate/ Volume is calculated as the difference  between the average  balances
     for the periods  multiplied by the difference between the average rates for
     the periods.
(2)  Income calculated on a pre-tax basis.


                                       11
<PAGE>


Interest Rate Sensitivity

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

         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.  For a bank with a negative gap such as the Bank,  falling interest
rates  would be expected to have a positive  effect on net  interest  income and
increasing rates would be expected to have the opposite effect.  However, if one
or more  assumptions  prove  incorrect,  the margin may not be  impacted  in the
manner expected. On a cumulative basis, rate sensitive liabilities exceeded rate
sensitive assets, resulting in a liability sensitive position at the end of 2009
of $31.8  million,  for a cumulative gap ratio of .74 calculated at the one-year
time  horizon,  assuming  that all assets and  liabilities  would reprice at the
earliest possible time.  Interest-bearing  liabilities,  in particular,  may not
reprice in  conjunction  with or by the same  magnitude  as  movements in market
interest rates.

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



                                       12
<PAGE>

                          Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                             December 31, 2009
                                                                             -----------------
                                                        1-3         3-12       1-3         3-5         5-15       > 15
                                          Immediate    Months      Months     Years       Years       Years       Years      Total
                                          ---------    ------      ------     -----       -----       -----       -----      -----
                                                                          (Dollars in thousands)
Interest earning assets
<S>                                       <C>        <C>         <C>         <C>         <C>         <C>         <C>        <C>
    Securities (1) ....................   $      -   $      -    $      -    $    185    $  2,302    $ 10,999    $ 16,558   $ 30,044
    Federal funds sold ................      1,670          -           -           -           -           -           -      1,670
    Loans(2) (3) ......................     72,333      7,200       8,213      15,573      21,406       3,285       9,753    137,763
                                          --------   --------    --------    --------    --------    --------    --------   --------
                                            74,003      7,200       8,213      15,758      23,708      14,284      26,311    169,477
                                          --------   --------    --------    --------    --------    --------    --------   --------

Interest bearing deposits
    Interest bearing transaction
    accounts ..........................     13,309          -           -           -           -           -           -     13,309
    MMDAs & Savings ...................     48,077          -           -           -           -           -           -     48,077
    Time deposits .....................      1,233     14,834      37,404      21,925       4,365           -           -     79,761
    Federal Funds purchased and
    Customer repurchase agreements ....        588        150       2,519           -           -           -           -      3,257
    FHLB advances .....................          -      1,538       1,613       4,302         231       2,059           -      9,743
    Broker repurchase agreements .. ...          -          -           -       2,000           -       3,000           -      5,000
                                          --------   --------    --------    --------    --------    --------    --------   --------
                                            63,207     16,522      41,536      28,227       4,596       5,059           -    159,147
                                          --------   --------    --------    --------    --------    --------    --------   --------

Interest sensitivity gap ..............   $ 10,796   $ (9,322)   $(33,323)   $(12,469)   $ 19,112    $  9,225    $ 26,311   $ 10,330
Cumulative interest sensitivity gap ...   $ 10,796   $  1,474    $(31,849)   $(44,318)   $(25,206)   $(15,981)   $ 10,330
Gap ratio .............................       1.17        .44         .20         .56        5.16        2.82          -
Cumulative gap ratio ..................       1.17       1.02         .74         .72         .84         .90       1.06
</TABLE>

<TABLE>
<CAPTION>
                                                                               December 31, 2008
                                                                               -----------------
                                                         1-3        3-12         1-3         3-5        5-15        > 15
                                          Immediate     Months     Months       Years       Years       Years      Years     Total
                                          ---------     ------     ------       -----       -----       -----      -----     -----
                                                                           (Dollars in thousands)
Interest earning assets
<S>                                       <C>         <C>         <C>         <C>          <C>        <C>        <C>        <C>
    Securities (1) ....................   $      -    $      -    $      -    $   1,541    $  1,617   $  9,718   $  7,915   $ 20,791
    Federal funds sold ................        140           -           -            -           -          -          -        140
    Loans (2)(3) ......................     73,618       2,246      10,128       13,409      27,135      2,105      2,541    131,182
                                          --------    --------    --------    ---------    --------   --------   --------   --------
       Total interest earning assets ..     75,558       2,468      10,245       15,212      28,752     11,823      8,055    152,113
                                          --------    --------    --------    ---------    --------   --------   --------   --------

Interest bearing deposits
    Interest bearing transaction
      accounts ........................     13,013           -           -            -           -          -          -     13,013
    MMDAs & Savings ...................     21,135           -           -            -           -          -          -     21,135
    Time deposits .....................      3,174      22,566      41,584        9,647       1,393          -          -     78,364
    Federal Funds purchased and
    Customer repurchase agreements ....      3,243         150       2,650          350           -          -          -      6,393
    FHLB advances .....................      3,500          38         113        4,302         301      2,140          -     10,394
    Broker repurchase agreements ......          -           -           -            -       2,000      3,000          -      5,000
                                          --------    --------    --------    ---------    --------   --------   --------   --------
        Total interest bearing
           liabilities ................     44,065      22,754      44,347       14,299       3,694      5,140          -    134,299
                                          --------    --------    --------    ---------    --------   --------   --------   --------

Interest sensitivity gap ..............   $ 31,493    $(20,286)   $(34,102)   $     913    $ 25,058   $  6,683   $  8,055   $ 17,814
Cumulative interest sensitivity gap ...   $ 31,493    $ 11,207    $(22,895)   $ (21,982)   $  3,076   $  9,759   $ 17,814
Gap ratio .............................       1.71         .11         .23         1.06        7.78       2.30          -
Cumulative gap ratio ..................       1.71        1.17         .79          .82        1.02       1.07       1.13
</TABLE>
(1)  Securities with call features have been included in the period in which the
     security matures.
(2)  There were no  unamortized  deferred loan fees included in the above tables
     in either year.
(3)  Nonaccruing  loans of $9.7  million are  included  in the 2009 table.  $2.4
     million are included in the 2008 table. All nonaccruing  loans are included
     in the >15 years category.

                                       13
<PAGE>

     Provision for Loan Losses

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

<TABLE>
<CAPTION>
                                                                                                 Year ended December 31,
                                                                                     2009                 2008              2007
                                                                                     ----                 ----              ----
                                                                                                  (Dollars in thousands)
<S>                                                                                 <C>                 <C>                 <C>
Allowance for loan losses, beginning of year ...........................            $ 1,699             $ 1,293             $ 1,200
Provision for loan losses ..............................................              2,955                 815                 197
Charge-offs ............................................................             (1,959)               (685)               (104)
Recoveries .............................................................                  -                 276                   -
                                                                                    -------             -------             -------

Allowance for loan losses, end of year .................................            $ 2,695             $ 1,699             $ 1,293
                                                                                    =======             =======             =======
</TABLE>

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

Noninterest Income

         Noninterest  income,  which  consists  primarily of service  charges on
deposit accounts, mortgage loan origination fees, gains and losses on securities
sales,  and other fee income,  increased  by $.9 million to $1.0 million in 2009
from $100,000 in 2008,  which was a decrease from $1.1 million in 2007.  Service
charges  were  fairly  consistent  in 2009  compared to 2008.  The Company  sold
securities  with a fair  value  of  $10.8  million,  resulting  in a net gain of
$299,063 in 2009.  Noninterest  income in 2008  included the impact of the Other
Than  Temporary  Impairment  charge  in the  amount  of  $918,264  taken on FNMA
Preferred  stock  in  September  2008.  Mortgage  loan  origination  fee  income
continued a trend of decreases in 2009. Effective November 30, 2009, the Company
closed its mortgage origination  department due to the difficulties  involved in
brokering mortgage loans to third party investors. When the housing and mortgage
markets stabilize,  the Company intends to reevaluate  offering  conventional 30
and 15-year mortgage loans to its customers.

Noninterest Expenses

         Noninterest expenses,  which consist primarily of salaries and employee
benefits,  occupancy  costs,  data  processing  expenses  and  professional  and
regulatory  fees,  totaled  $4.8  million in 2009,  and $4.3 million in 2008 and
2007.  Salaries and employee benefits  decreased  slightly in 2009. There was no
accrual of incentive compensation in 2009 due to economic conditions.  As of the
end of 2009,  the Company  employed 36 full-time  personnel.  Net  occupancy and
equipment  expenses decreased to $572,025 from $600,426 in 2008, which increased
from $567,222 in 2007. Data processing,  supplies,  and advertising expenses all
decreased in 2009 compared to 2008.  The Company is constantly  looking for ways
to become more efficient and to find cost savings without compromising  customer
service.  Professional and regulatory fees increased 72.3% in 2009 in comparison
to 2008,  primarily due to the  increased  cost of FDIC  insurance.  The Company
expensed  $307,376 for FDIC  premiums in 2009  compared to $76,224 in 2008.  The
company  expensed  $322,687  and  $117,272  for loan  expenses  and  expenses to
maintain  other real  estate  owned in 2009  compared  to $51,706  and  $50,889,
respectively,  in 2008.  The increases are related to  foreclosure  expenses and
property  taxes paid in order to protect the  Company's  interest in real estate
collateral.  The Company's  efficiency ratio,  which is measured as the ratio of
noninterest  expense  to the  sum of  net  interest  income  plus  other  income
expressed as a percentage,  was 86.2% in 2009 compared to 81% in 2008 and 62% in
2007.


                                       14
<PAGE>

Income Taxes

         For 2009 the  Company  recorded  an  income  tax  benefit  of  $819,737
compared  to a benefit of $17,600 in 2008 and tax  expense of  $810,232 in 2007.
The primary  reasons for the benefit  recognized  in 2009 are the  exclusions of
nontaxable municipal bond income and operating expenses related to nonperforming
assets.  The benefit recognized in 2008 primarily resulted from the exclusion of
nontaxable  municipal bond income and the tax effect of the other than temporary
impairment  charge on the FNMA  preferred  stock.  In the fourth quarter of 2008
legislation was passed by Congress making the OTTI charge includable in ordinary
income for holders of FNMA and Federal Home Loan Mortgage Corporation  ("FHLMC")
preferred  stocks.  The FNMA  preferred  stock was sold in 2009.  The  financial
accounting  standard  under which the Bank  accounts for income  taxes  requires
certain  items of income and expense  (principally  provision  for loan  losses,
depreciation,  and prepaid  expenses) to be included in one reporting period for
financial accounting purposes and another for income tax purposes.  Refer to the
notes to the Company's  consolidated  financial  statements  contained elsewhere
herein for more information.

Investment Securities

         Management  assigns securities upon purchase into one of the categories
(trading,  available-for-sale and held-to-maturity)  designated by GAAP based on
intent,  taking into  consideration  other factors  including  expectations  for
changes in market rates of interest, liquidity needs, asset/liability management
strategies,  and  capital  requirements.  The  Bank  has not  historically  held
securities for trading  purposes.  As of December 31, 2009,  2008, and 2007, the
Bank's investment  portfolio  comprised  approximately  15.9%, 12.7%, and 13.4%,
respectively, of total assets.

         The following table  summarizes the carrying amounts of securities held
by the Bank at December  31, 2009 and 2008.  Available-for-sale  securities  are
stated at estimated fair value. The Company had no  held-to-maturity  securities
in either period. Federal Reserve Bank of Richmond and Federal Home Loan Bank of
Atlanta stocks have no quoted market value, but have  historically been redeemed
at par  value,  and are  therefore  carried  at cost.  However,  there can be no
assurance  that these stocks will be redeemed at par value in the future.  There
are no individual issuers,  other than government sponsored  enterprises,  whose
securities represent more than 10% of the Company's  consolidated  shareholders'
equity at December  31,  2009.  Government  sponsored  enterprises  ("GSEs") are
agencies and corporations  established by the U. S. Government,  including among
others,  the Federal Home Loan Banks,  Federal  National  Mortgage  Association,
Federal Home Loan  Mortgage  Corporation  and Federal Farm Credit  Banks.  Until
2008,  securities  issued by these enterprises were not obligations of the U. S.
Government  and were  not  backed  by the full  faith  and  credit  of the U. S.
Government or otherwise  guaranteed by the U. S. Government,  although they were
commonly  treated as  guaranteed.  In 2008, in an attempt to stabilize  U.S. and
international  financial  markets,  the U.S.  Government  explicitly  guaranteed
certain debt  instruments of the GSEs.  These securities have generally been and
will  continue to be eligible to be used as security for public  deposits of the
U. S.  Treasury,  government  agencies  and  corporations  and  states and other
political  subdivisions.  At December 31, 2009 and 2008,  securities with a fair
value  of  $22.9  million  and  $18.4  million  respectively,  were  pledged  to
collateralize  public  deposits,   sweep  accounts,   and  customer  and  broker
repurchase  agreements.  Refer  to  the  notes  to  the  Company's  consolidated
financial statements contained elsewhere herein for more information.

                   Investment Securities Portfolio Composition

                                                                December 31,
                                                           2009             2008
                                                           ----             ----
                                                          (Dollars in thousands)
Available for sale:
   Government sponsored enterprise bonds ...........       $10,188       $ 9,293
   Mortgage-backed securities ......................        12,364         4,280
   Municipal bonds .................................         6,350         6,072
   FNMA preferred stock ............................             -            32
                                                           -------       -------
      Total available for sale .....................        28,902        19,677

Federal Reserve Bank of Richmond stock .............           405           394
Federal Home Loan Bank of Atlanta stock ............           737           720
                                                           -------       -------

Total ..............................................       $30,044       $20,791
                                                           =======       =======


                                       15
<PAGE>


         The  following  table  presents  contractual  maturities  and  weighted
average  yields of  securities  at December  31, 2009 and 2008.  Securities  are
presented at their carrying value  (available for sale securities are carried at
fair value and other  securities  are carried at book  value,  which is equal to
their amortized cost.)

              Investment Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                                    December 31, 2009            December 31, 2008
                                                                 Amount        Yield(1)        Amount        Yield(1)
                                                                 ------        --------        ------        --------
                                                                 (Dollars in thousands)        (Dollars in thousands)
  Available for sale securities:
  Government sponsored enterprises
<S>                                                            <C>               <C>         <C>               <C>
       Within one year ....................................    $     -              -%       $     -              -%
       After one through five years .......................      2,032           4.34%         2,631           4.44%
       After five through ten years .......................      8,155           3.96%         6,662           5.90%

  FNMA and FHLMC Mortgage-backed securities (2)
       After one through five years .......................        185           3.79%           280           3.84%
       After five through ten years .......................          -              -%             -              -%
       After 10 years .....................................     12,180           3.97%         4,000           5.75%

  Municipal bonds
          After one through five years ....................        269           3.62%           247           3.25%
          After five through ten years ....................      1,536           3.86%         1,888           3.80%
          After 10 years ..................................      4,545           4.09%         3,937           4.09%

  Other securities
       No stated maturity .................................      1,142           2.33%         1,146           2.06%
                                                               -------                       -------
       Total ..............................................    $30,044           3.94%       $20,791           4.88%
                                                               =======                       =======
</TABLE>
(1)  Yields calculated on a pre-tax basis.
(2)  These securities  mature on an amortizing  basis. They are included here in
     the period of final maturity.

         While seven of the Company's  Government sponsored enterprise bonds and
mortgage-backed securities available-for-sale are in an unrealized loss position
as of December 31, 2009, none has been in an unrealized loss position for twelve
months or more. None of these securities is expected to have a loss of principal
at final  maturity.  The  Company  has the  intent  and  ability  to hold  these
securities until such time as the value recovers or the securities  mature.  All
of the  Company's  municipal  bonds were in an  unrealized  gain  position as of
December   31,   2009.   During   2008,   the  Company   recognized   other-than
temporary-impairment  on the FNMA preferred stock of $606,054, net of tax, based
on analysis under FSP 115-1 and FNMA's being placed into  conservatorship by the
U.S. Treasury  Department.  The Company sold the FNMA preferred stock in 2009 at
an additional loss of $58,788. The Company's  investments are obligations of the
United  States,  its  sponsored  enterprises,  or municipal  securities.  In the
opinion  of  Management,  there  is no  concentration  of  credit  risk  in  the
investment portfolio.

Loan Portfolio

         Management  believes  the loan  portfolio  is  adequately  diversified,
although real estate collateral is the predominant  collateral in the portfolio.
There are no significant  concentrations of loans to any particular individuals,
and there are no  foreign  loans.  The Bank does  have  loans in  certain  broad
categories  that comprise over 25% of Tier 1 Capital  adjusted for the allowance
for loan  losses.  Those  categories  are as  follows:  real  estate  rental and
leasing,  accommodation and food services,  construction,  retail trade,  health
care and social  assistance,  and other services.  The Company believes that the
Bank has  appropriate  controls in place to monitor  risks that may arise due to
concentrations in the loan portfolio.

         Loans made outside the loan policy  guidelines  may present  additional
credit risk to the Company. In order to monitor these loans and the total number
and amount of loans made with exceptions to loan policies, the Bank monitors all




                                       16
<PAGE>

loans approved with policy exceptions.  Monthly, statistics regarding the number
of loans and the amount of loans with  policy  exceptions  are  reported  to the
Board of Directors. One of the policy exceptions reported is for loans exceeding
the regulatory  guidelines on loan to value ratios. The regulatory loan to value
guidelines  permit  exceptions  to the  guidelines  not to exceed  100% of Total
Regulatory Capital for single family  residential  mortgage loans ($20.2 million
at December 31, 2009), or 30% of Total Regulatory  Capital for real estate loans
other than single  family  residential  loans ($6.0  million as of December  31,
2009).  As of  December  31,  2009,  the Bank had $6.5  million  of loans  which
exceeded  regulatory  loan to  value  guidelines.  This  amount  is  within  the
allowable  maximum of exceptions  to the  guidelines.  Of the total  exceptions,
74.4% were not exceptions at the time the loan was made,  but became  exceptions
upon  reappraisal.  Reappraisals are routinely ordered when a loan is collateral
dependent and showing signs of weakness. Specifically, the Company's reappraisal
policy  states that  collateral  for single  family  construction  loans will be
reappraised if the home is complete and remains unsold for twelve months,  or if
the original loan has been  outstanding  for eighteen  months.  For  development
loans, if lot absorption varies from the original  appraiser's  estimates by 25%
or more, the collateral will be reappraised. Collateral will also be reappraised
if there is any indication that the collateral may have decreased  significantly
in value. If the value of collateral  decreases  significantly upon reappraisal,
the Company may take any one or a combination  of steps to protect its position.
Possible  actions include  requesting  additional  collateral from the borrower,
requiring the borrower to make  principal  reductions on the loan, or charge-off
of a portion of the loan balance.

         The  Company  currently  has  concentrations  in real  estate  lending,
including  construction  and  development  loans.  This  segment  of the  Bank's
business is managed in specific  ways in order to  minimize  the risks  normally
associated with construction  lending.  Management requires lending personnel to
visit job  sites,  maintain  frequent  contact  with  borrowers  and  perform or
commission   inspections   of  completed   work  prior  to  issuing   additional
construction loan draws. In addition,  management employs additional  procedures
for monitoring  construction loans such as engaging an independent  appraiser to
perform  routine  inspections of  construction  work to determine the percentage
complete prior to approval of draws on construction loans.  However,  even tight
internal controls and management  oversight will not prevent some borrowers from
defaulting on these types of loans. Where declining market conditions last for a
long  period  of  time,  many  participants  in  the  housing  and  real  estate
construction  industries  cannot  continue to perform as specified in their loan
agreements without sales activity. In such cases, the Bank attempts to work with
various  borrowers in the real estate and construction  industry to minimize the
effect on the Bank and the  borrowers.  Loans in this  situation  are  placed on
nonaccrual,  and included in the Company's  impaired loans. See "Impaired Loans"
below.

         The banking  industry  offers  products  that can increase  credit risk
should   economic   conditions   change  over  the  course  of  a  loan's  life.
Interest-only loans,  adjustable rate loans, and loans with amortization periods
that differ from the maturity date (i.e., balloon payment loans) are examples of
products that could  subject the Company to increased  credit risk in periods of
changing  economic  conditions.  The Company  evaluates each  customer's  credit
worthiness based on current and expected economic conditions and underwrites and
monitors each such loan for associated  risks.  Therefore,  Management  does not
believe that these  particular  products  subject the Company to unusual  credit
risk.  As of  December  31,  2009,  the Bank did not have in its  portfolio  any
residential  mortgage  loans  with  negative  amortization  features,  long term
interest only payment features, or loan to value ratios at origination in excess
of 100%.

         Until November 2009, the Bank had a mortgage loan brokerage  department
that accepted  mortgage  applications  for mortgages  with terms greater than 15
years.  Mortgage  applications  were  processed  and sent to third  parties  for
underwriting.  Approved  loans were funded by, and closed in the name of,  third
parties and the Bank received an origination fee.  However,  effective  November
2009,  the Bank  suspended  such  mortgage  originations.  When the  housing and
mortgage loan markets  stabilize,  the Bank intends to reevaluate  offering this
service to its customers.


                                       17
<PAGE>


         The amount of loans outstanding at December 31, 2009 and 2008 are shown
in the following table according to type of loan:

                           Loan Portfolio Composition

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                        ------------
                                                                            2009                            2008
                                                                            ----                            ----
                                                                                   (Dollars in thousands)
                                                                                    %of                             %of
                                                                     Amount        Loans              Amount       Loans
                                                                     ------        -----              ------       -----
<S>                                                                  <C>           <C>               <C>          <C>
        Commercial and industrial ...............................    $ 14,974       10.9%            $ 18,597      14.2%
        Real Estate - construction ..............................      53,827       39.1               49,670      37.9
        Real Estate - mortgage
               1-4 family residential ...........................      23,285       16.9               26,429      20.1
               Nonfarm, nonresidential ..........................      41,810       30.3               33,214      25.3
               Multifamily residential ..........................       2,520        1.8                1,223        .9
        Consumer installment ....................................       1,347        1.0                2,049       1.6
                                                                     --------      -----             --------     -----
               Total Loans ......................................     137,763      100.0%             131,182     100.0%
                                                                                   =====                          =====
                Less allowance for loan losses ..................      (2,695)                         (1,699)
                                                                     --------                        --------
                   Net Loans ....................................    $135,068                        $129,483
                                                                     ========                        ========
</TABLE>

Maturity Distribution of Loans

         The Bank's loan  portfolio  has a large  component of  adjustable  rate
loans.  As of December 31,  2009,  approximately  $82.4  million or 59.8% of the
Bank's loan portfolio was variable rate.

         The following table sets forth the maturity  distribution of the Bank's
loans,  by type,  as of  December  31,  2009,  as well as the  type of  interest
requirement on loans with maturities greater than one year. For purposes of this
table,  variable rate loans are included in the period of their final  maturity,
as opposed to their repricing date.


                         Maturity Distribution on Loans

<TABLE>
<CAPTION>
                                                                            December 31, 2009
                                                                            -----------------
                                                                          (Dollars in thousands)
                                                                1 Year       1-5       5 Years
                                                               or Less      Years      or More       Total
                                                               -------      -----      -------       -----

<S>                                                             <C>         <C>         <C>        <C>
Commercial and industrial .................................     $10,202     $ 4,421     $   351    $ 14,974
Real Estate-construction ..................................      43,264      10,556           7      53,827
Real Estate-mortgage ......................................      20,867      35,146      11,602      67,615
Consumer ..................................................         885         348         114       1,347
                                                                -------     -------     -------    --------
      Total ...............................................     $75,218     $50,471     $12,074    $137,763
                                                                =======     =======     =======    ========

Predetermined rate, maturity greater than one year ........                  24,905       1,772      26,677

Variable rate, maturity greater than one year .............                  25,566      10,302      35,868
</TABLE>

Impaired Loans

         A loan will be considered to be impaired when, in management's judgment
based on  current  information  and  events,  it is  probable  that  the  loan's
principal or interest will not be  collectible  in accordance  with the terms of
the original loan agreement.  Impaired loans, when not material, will be carried
on 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.

                                       18
<PAGE>

         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.  As of
December 31, 2009,  the Bank had nonaccrual  loans of $9.7 million.  This amount
includes  28  loans,  all of which are  collateral  dependent.  These  loans are
secured  by real  estate,  and  were in the  process  of  foreclosure  or  other
collection  processes as of December 31, 2009.  If these loans had been current,
the Company would have recorded  additional interest income of $292,243 on these
loans.  All previously  accrued but  uncollected  income on these loans has been
eliminated  from the  accompanying  consolidated  income  statement.  Impairment
reserves of $165,771 are included in the  allowance  for loan losses  related to
loans on nonaccrual as of December 31, 2009. The Company has already charged-off
$224,271  related  to  these  loans  as of  December  31,  2009.  The  Company's
investment  in  nonaccruing  loans has been  increasing  throughout  2009 partly
because  of the  length of time  required  to  foreclose  on  property  in South
Carolina.  The loans on  nonaccrual  at December 31, 2009 had been on nonaccrual
and in the foreclosure process for an average of 134 days. This does not include
the 90-day period prior to placing the loan on non-accrual during which the Bank
did not  record  interest.  The  length  of time  required  to  obtain  title to
foreclosed  property is increased if the  creditor  seeks a deficiency  judgment
against a guarantor  or if the  property is rented.  A minimum of thirty days is
added for  deficiency  judgments  and  notice  requirements  of ninety  days are
required if the property is rented.

         The Company also considers  restructured loans to be impaired under the
definition  of an impaired  loan.  As of December 31, 2009 the bank had 24 loans
totaling $4.05 million that are restructured in some manner.  Of those 24 loans,
15 loans totaling $1.5 million are newly constructed  single family homes. These
loans are current, but paying interest only. The average loan amount is $99,444.
Homes  priced  under  $150,000  have  generally  continued  to sell  through the
economic crisis in our market area due to first time home buyer programs. Of the
remaining $2.5 million,  one loan ($555,000) is collateralized by several rental
properties,  one loan ($1.3 million) is  collateralized by undeveloped land, and
seven  loans are  collateralized  by  various  types of  property.  All of these
additional loans are in compliance with their restructured  terms, but deemed to
be impaired due to changes in the original  terms or due to the absence of terms
that would be in effect  under  normal  conditions.  These loans are  considered
impaired primarily because of terms such as interest-only  payment  requirements
that would not normally be available under current  conditions.  The Company has
not charged off amounts  associated with accruing  impaired loans as of December
31, 2009. Refer to the notes to the Company's  consolidated financial statements
contained  elsewhere herein for more information.  The allowance for loan losses
includes  management's  best estimate of the probable  losses on these loans. At
December 31, 2008 the Bank had $2.4 million of nonaccrual loans or loans 90 days
or more past due.

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

Potential Problem Loans

         Management  identifies and maintains a list of potential problem loans.
A loan is added to the potential  problem list when management  becomes aware of
information  about  possible  credit  problems of borrowers  that causes serious
doubts as to the  ability of such  borrowers  to comply  with the  current  loan
repayment  terms.  These loans are  designated  as such in order to be monitored
more closely than other credits in the Bank's portfolio. Potential problem loans
include loans such as loans that are not included in nonaccrual status, or loans
that  are past due 90 days or more and  still  accruing  interest.  Loans in the
amount of $4.0 million had been determined by management to be potential problem
loans at  December  31,  2009.  The  majority of these loans are secured by real
estate.  These loans have not been  restructured as of December 31, 2009 and are
not on  nonaccrual,  but they exhibit some  weaknesses.  Management is currently
assessing the potential impact on the Bank and the Company.  Reassessment  would
normally be in the form of a new appraisal on the collateral supporting the loan
if the loan is  collateral  dependent.  These  loans are  monitored  closely  by
management.

Allowance for Loan Losses

         The  allowance  for loan  losses  is  increased  by direct  charges  to
operating  expense.  Losses on loans are charged  against the  allowance  in the


                                       19
<PAGE>

period in which  management  determines  that it is likely  that such loans have
become  uncollectible.  Recoveries  of  previously  charged  off  loans  will be
credited to the  allowance.  In reviewing the adequacy of the allowance for loan
losses at each year end, management takes 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, 2009.

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

         At the beginning of 2009 the Company's  market area was just  beginning
to realize  the  effects of the  economic  downturn.  Other  areas of the United
States were feeling the effects of inflated  real estate  prices  earlier and in
much more significant ways than the Upstate of South Carolina.  We had continued
to have reasonable  levels of unemployment and some continued  economic activity
throughout  most of 2008.  However,  during  2009 it  became  apparent  that the
construction  industry in South Carolina had not only overbuilt its inventory of
homes,  but  the  industry  was  also  responsible  for a large  portion  of the
employment base. By November of 2009,  unemployment levels in South Carolina had
reached 12.3% and  unemployment in the Company's  market areas ranged from 10.5%
to 12.7% in the month of November.  As a result,  the  Company's  problem  loans
continued to increase throughout the year.

         The table below  summarizes the Company's loan loss  experience in 2008
and  2009.  The   charge-offs   on  commercial   loans  were  related  to  three
relationships. These loans experienced the highest charge-off percentages of any
of our loans,  by far.  By  contrast,  the real  estate  loan  charge-offs  were
comprised of 19 relationships and 32 individual loans.



                                       20
<PAGE>


                         Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                                        Year ended December 31,
                                                                                                        -----------------------
                                                                                                      2009                   2008
                                                                                                      ----                   ----
                                                                                                        (Dollars in thousands)

<S>                                                                                                <C>                   <C>
Total loans outstanding at end of period ...............................................           $ 137,763             $ 131,182
Average amount of loans outstanding ....................................................           $ 138,066             $ 115,162
                                                                                                   ---------             ---------

Balance of allowance for loan losses-beginning .........................................           $   1,699             $   1,293
Loans charged-off
      Commercial and industrial ........................................................                 669                   186
      Commercial real estate ...........................................................               1,289                   498
      Consumer installment .............................................................                   1                     1
                                                                                                   ---------             ---------
         Total charge-offs .............................................................               1,959                   685
Recoveries of loans previously charged-off - commercial loans ..........................                   -                   276
                                                                                                   ---------             ---------
Net (charge-offs) recoveries ...........................................................              (1,959)                 (409)

Additions to allowance charged to expense ..............................................               2,955                   815
                                                                                                   ---------             ---------


Additions to allowance charged to expense
Balance of allowance for loan losses-ending ............................................           $   2,695             $   1,699
                                                                                                   =========             =========


Ratios
      Net (charge-offs) recoveries to average loans outstanding ........................               (1.42%)                (.35%)
      Net (charge-offs) recoveries to loans at end of period ...........................               (1.42%)                (.31%)
      Allowance for loan losses to average loans .......................................                1.95%                 1.48%
      Allowance for loan losses to loans at end of period ..............................                1.96%                 1.30%
      Net (charge-offs) recoveries to allowance for loan losses ........................               (72.7%)               (24.1%)
      Net (charge-offs) recoveries to provision for loan losses ........................               (66.3%)               (50.3%)
</TABLE>

         The allowance for loan losses is not restricted to specific  categories
of loans and is available to absorb losses in all  categories.  Each category of
loans is reviewed for  characteristics  that  increase or decrease risk of loss,
such  as  the   availability  and   marketability   of  collateral,   degree  of
susceptibility  to  changes  in  economic  conditions,  etc.,  for  purposes  of
estimating   the   allowance   for   loan   losses.   (See   "Business   of  the
Company--Services of the Bank" for a discussion of risk characteristics for each
loan  category.)  Individual  loans are graded using an internal  grading system
that  considers  information  specific  to the loan.  If  warranted,  a specific
allocation  may be  associated  with that loan for  purposes of  estimating  the
adequacy of the allowance for loan losses.

Real Estate Owned

         The Bank had $6.713  million and $575,000 of real estate owned pursuant
to  foreclosure  or  in-substance  foreclosure  at  December  31, 2009 and 2008,
respectively.  Real estate owned is  initially  recorded at its  estimated  fair
market value less estimated selling costs. The estimated fair value is generally
determined  by appraisal at the time of  acquisition.  The Bank's  investment in
real estate  owned is  comprised of 37  properties  at December  31,  2009.  The
majority of these properties are single family homes or residential lots. Two of
the  properties  are  commercial  properties,  and  two are  commercially  zoned
building lots.  The Company's plan for  liquidating  these  properties  involves
listing the properties with experienced local real estate agents and pricing the
properties  appropriately  for sale within a six month  period.  Sales plans for
properties listed but unsold for more than six months will be reevaluated. Since
year end, nine  properties  have been disposed of. The Company had no investment
in  repossessed  assets other than real estate.  See note 7 to the  consolidated
financial statements for further information.


                                       21
<PAGE>

Deposits

         The amounts and percentage  composition of deposits held by the Bank as
of December 31, 2009 and 2008 are summarized below:

                               Deposit Composition

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                     ------------
                                                          2009                            2008
                                                          ----                            ----
                                                               (Dollars in thousands)
                                                                 % of                              % of
                                                   Amount        Deposits          Amount        Deposits
                                                   ------        --------          ------        --------

<S>                                              <C>             <C>             <C>              <C>
Noninterest bearing demand                       $  11,235         7.4%          $ $10,070          8.2%
Interest bearing transaction accounts               13,308         8.7              13,013         10.6
Savings                                             37,317        24.5              13,849         11.3
Money market                                        10,760         7.1               7,286          6.0
Time deposits $100,000 and over                     51,245        33.6              41,810         34.1
Other time deposits                                 28,516        18.7              36,554         29.8
                                                 ---------       -----           ---------        -----
    Total deposits                               $ 152,381       100.0%          $ 122,582        100.0%
                                                 =========       =====           =========        =====
</TABLE>


         The average  amounts of and average  rate paid on deposits  held by the
Bank for the years ended December 31, 2008 and 2007, are summarized below:

                                Average Deposits

<TABLE>
<CAPTION>
                                                                                   Year ended December 31,
                                                                                   -----------------------
                                                                              2009                        2008
                                                                              ----                        ----
                                                                      Amount         Rate         Amount         Rate
                                                                      ------         ----         ------         ----
                                                                                 (Dollars in thousands)

<S>                                                                  <C>             <C>        <C>             <C>
Noninterest bearing demand .....................................     $  11,227          -%      $  10,914           -%
Interest bearing transaction accounts ..........................        13,169        .57%         13,502         .92%
Savings and money market .......................................        34,936       1.88%         14,994        1.98%
Time deposits ..................................................        86,435       2.54%         76,234        3.68%
                                                                     ---------                  ---------
      Total average deposits ...................................     $ 145,767                  $ 115,644
                                                                     =========                  =========
</TABLE>

         As of December 31, 2009,  the Bank held $51.2  million of time deposits
with  balances of $100,000 or more. Of that amount,  $8.0 million  mature within
three months,  $8.8 million mature over three through six months,  $17.5 million
mature over six through  twelve  months,  and $16.9  million  mature over twelve
months. $400,000 of time deposits over $100,000 or more are at floating rates of
interest at December 31, 2009.

         While many 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.  Certain deposits
included  in total  deposits  over  $100,000  are  brokered  deposits.  Brokered
deposits  are  acquired in the  wholesale  market but are issued to the eventual
customer in increments of less than $100,000. The majority of these deposits are
not redeemable  prior to maturity except in the case of death. All time deposits
over $100,000  involve the  maintenance of an  appropriate  matching of maturity
distribution and a diversification of sources to achieve an appropriate level of
liquidity.

Customer Repurchase Agreements

         Customer  repurchase  agreements  consist of sweep  accounts and retail
repurchase agreements, and totaled $3.3 million and $4.6 million at December 31,
2009  and  2008,   respectively.   Securities  issued  by  government  sponsored
enterprises  with an amortized cost of $3.3 million and $5.6 million (fair value
of $3.3 million and $5.9 million) were used as collateral for the sweep accounts
and retail repurchase agreements,  at December 31, 2009 and 2008,  respectively.


                                       22
<PAGE>

All of the sweep  accounts pay interest on a floating  rate basis.  The customer
repurchase  agreements pay interest on a fixed rate basis and have maturities of
varying lengths.  As of December 31, 2009 all of the Bank's customer  repurchase
agreements mature in 2010. During 2009 the average amount of customer repurchase
agreements  and sweep  accounts  totaled $3.8 million.  The Bank paid an average
interest rate of 2.04% on these funds in 2009.

Broker Repurchase Agreements

         Broker  repurchase   agreements  consist  of  two  separate  borrowings
totaling $5.0 million.  These borrowings carry fixed rates of interest with call
features. The agreements mature as follows: $3.0 million maturing on January 15,
2015,  callable by the broker quarterly after January 15, 2012, and $2.0 million
maturing  on January  15,  2013,  callable  by the broker  quarterly,  beginning
January 10, 2010.  Securities with fair value of $6.0 million and amortized cost
of $5.7 million  collateralize the agreements.  During 2009, the highest balance
as of any month end for broker  repurchase  agreements  was $5.0 million and the
average  balance  for 2009 was $5.0  million.  The  average  rate paid on broker
repurchase  agreements during 2009 was 3.53%. During 2008 the highest balance as
of any month end for  broker  repurchase  agreements  was $5.0  million  and the
average  balance  for 2008 was  $4,836,066.  The  average  rate  paid on  broker
repurchase agreements during 2008 was 3.53%.

Liquidity

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner.  Some liquidity is ensured by maintaining assets that may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less time deposits  greater than $100,000)  provide a relatively  stable funding
base, and were equal to 53.4% of total assets at December 31, 2009.

         Asset liquidity is provided from several sources, including amounts due
from banks and federal funds sold, unpledged securities, and funds from maturing
loans. The Company had $6.0 million in cash and cash equivalents at December 31,
2009.  The Bank has access to $4.1  million in lines of credit  with other banks
and a line of credit with the Federal Home Loan Bank of Atlanta ("FHLB"), all of
which are subject to various  conditions  and may be terminated at the option of
the lender, as additional sources of liquidity funding. The lines with the other
banks are for short-term use only. Approximately 50% of the lines available from
other banks are unsecured,  and 50% would need to be collateralized.  There were
no balances outstanding on these lines as of December 31, 2009.

         The  line  with  the FHLB is  equal  to 10% of  assets,  provided  that
adequate collateral is available for pledging. The line may be used for short or
long term funding needs and may be used on a fixed or variable-rate basis. As of
December  31,  2009,  the Bank had $9.7  million at a weighted  average  rate of
interest equal to 2.55%,  maturing at various dates through 2018,  borrowed from
the FHLB.  During 2009,  the highest  balance as of any month end for borrowings
from the FHLB was $9.8  million.  The average rate paid on the  advances  during
2009 was 2.78%.  The average balance of FHLB advances for 2009 was $8.6 million.
During 2008,  the highest  balance as of any month end for  borrowings  from the
FHLB was $10.4 million. The average rate paid on advances during 2008 was 3.28%.
The average balance of FHLB advances for 2008 was $7.0 million.

         At December 31, 2009,  approximately  $9.2 million of additional  funds
were  available  under  the FHLB  line  provided  that  eligible  collateral  is
available.  The Bank primarily uses bonds and mortgage-backed  securities issued
by US Government  agencies to  collateralize  advances.  As of December 31, 2009
securities with a market value of $5.6 were available to pledge as collateral to
the FHLB should the Company require additional funding. Management believes that
the Bank's overall liquidity sources are adequate to meet its operating needs in
the ordinary course of its business.

Off-Balance Sheet Risk

         The Company,  through the  operations  of the Bank,  makes  contractual
commitments to extend credit in the ordinary course of its business  activities.
These  commitments are legally binding  agreements to lend money to customers of


                                       23
<PAGE>

the Bank at  predetermined  interest  rates for a specified  period of time.  At
December 31, 2009 and 2008,  unfunded  commitments  to extend  credit were $17.6
million and $21.9  million,  respectively.  At December 31,  2009,  the unfunded
commitments  consisted of $17.3 million at variable  rates and $304,600 at fixed
rates with $10.4 million  expiring within one year.  Past  experience  indicates
that many of these  commitments  to extend  credit will expire  unused and it is
unlikely that a large portion would be used in a short period of time.  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.

         In  addition  to  commitments  to extend  credit,  the Bank also issues
standby letters of credit which are assurances to a third party that it will not
suffer a loss if the Bank's customer fails to meet its contractual obligation to
the third party.  Standby  letters of credit totaled  approximately  $660,000 at
December 31, 2009. Past experience  indicates that many of these standby letters
of credit will expire unused. However,  through its various sources of liquidity
discussed above, the Bank believes that it will have the necessary  resources to
meet these obligations should the need arise.

         The  Bank   offers   an   automatic   overdraft   protection   product.
Approximately  $1.2 million of  overdraft  protection  is  available  under this
product as of December 31, 2009.  The Bank expects the majority of this capacity
will not be  utilized.  During  2009,  the  average  balance  of demand  deposit
overdrafts was $20,177.

         Neither the Company nor the Bank is involved in other off-balance sheet
contractual relationships, unconsolidated related entities that have off-balance
sheet arrangements or transactions that could result in liquidity needs or other
commitments or significantly  impact earnings.  The Company did not maintain any
obligations  under  non-cancelable  operating  lease  agreements at December 31,
2009. The Company has less than one year remaining on a five-year  contract with
a company which provides data,  item and ATM  processing  services.  The monthly
costs are  approximately  $20,000.  The Company  expects to replace the existing
contract  with  a new  five-year  contract.  Refer  to  notes  12  and 16 to the
Company's  consolidated  financial statements for additional discussion on these
and  other  commitments  and   contingencies  and  financial   instruments  with
off-balance sheet risk.

Capital Resources

         At  December  31,  2009,  total   shareholders'   equity  decreased  by
approximately  $1.1  million  from $19.1  million at December  31, 2008 to $18.0
million at December 31, 2009.  The decrease was due to a net loss of $1,361,274,
items  related to stock based  compensation  and the stock  dividend,  including
option exercises, of $150,749 and an unrealized gain on investment securities of
$112,983,  net of tax.  The Company  does not  anticipate  it will need to raise
additional  capital in 2010 if the economy  does not  deteriorate  further.  The
Company's  current  plan is to  maintain  its asset size in 2010,  and return to
modest growth in 2011.

         The Company made capital  expenditures  for  furniture and equipment in
2009  totaling  approximately  $5,000.  Capital  expenditures  for  premises and
equipment  planned  for  2010  consist  of  replacements  of  outdated  computer
equipment. There are no plans for additional premises in 2010.

         The  Company and the Bank are subject to  regulatory  capital  adequacy
standards.  Under  these  standards,  financial  institutions  are  required  to
maintain certain minimum ratios of capital to risk-weighted  assets and adjusted
total  assets  (Tier 1 leverage  ratio).  Under the  provisions  of the  Federal
Deposit  Insurance  Corporation  Improvements  Act of  1991,  federal  financial
institution  regulatory authorities are required to implement prescribed "prompt
corrective  action" upon the deterioration of the capital position of a bank. If
the  capital  position  of an affected  institution  were to fall below  certain
levels,  increasingly  stringent  regulatory  corrective  actions are  mandated.
Additionally,  the  OCC  may  require  higher  minimum  capital  ratios  for  an
individual  bank in view of its  circumstances.  The  Company's  and the  Bank's
regulatory  capital  requirements and positions are summarized in note 20 to the
consolidated financial statements.

     Because the Bank had a  relatively  high level of  nonperforming  assets at
December 31, 2009 and recorded a substantial  loss for 2009, the OCC may require
the Bank to maintain capital ratios in excess of those generally  required to be
well  capitalized  and may seek the Bank's  agreement  to take  other  specified
actions  intended  to  reduce  the  risks  faced  by the  Bank.  The OCC has the
authority to enforce such an agreement with various regulatory actions.

                                       24
<PAGE>

Return on Equity and Assets

         The following  table shows the return on assets (net income  divided by
average total assets),  return on equity (net income divided by average equity),
dividend payout ratio (cash  dividends  declared per share divided by net income
per share),  and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2009 and 2008.

                                                         December 31,
                                                         ------------
                                                    2009              2008
                                                    -----             ----
Return on assets ............................      (.75%)              .15%
Return on equity ............................     (7.21%)             1.16%
Dividend payout ratio .......................         -                265%
Equity to assets ratio (average) ............      10.42%            12.68%


         In May, 2008 the Company  declared its first cash dividend.  The amount
of the dividend was determined based on a number of factors,  including previous
year's  earnings,  capital levels,  prospects for growth and earnings during the
coming  twelve  months,  and  availability  of  dividends  from  the Bank to the
Company.  There can be no assurance  that cash dividends will be declared in the
future.

          During  2010,  the Bank's plan of  operation is to continue to attract
new deposit  customers,  convert our nonperforming  assets into interest earning
assets,  to increase the ratio of services per customer and increase the account
profitability  of the Bank's current  customers.  The Bank plans to seek deposit
accounts from individuals and businesses in the Easley, Berea,  Powdersville and
surrounding  markets.  The Bank  intends  to offer  competitive  rates  for such
accounts  and may seek new  accounts  by  offering  rates  slightly  above those
prevailing  in the  market.  Management  will  continue  to  emphasize  personal
service, accessibility,  and flexibility as reasons for customers to do business
with the Bank.  Personal  contacts by management,  advertising,  and competitive
prices and services will be the Bank's principal marketing tools.

Inflation

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

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

Market for Common Equity and Related Stockholder Matters

         The  following  table  shows the high and low bid  prices of our common
stock  reported  by the OTC  Bulletin  Board for the past two years.  The prices
reflect inter-dealer prices,  without retail mark-up,  mark-down,  or commission
and may not  represent  actual  transactions.  The prices have been  adjusted to
reflect a 5% stock dividend  declared in April 2009 to shareholders of record as
of May 12, 2009.

                                         Year ended              Year ended
                                     December 31, 2009       December 31, 2008
                                     -----------------       -----------------
                                       Low        High        Low        High
                                       ---        ----        ---        ----
         First Quarter ...........    $4.10       $8.25     $10.71      $14.76
         Second Quarter ..........    $4.10       $6.00     $13.09      $13.33
         Third Quarter ...........    $4.00       $6.00      $9.80      $13.23
         Fourth Quarter ..........    $3.55       $5.90      $9.52      $10.95

         Although  the common  stock of the  Company  may be traded from time to
time on an individual basis, no active trading market has developed and none may


                                       25
<PAGE>

develop  in the  foreseeable  future.  The  common  stock is not  listed  on any
exchange.  The stock is  quoted  on the OTC  Bulletin  Board  under  the  symbol
"CTOT.OB."

         As of February 10, 2010, there were approximately 590 holders of record
of the Company's  common stock,  excluding  individual  participants in security
position listings.

         The Company paid cash  dividends  of $597,471  ($.30 per share) for the
first  time in 2008.  The  dividend  policy of the  Company  is  subject  to the
discretion  of the Board of  Directors  and  depends  upon a number of  factors,
including  earnings,  financial  conditions,  cash  needs and  general  business
conditions, as well as applicable regulatory considerations. Because the Company
has no  operations  other than those of the Bank and only has limited  income of
its own,  the Company  would rely on  dividends  from the Bank as its  principal
source of cash to pay cash dividends.

         Each national banking  association is required by federal law to obtain
the prior approval of the Office of the Comptroller of the Currency (the "OCC"),
the primary Federal regulator of national banks, 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.

Management's Annual Report on Internal Control Over Financial Reporting

         Management is responsible for  establishing  and  maintaining  adequate
internal control over financial  reporting,  as such term is defined in Exchange
Act Rule 13a-15(f).  A system of internal control over financial  reporting is a
process designed to provide  reasonable  assurance  regarding the reliability of
financial  reporting and the  preparation  of financial  statements for external
purposes in accordance with generally accepted accounting principles.

         Under  the  supervision  and  with  the  participation  of  management,
including the principal  executive officer and the principal  financial officer,
the Company's management has evaluated the effectiveness of its internal control
over  financial  reporting  as of  December  31,  2009  based  on  the  criteria
established in a report entitled "Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission" and the
interpretive  guidance  issued by the  Securities  and  Exchange  Commission  in
Release No.  34-55929.  Based on this evaluation,  the Company's  management has
evaluated  and  concluded  that the Company's  internal  control over  financial
reporting was effective as of December 31, 2009.

         This  annual  report  does not  include  an  attestation  report of the
Company's  independent  registered  public  accounting  firm regarding  internal
control over financial reporting because  management's report was not subject to
attestation  by the  Company's  registered  public  accounting  firm pursuant to
temporary  rules of the  Securities  and  Exchange  Commission  that  permit the
Company to provide only management's report in this annual report.


                                       26
<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Shareholders and 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, 2009 and 2008, and the
related  consolidated  statements  of income  (loss),  shareholders'  equity and
comprehensive  income  (loss) and cash flows for each of the three  years in the
period ended December 31, 2009. These consolidated  financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Cornerstone Bancorp
and  Subsidiary  as of  December  31,  2009 and 2008,  and the  results of their
operations  and their cash flows for each of the three years in the period ended
December  31,  2009,  in  conformity  with  United  States  generally   accepted
accounting principles.

 We were not engaged to examine management's  assessment of the effectiveness of
Cornerstone  Bancorp and Subsidiary's  internal control over financial reporting
as of December 31, 2009, included in the accompanying Management's Annual Report
on Internal  Controls Over  Financial  Reporting,  and,  accordingly,  we do not
express an opinion thereon.


                                                          /s/ Elliott Davis, LLC


Greenville, South Carolina
March 30, 2010



                                       27
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                              December 31,
                                                                                                              ------------
                                                                                                        2009                2008
                                                                                                        ----                ----
Assets
<S>                                                                                               <C>                  <C>
Cash and due from banks ...................................................................       $   4,369,596        $   3,820,227
Federal funds sold ........................................................................           1,670,000              140,000
                                                                                                  -------------        -------------
       Cash and cash equivalents ..........................................................           6,039,596            3,960,227

Investment securities
     Available-for-sale ...................................................................          28,902,143           19,676,604
     Other investments ....................................................................           1,142,050            1,114,150

Loans, net ................................................................................         135,067,914          129,483,130
Property and equipment, net ...............................................................           5,291,203            5,551,275
Cash surrender value of life insurance policies ...........................................           1,838,663            1,768,520
Other real estate owned ...................................................................           6,712,948              575,000
Other assets ..............................................................................           3,975,813            1,722,161
                                                                                                  -------------        -------------
              Total assets ................................................................       $ 188,970,330        $ 163,851,067
                                                                                                  =============        =============

Liabilities And Shareholders' Equity

Liabilities
     Deposits
         Noninterest bearing ..............................................................       $  11,234,486        $  10,069,125
         Interest bearing .................................................................         141,146,788          112,512,449
                                                                                                  -------------        -------------
         Total deposits ...................................................................         152,381,274          122,581,574
     Federal funds purchased ..............................................................                   -            1,810,000
     Customer repurchase agreements .......................................................           3,257,002            4,582,619
     Borrowings from Federal Home Loan Bank of Atlanta ....................................           9,743,172           10,394,005
     Broker repurchase agreements .........................................................           5,000,000            5,000,000
     Other liabilities ....................................................................             549,477              345,922
                                                                                                  -------------        -------------

         Total liabilities ................................................................         170,930,925          144,714,120

Commitments and contingencies - Notes 11 and 15

Shareholders' equity
     Preferred stock, 10,000,000 shares authorized, no shares issued ......................                   -                    -
     Common stock, no par value, 20,000,000 shares authorized, 2,105,738 and
       1,991,565 shares issued at December 31, 2009 and 2008, respectively ................          18,799,728           18,323,333
     Retained earnings (deficit) ..........................................................            (921,014)             765,906
       Accumulated other comprehensive income .............................................             160,691               47,708
                                                                                                  -------------        -------------

         Total shareholders' equity .......................................................          18,039,405           19,136,947
                                                                                                  -------------        -------------

         Total liabilities and shareholders' equity .......................................       $ 188,970,330        $ 163,851,067
                                                                                                  =============        =============
</TABLE>

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


                                       28
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                    CONSOLIDATED STATEMENTS OF INCOME (LOSS)

<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                               -----------------------
                                                                                      2009             2008               2007
                                                                                      ----             ----               ----
Interest Income
<S>                                                                              <C>                <C>                <C>
     Loans and fees on loans ..............................................      $  6,997,466       $  7,848,630       $  8,834,764
     Investment securities ................................................         1,025,983          1,161,545            944,003
     Federal funds sold and other .........................................            16,378             91,870            228,687
                                                                                 ------------       ------------       ------------

          Total interest income ...........................................         8,039,827          9,102,045         10,007,454

Interest Expense
     Deposits .............................................................         2,930,929          3,229,237          3,822,618
     Federal funds sold and customer repurchase agreements ................            78,438            170,090            238,562
     Federal Home Loan Bank advances ......................................           237,870            228,129            115,810
     Broker repurchase agreements .........................................           176,619            170,756                  -
                                                                                 ------------       ------------       ------------

          Total interest expense ..........................................         3,423,856          3,798,212          4,176,990
                                                                                 ------------       ------------       ------------

          Net interest income .............................................         4,615,971          5,303,833          5,830,464

     Provision for loan losses ............................................         2,955,000            815,000            196,636
                                                                                 ------------       ------------       ------------

          Net interest income after provision for loan losses .............         1,660,971          4,488,833          5,633,828

Noninterest Income (Expense)
     Mortgage loan origination fees .......................................           154,905            275,721            437,157
     Service fees on deposit accounts .....................................           572,973            579,298            542,937
     Gain on sale of available-for-sale investments .......................           299,063                  -                  -
     Other-than-temporary-impairment of FNMA preferred stock ..............                 -           (918,264)                 -
     Gain (loss) on sale of repossessed assets ............................          (228,547)             3,464             (9,672)
     Other ................................................................           183,225            123,747            104,392
                                                                                 ------------       ------------       ------------

          Total noninterest income ........................................           981,619             63,966          1,074,814
                                                                                 ------------       ------------       ------------

Noninterest Expenses
     Salaries and benefits ................................................         2,392,717          2,415,115          2,443,315
     Occupancy and equipment ..............................................           572,025            600,426            567,222
     Data processing ......................................................           218,110            231,958            234,671
     Advertising ..........................................................            30,258             69,859             76,530
     Supplies .............................................................            69,383             85,895            111,918
     Professional and regulatory fees .....................................           551,330            320,027            314,516
     Directors fees .......................................................           138,475            130,450            127,700
     Loan expenses ........................................................           322,687             51,706             24,766
     Other real estate owned ..............................................           117,272             50,889              8,216
     Deposit charge-offs ..................................................            20,912             26,461             39,387
     Other operating ......................................................           390,432            362,297            337,416
                                                                                 ------------       ------------       ------------

          Total noninterest expenses ......................................         4,823,601          4,345,083          4,285,657
                                                                                 ------------       ------------       ------------

          Income (loss) before income taxes ...............................        (2,181,011)           207,716          2,422,985

     Income tax provision (benefit) .......................................          (819,737)           (17,600)           810,232
                                                                                 ------------       ------------       ------------

          Net income (loss) ...............................................      $ (1,361,274)      $    225,316       $  1,612,753
                                                                                 ============       ============       ============

Earnings (Loss) Per Common Share
     Basic ................................................................      $       (.65)      $        .11       $        .78
     Diluted ..............................................................      $       (.65)      $        .11       $        .76

Weighted Average Common Shares Outstanding
     Basic ................................................................         2,103,039          2,089,384          2,063,917
     Diluted ..............................................................         2,103,039          2,143,953          2,117,693
</TABLE>

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


                                       29
<PAGE>

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

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

<S>                                                    <C>           <C>             <C>              <C>              <C>
Balance, December 31, 2006 .....................       1,777,313     $ 15,972,666    $  1,499,803     $     66,258     $ 17,538,727
                                                                                                                       ------------

Net income .....................................               -                -       1,612,753                -        1,612,753
   Other comprehensive income, net of
     income taxes:
   Unrealized gain on investment
       securities ..............................               -                -               -          151,794          151,794
                                                                                                                       ------------
   Comprehensive income ........................                                                                          1,764,547
Stock based compensation .......................               -           40,797               -                -           40,797
Stock option exercises, including
      Tax benefit of $54,550 ...................          27,306          238,990               -                -          238,990
Stock dividend (10%), net of
       cash in lieu of fractional shares .......         178,550        1,932,875      (1,935,106)               -           (2,231)
                                                    ------------     ------------    ------------     ------------     ------------

Balance, December 31, 2007 .....................       1,983,169       18,185,328       1,177,450          218,052       19,580,830
                                                                                                                       ------------

Net income .....................................               -                -         225,316                -          225,316
   Other comprehensive income, net of
     income taxes:
   Unrealized loss on investment
       securities ..............................               -                -               -         (170,344)        (170,344)
                                                                                                                       ------------
   Comprehensive income ........................                                                                             54,972
Cumulative effect of accounting change .........               -                -         (39,389)               -          (39,389)
Stock based compensation .......................               -           56,172               -                -           56,172
Stock option exercises .........................           8,396           81,833               -                -           81,833
Cash dividend paid .............................               -                -        (597,471)               -         (597,471)
                                                    ------------     ------------    ------------     ------------     ------------
Balance, December 31, 2008 .....................       1,991,565       18,323,333         765,906           47,708       19,136,947
                                                                                                                       ------------

Net loss .......................................               -                -      (1,361,274)               -       (1,361,274)
   Other comprehensive income, net of
     income taxes:
   Unrealized gain on investment
       securities ..............................               -                -               -          112,983          112,983
                                                                                                                       ------------
   Comprehensive loss ..........................                                                                         (1,248,291)
Stock based compensation .......................               -           72,464               -                -           72,464
Stock option exercises .........................          14,172           80,000               -                -           80,000
Stock dividend (5%), net of cash in
     lieu of fractional shares .................         100,001          323,931        (325,646)               -           (1,715)
                                                    ------------     ------------    ------------     ------------     ------------
Balance, December 31, 2009 .....................       2,105,738     $ 18,799,728    $   (921,014)    $    160,691     $ 18,039,405
                                                    ============     ============    ============     ============     ============
</TABLE>


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


                                       30
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                               Years ended December 31,
                                                                                               ------------------------
                                                                                        2009             2008             2007
                                                                                        ----             ----             ----
Operating Activities
<S>                                                                                <C>             <C>             <C>
       Net income (loss) .......................................................   $ (1,361,274)   $    225,316    $  1,612,753
       Adjustments to reconcile net income to net cash provided
        by operating activities
             Depreciation and net amortization .................................        351,303         292,585         285,241
             Deferred income tax (benefit) expense .............................       (286,803)       (315,107)          4,508
             Provision for loan losses .........................................      2,955,000         815,000         196,636
             Other than temporary impairment of FNMA Preferred .................              -         918,264               -
             Gain on sale of available-for-sale investments ....................       (299,063)              -               -
             (Gain) loss on sale of repossessed collateral .....................        202,296          (3,464)          9,672
             Gain on sale of fixed assets ......................................           (625)           (481)              -
             Non-cash option expense ...........................................         72,464          56,172          40,797
             Increase in other assets ..........................................     (2,184,323)         (9,958)       (216,723)
             Increase (decrease) in other liabilities ..........................        145,474        (240,717)       (104,341)
                                                                                   ------------    ------------    ------------

               Net cash provided by (used for) operating activities ............       (405,551)      1,737,610       1,828,543
                                                                                   ------------    ------------    ------------
        activities

Investing Activities
       Proceeds from maturities and principal paydowns of
        investment securities ..................................................     16,654,053       4,276,949       4,358,412
       Proceeds from sale of OREO ..............................................      2,498,705         399,208          96,528
       Purchase of investment securities .......................................    (25,495,248)     (7,085,514)     (5,005,942)
       Purchase of FHLB and Federal Reserve stock, net .........................        (27,900)       (297,650)         (2,900)
       Increase in loans, net ..................................................    (17,167,459)    (23,849,672)    (11,365,651)
       Proceeds from sale of property and equipment ............................            625           7,495               -
       Capitalization of improvements to OREO ..................................        (63,943)              -               -
       Purchase of property and equipment ......................................         (5,448)        (32,295)     (1,679,829)
                                                                                   ------------    ------------    ------------

               Net cash used for investing activities ..........................    (23,606,615)    (26,581,479)    (13,599,382)
                                                                                   ------------    ------------    ------------

Financing Activities
       Net increase in deposits ................................................     29,799,700      11,647,106       9,268,272
       Net increase (decrease) in customer repurchase agreements ...............     (1,325,617)     (1,220,316)        738,795
       Net increase (decrease) Federal funds purchased .........................     (1,810,000)      1,810,000               -
       Borrowings from Federal Home Loan Bank of Atlanta .......................      4,500,000      11,800,000       1,000,000
       Repayments to Federal Home Loan Bank of Atlanta .........................     (5,150,833)     (4,950,833)       (150,833)
       Proceeds from broker repurchase agreements ..............................              -       5,000,000               -
       Proceeds from exercise of stock options .................................         80,000          81,833         238,990
       Cash dividends paid .....................................................              -        (597,471)              -
       Cash paid in lieu of fractional shares ..................................         (1,715)              -          (2,231)
                                                                                   ------------    ------------    ------------

               Net cash provided by financing activities .......................     26,091,535      23,570,319      11,092,993
                                                                                   ------------    ------------    ------------

                    Net increase (decrease) in cash and cash equivalents .......      2,079,369      (1,273,550)       (677,846)

Cash and cash equivalents, beginning of year ...................................      3,960,227       5,233,777       5,911,623
                                                                                   ------------    ------------    ------------

Cash and cash equivalents, end of year .........................................   $  6,039,596    $  3,960,227    $  5,233,777
                                                                                   ============    ============    ============

Cash paid for:
       Interest ................................................................   $  3,457,004    $  3,803,188    $  4,145,118
                                                                                   ============    ============    ============
       Income taxes ............................................................   $     54,946    $    438,048    $    932,075
                                                                                   ============    ============    ============
Non-cash Supplemental information:
       Loans transferred to other real estate owned ............................   $  8,922,517    $    931,761    $     69,000
                                                                                   ============    ============    ============
       Loans charged-off, net ..................................................   $  1,958,726    $    409,567    $    103,505
                                                                                   ============    ============    ============
</TABLE>

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


                                       31
<PAGE>

                       CORNERSTONE BANCORP AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

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

         The Bank provides full commercial  banking services to customers and is
subject to regulation by the Office of the  Comptroller of the Currency  ("OCC")
and the  Federal  Deposit  Insurance  Corporation.  The  Company  is  subject to
regulation by Federal  Reserve and to limited  regulation by the South  Carolina
State Board of Financial  Institutions.  The Bank maintains  branch locations in
the Berea  area of  Greenville  County  and the  Powdersville  area of  Anderson
County,  South  Carolina in addition  to its  headquarters  in Easley in Pickens
County, South Carolina. In 2004, the Bank established a wholly owned subsidiary,
Crescent Financial Services, Inc. ("Crescent"), which is an insurance agency. In
2009, 2008 and 2007, Crescent's transactions were immaterial to the consolidated
financial statements.

   Basis of presentation

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

   Estimates

     The  preparation of  consolidated  financial  statements in conformity with
     accounting  principles  generally  accepted in the United States of America
     ("GAAP") requires  management to make estimates and assumptions that affect
     the reported amounts of assets and liabilities and disclosure of contingent
     assets and  liabilities as of the date of the financial  statements and the
     reported amount of income and expenses during the reporting periods. Actual
     results could differ from those  estimates.  The Company's most significant
     estimates relate to the allowance for loan losses and income taxes.

   Concentrations of credit risk

     The Company makes loans to individuals and businesses in and around Upstate
     South Carolina for various personal and commercial purposes. The Bank has a
     diversified loan portfolio and the borrowers'  ability to repay their loans
     is not  dependent  upon any specific  economic  sector.  The Bank  monitors
     concentrations in its customer base using the North American Industry Codes
     ("NAIC") and using certain regulatory definitions. As of December 31, 2009,
     the Bank has  concentrations  of credit in real estate  rental and leasing,
     accommodation and food services,  construction,  retail trade,  health care
     and social assistance,  and other services, which by NAIC category comprise
     over 25% of Tier 1 Capital adjusted for the allowance for loan losses.  The
     Bank  also has a  concentration  in loans  collateralized  by real  estate.
     Although a majority of the Bank's loans are  collateralized by real estate,
     the Bank  believes  that it has proper  internal  controls to identify  and
     mitigate  risks   associated  with  this   concentration   in  real  estate
     collateral.

   Investment securities

     The Company accounts for investment securities in accordance with financial
     accounting  standards  which  require that  investments  in equity and debt
     securities to be classified into three categories:
                                                                     (Continued)


                                       32
<PAGE>

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

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

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

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

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

    The  financial  accounting  standard  followed by the Company  defines  fair
    value,  establishes  a framework for  measuring  fair value under  generally
    accepted  accounting  principles,  and expands  disclosures about fair value
    measurements.  Available for sale  securities  owned by the Company  include
    government sponsored enterprise bonds,  mortgage-backed securities issued by
    government  sponsored  enterprises,  and municipal bonds. The fair values of
    the Company's  available for sale  investments,  other than municipal bonds,
    are  measured on a  recurring  basis using  quoted  market  prices in active
    markets for  identical  assets and  liabilities  ("Level 1 inputs" under the
    standard).  Due to the lower level of trading  activity in municipal  bonds,
    the fair market  values of these  investments  are  measured  based on other
    inputs  such  as  inputs  that  are  observable  or can be  corroborated  by
    observable market data for similar assets with  substantially the same terms
    ("Level 2 inputs" under the standard.)

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

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

   Loans, interest and fee income on loans

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

     Generally,  the accrual of interest will be  discontinued on impaired loans
     when  principal  or interest  becomes 90 days past due, or when  payment in
     full is not anticipated,  and any previously accrued interest on such loans
     will be reversed  against  current income.  Any subsequent  interest income
     will be recognized on a cash basis when received unless collectibility of a
     significant  amount  of  principal  is in  serious  doubt.  In such  cases,
     collections are credited first to the remaining principal balance on a cost
     recovery  basis.  An impaired  loan will not be returned to accrual  status
     unless principal and interest are current and the borrower has demonstrated
     the ability to continue  making payments as agreed.  Non-performing  assets
     include real estate acquired  through  foreclosure or deed taken in lieu of
     foreclosure,  and  loans on  non-accrual  status.  Fee  income  on loans is
     recognized  as  income  at  the  time  loans  are  originated.  Due  to the
     short-term nature of the majority of the Bank's loans and the immateriality
     of the net deferred amount,  this method approximates the income that would
     be earned if the Company deferred loan fees and costs.

                                                                     (Continued)



                                       33
<PAGE>

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

Allowance for loan losses

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

     The Bank  accounts  for  impaired  loans  in  accordance  with a  financial
     accounting standard that requires all lenders to value a loan at the loan's
     fair value if it is probable  that the lender will be unable to collect all
     amounts  due  according  to  the  terms  of  the  loan  agreement.  Factors
     considered by management in determining  impairment include payment status,
     collateral value, and the probability of collecting scheduled principal and
     interest  payments when due. Loans that  experience  insignificant  payment
     delays and payment  shortfalls  generally  are not  classified as impaired.
     Management  determines  the  significance  of payment  delays  and  payment
     shortfalls  on a  case-by-case  basis  taking  into  consideration  all the
     circumstances  of the loan and the  borrower,  including  the length of the
     delay,  reasons for the delay, the borrower's payment record and the amount
     of the shortfall in relation to the principal and interest owed. Impairment
     is determined on a case-by-case  basis.  The fair value of an impaired loan
     may be  determined  based upon the present  value of  expected  cash flows,
     market  price  of the  loan,  if  available,  or  value  of the  underlying
     collateral. Expected cash flows are required to be discounted at the loan's
     effective interest rate.

     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.

Other real estate owned

     Other  real  estate  owned is  carried  at fair  value  (market  value less
     estimated selling cost), determined using an independent appraisal.

Property and equipment

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

Income taxes

     The  Company  accounts  for income  taxes in  accordance  with a  financial
     accounting  standard that requires that deferred tax assets and liabilities
     be recognized for the expected future tax  consequences of events that have
     been recognized in the  consolidated  financial  statements or tax returns.
     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.
                                                                     (Continued)


                                       34
<PAGE>


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

     The  Company has  analyzed  its filing  positions  in the federal and state
     jurisdictions  where it is required to file income tax returns,  as well as
     all open tax years in these jurisdictions. The Company believes that income
     tax filing  positions taken or expected to be taken in its tax returns will
     more likely than not be sustained upon audit by the taxing  authorities and
     does not anticipate any adjustments  that will result in a material adverse
     impact on the Company's financial condition, results of operations, or cash
     flows.  Therefore, no reserves for uncertain income tax positions have been
     recorded.

Advertising and public relations expense

     Advertising, promotional and other business development costs are generally
     expensed  as  incurred.   External  costs   incurred  in  producing   media
     advertising  are  expensed  the first  time the  advertising  takes  place.
     External  costs relating to direct mailing costs are expensed in the period
     in which the direct mailings are sent.

Earnings per common share

     Basic  earnings  per common  share is computed on the basis of the weighted
     average number of common shares  outstanding.  The treasury stock method is
     used to compute the effect of stock options on the weighted  average number
     of common shares  outstanding for diluted  earnings per common share. As of
     December 31, 2009, there were no common stock  equivalents  included in the
     Company's loss per share calculation. Options to purchase 106,255 shares of
     common stock were  antidilutive  as of December 31, 2009 and were  excluded
     from the diluted  share  calculation.  The Company  declared a five percent
     stock  dividend  to  shareholders  of record on May 12, 2009 and 10 percent
     stock  dividends to  shareholders of record as of May 8, 2007, May 9, 2006,
     May 10,  2005,  May 11, 2004,  March 17, 2003 and April 30, 2002.  2008 and
     2007 share and per share amounts on the  Consolidated  Statements of income
     (loss) have been restated to reflect the applicable transactions.

Cash surrender value of life insurance policies

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

Statement of cash flows

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

Fair values of financial instruments

     The Company  discloses fair value  information  for financial  instruments,
     whether or not recognized in the balance  sheet,  when it is practicable to
     estimate the fair value.  Under GAAP, a financial  instrument is defined as
     cash,  evidence  of an  ownership  interest  in an  entity  or  contractual
     obligations   that  require  the  exchange  of  cash  or  other   financial
     instruments.  Certain items are  specifically  excluded from the disclosure
     requirements,  including the Company's  common  stock.  In addition,  other
     nonfinancial  instruments  such as premises and  equipment and other assets
     and liabilities are not subject to the disclosure requirements.

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

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

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

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

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

                                                                     (Continued)

                                       35
<PAGE>

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

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

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

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

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

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


Stock Based Compensation

     The  Company  has  issued  stock  options  to  certain  directors  who were
     organizers of the Company and the Bank, and also has a stock-based director
     and employee  compensation  plan (the "2003 Plan") as further  described in
     Note 18. Under the 2003 Plan,  18,000  options were granted  during each of
     the years 2004,  2005, 2006 and 2007.  19,200 options were granted in 2008.
     Options to purchase  15,600  shares of common  stock were  granted in 2009.
     Stock  dividends  were  declared  subsequent  to  the  grant  dates  of the
     Organizers'  options and some of the  employees'  options.  Pursuant to the
     terms of the 2003 Plan and the Organizers' option agreements, the number of
     options  outstanding  was increased and the exercise price was decreased to
     give effect to these stock dividends.

     The Company accounts for stock based  compensation in accordance with GAAP.
     Fair value of an option  grant is  estimated on the date of grant using the
     Black-Scholes  option pricing model.  The risk free interest rates used for
     the 2009, 2008, and 2007 grants were 2.34%, 3.91%, and 4.68%, respectively,
     which was the 10 Year Constant  Maturity Rate on U.S.  Treasury  Securities
     during the months in which the options were granted.  The assumed  dividend
     rate was zero and the expected option life was 10 years for 2009, 2008, and
     2007 grants.  Volatility is difficult to measure  accurately due to the low
     volume of trading of the Company's stock. The common stock is not listed on
     any exchange and has no active  trading  market.  Since 2006, the stock has
     been quoted on the OTC Bulletin  Board.  Based on information  available at
     the date of the  grant,  the  volatility  assumption  used for 2009  option
     grants was  38.71%,  for 2008  option  grants was 28%,  and for 2007 option
     grants was 12%.

   Recently issued accounting standards

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

     In June 2009, the FASB issued "The FASB Accounting  Standards  Codification
     TM and the  Hierarchy  of  Generally  Accepted  Accounting  Principles  - a
     replacement of FASB Statement No. 162." This standard  establishes the FASB
     Accounting Standards Codification TM ("ASC") as the source of authoritative
     generally accepted accounting principles for nongovernmental entities.

     The  standard was  effective  for interim and annual  periods  ending after
     September 15, 2009.  It did not have any impact on the Company's  financial
     position. In conjunction with the issuance of the ASC, the FASB also issued
     its first  Accounting  Standards  Update,  "Topic 105  -Generally  Accepted
     Accounting Principles."
                                                                     (Continued)



                                       36
<PAGE>

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

     The update was  effective  for  interim  and annual  periods  ending  after
     September  15, 2009 and did not have an impact on the  Company's  financial
     position or results of operations. It did change the referencing system for
     accounting standards.

     "Amendments to the Impairment Guidance of EITF Issue No. 99-20," was issued
     in  January  2009.  Prior  to  the  Staff  Position,   other-than-temporary
     impairment was determined by using either  "Recognition  of Interest Income
     and Impairment on Purchased  Beneficial  Interests and Beneficial Interests
     that Continue to be Held by a Transferor in Securitized  Financial Assets,"
     ("EITF  99-20") or "Accounting  for Certain  Investments in Debt and Equity
     Securities," depending on the type of security. EITF 99-20 required the use
     of market participant assumptions regarding future cash flows regarding the
     probability  of  collecting  all cash  flows  previously  projected.  Other
     standards  determined  impairment  to be  other  than  temporary  if it was
     probable  that the  holder  would be  unable to  collect  all  amounts  due
     according  to  the   contractual   terms.  To  achieve  a  more  consistent
     determination of other-than-temporary impairment, the Staff Position amends
     EITF 99-20 to determine any  other-than-temporary  impairment  based on the
     guidance  in SFAS No.  115,  allowing  management  to use more  judgment in
     determining  any  other-than-temporary  impairment.  The Staff Position was
     effective for the Company as of December 31, 2008.  Management has reviewed
     and evaluated the Company's security portfolio for any other-than-temporary
     impairments.

     The SEC's Office of the Chief  Accountant  and the staff of the FASB issued
     press release  2008-234 on September 30, 2008 ("Press  Release") to provide
     clarifications  on  fair  value  accounting.  The  Press  Release  included
     guidance on the use of  management's  internal  assumptions  and the use of
     "market"  quotes.  It also  reiterated the factors in SEC Staff  Accounting
     Bulletin  ("SAB")  Topic 5M that  should  be  considered  when  determining
     other-than-temporary impairment: the length of time and extent to which the
     market value has been less than cost;  financial  condition  and  near-term
     prospects of the issuer; and the intent and ability of the holder to retain
     its investment for a period of time sufficient to allow for any anticipated
     recovery in market value.

     On October 10, 2008, the FASB issued a staff position ("FSP"), "Determining
     the Fair Value of a  Financial  Asset When the Market for That Asset Is Not
     Active." This FSP clarified the application of previously  issued standards
     in a market that is not active,  and provided an example to illustrate  key
     considerations  in determining the fair value of a financial asset when the
     market for that asset is not active.  The FSP was effective  upon issuance,
     including  prior  periods  for  which  financial  statements  have not been
     issued.  For the  Company,  this FSP was  effective  for the quarter  ended
     September  30,  2008.  The  Company  considered  the  guidance in the Press
     Release   and  in  FSP  SFAS   157-3   when   conducting   its  review  for
     other-than-temporary impairment as of the balance sheet date.

     On April 9, 2009,  the FASB issued  three staff  positions  related to fair
value which are discussed below.

     "Recognition   and   Presentation  of   Other-Than-Temporary   Impairments"
     categorizes    losses   on   debt    securities    available-for-sale    or
     held-to-maturity  determined  by  management  to be  other-than-temporarily
     impaired into losses due to credit  issues and losses  related to all other
     factors.  Other-than-temporary  impairment  (OTTI)  exists  when it is more
     likely  than  not that the  security  will  mature  or be sold  before  its
     amortized  cost basis can be  recovered.  An OTTI related to credit  losses
     should be  recognized  through  earnings.  An OTTI related to other factors
     should be recognized in other comprehensive  income. The FSP does not amend
     existing     recognition    and    measurement    guidance    related    to
     other-than-temporary impairments of equity securities.

     "Determining Fair Value When the Volume and Level of Activity for the Asset
     or Liability Have Significantly Decreased and Identifying Transactions That
     are Not Orderly"  recognizes that quoted prices may not be determinative of
     fair value when the volume and level of trading activity have significantly
     decreased.  The  evaluation of certain  factors may  necessitate  that fair
     value be  determined  using a  different  valuation  technique.  Fair value
     should  be the price  that  would be  received  to sell an asset or paid to
     transfer a liability in an orderly transaction, not a forced liquidation or
     distressed sale. If a transaction is considered to not be orderly,  little,
     if any, weight should be placed on the  transaction  price. If there is not
     sufficient  information to conclude as to whether or not the transaction is
     orderly,  the  transaction  price should be considered when estimating fair
     value. An entity's  intention to hold an asset or liability is not relevant
     in determining fair value.
                                                                     (Continued)


                                       37
<PAGE>

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

     Quoted  prices  provided  by  pricing  services  may  still  be  used  when
     estimating  fair value in accordance with financial  accounting  standards;
     however,  the entity should evaluate whether the quoted prices are based on
     current  information  and  orderly   transactions.   Inputs  and  valuation
     techniques  are  required  to be  disclosed  in  addition to any changes in
     valuation techniques.

      "Interim Disclosures about Fair Value of Financial  Instruments"  requires
     disclosures  about the fair  value of  financial  instruments  for  interim
     reporting  periods  of  publicly  traded  companies  as well  as in  annual
     financial  statements  and also requires  those  disclosures  in summarized
     financial  information  at  interim  reporting  periods A  publicly  traded
     company  includes any company whose  securities trade in a public market on
     either a stock exchange or in the  over-the-counter  market, or any company
     that is a conduit bond obligor. Additionally, when a company makes a filing
     with a regulatory  agency in  preparation  for sale of its  securities in a
     public market it is considered a publicly traded company for this purpose.

     The three staff  positions were effective for periods ending after June 15,
     2009,  with early  adoption  permitted  for periods  ending after March 15,
     2009,  in which case all three must be  adopted.  The  Company  adopted the
     staff positions for its second quarter  quarterly  report on Form 10-Q. The
     staff  positions  did  not  have a  material  impact  on  the  consolidated
     financial statements.

     Also on April 1,  2009,  the FASB  issued an FSP,  "Accounting  for  Assets
     Acquired and Liabilities Assumed in a Business  Combination That Arise from
     Contingencies."  This FSP requires  that assets  acquired  and  liabilities
     assumed  in a  business  combination  that  arise  from  a  contingency  be
     recognized  at fair value.  If fair value cannot be  determined  during the
     measurement  period,  the asset or liability  can still be recognized if it
     can be  determined  that it is  probable  that  the  asset  existed  or the
     liability had been incurred as of the measurement date and if the amount of
     the asset or liability can be reasonably estimated. If it is not determined
     to  be  probable  that  the  asset/liability  existed/was  incurred  or  no
     reasonable  amount can be determined,  no asset or liability is recognized.
     The entity should determine a rational basis for subsequently measuring the
     acquired   assets  and  assumed   liabilities.   Contingent   consideration
     agreements  should be recognized  initially at fair value and  subsequently
     reevaluated.  The FSP  was  effective  for  business  combinations  with an
     acquisition  date on or after the beginning of the  Company's  first annual
     reporting  period beginning on or after December 15, 2008. The Company will
     assess the impact of the FSP if and when a future acquisition occurs.

     The Securities  and Exchange  Commission  ("SEC")  issued Staff  Accounting
     Bulletin  ("SAB")  No.  111 on  April  9,  2009 to amend  Topic  5.M.  (ASC
     320-10-S99),  "Other Than  Temporary  Impairment of Certain  Investments in
     Debt and  Equity  Securities"  and to  supplement  FSP SFAS  115-2 and SFAS
     124-2.  SAB 111  maintains  the staff's  previous  views  related to equity
     securities;  however debt  securities are excluded from its scope.  The SAB
     provides that "other-than-temporary" impairment is not necessarily the same
     as  "permanent"  impairment and unless  evidence  exists to support a value
     equal  to or  greater  than  the  carrying  value  of the  equity  security
     investment, a write-down to fair value should be recorded and accounted for
     as a realized  loss.  The SAB was effective upon issuance and had no impact
     on the Company's financial position.

     The FASB issued a standard, "Subsequent Events," in May 2009 which provides
     guidance on when a subsequent  event should be  recognized in the financial
     statements.  Subsequent  events  that  provide  additional  evidence  about
     conditions  that  existed  at the  date  of the  balance  sheet  should  be
     recognized  at the balance  sheet  date.  Subsequent  events  that  provide
     evidence  about  conditions  that arose  after the  balance  sheet date but
     before financial  statements are issued, or are available to be issued, are
     not required to be  recognized.  The date through which  subsequent  events
     have been evaluated must be disclosed as well as whether it is the date the
     financial  statements were issued or the date the financial statements were
     available to be issued. For  non-recognized  subsequent events which should
     be disclosed to keep the financial  statements from being  misleading,  the
     nature of the event and an estimate of its financial effect, or a statement
     that such an estimate cannot be made, should be disclosed.  The standard is
     effective  for interim or annual  periods  ending after June 15, 2009.  See
     Note 23 for Management's evaluation of subsequent events.

     The FASB issued ASU  2009-05,  "Fair  Value  Measurements  and  Disclosures
     (Topic  820) -  Measuring  Liabilities  at Fair  Value" in August,  2009 to
     provide  guidance  when  estimating  the fair value of a liability.  When a
     quoted  price  in an  active  market  for the  identical  liability  is not
     available,  fair value should be measured  using (a) the quoted price of an
     identical  liability when traded as an asset; (b) quoted prices for similar
     liabilities

                                                                     (Continued)



                                       38
<PAGE>

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

     or similar  liabilities  when traded as assets;  or (c)  another  valuation
     technique  consistent  with the  principles  of Topic 820 such as an income
     approach or a market  approach.  If a restriction  exists that prevents the
     transfer of the liability, a separate adjustment related to the restriction
     is not required when estimating fair value.  The ASU was effective  October
     1,  2009  for the  Company  and had no  impact  on  financial  position  or
     operations.

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

Risks and Uncertainties

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

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

Reclassification

     Certain amounts in prior year's financial statements have been reclassified
     to conform to current  year  presentation.  No changes  have been made that
     affect the  reported  results of  operations,  financial  condition or cash
     flows.

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

         The Bank is required to maintain average reserve balances,  computed by
applying prescribed percentages to its various types of deposits,  either at the
Bank or on deposit  with the Reserve  Bank.  At December 31, 2009 and 2008 these
required reserves were met by vault cash.

NOTE 3 - FEDERAL FUNDS SOLD

         When the Bank's cash  reserves  (Note 2) are in excess of the  required
amount,  it may lend any excess to other banks on a daily basis.  As of December
31, 2009 and 2008  federal  funds sold  amounted  to  $1,670,000  and  $140,000,
respectively.



                                       39
<PAGE>

NOTE 4 - INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                                            December 31, 2009
                                                                                            -----------------
                                                                      Amortized               Gross unrealized                 Fair
                                                                        Cost               Gains            Losses             value
                                                                        ----               -----            ------             -----
<S>                                                                <C>               <C>               <C>               <C>
Government sponsored enterprise bonds ......................       $10,339,754       $    38,979       $   191,026       $10,187,707
Mortgage-backed securities .................................        12,232,754           189,480            57,812        12,364,422
Municipal bonds ............................................         6,086,285           263,729                 -         6,350,014
                                                                   -----------       -----------       -----------       -----------
        Total investment securities available-
        for-sale ...........................................       $28,658,793       $   492,188       $   248,838       $28,902,143
                                                                   ===========       ===========       ===========       ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                             December 31, 2008
                                                                                             -----------------
                                                                     Amortized               Gross unrealized                 Fair
                                                                       cost               Gains            Losses             value
                                                                       ----               -----            ------             -----
<S>                                                                <C>               <C>               <C>               <C>
Government sponsored enterprise bonds ......................       $ 8,859,181       $   433,569       $         -       $ 9,292,750
FNMA preferred stock .......................................            87,200                 -            54,800            32,400
Mortgage-backed securities .................................         4,173,881           113,419             7,611         4,279,689
Municipal bonds ............................................         6,484,056            46,120           458,411         6,071,765
                                                                   -----------       -----------       -----------       -----------
        Total investment securities available-for-sale .....       $19,604,318       $   593,108       $   520,822       $19,676,604
                                                                   ===========       ===========       ===========       ===========
</TABLE>

         While seven of the Company's  Government sponsored enterprise bonds and
mortgage-backed securities available-for-sale are in an unrealized loss position
as of December  31,  2009,  none have been in an  unrealized  loss  position for
twelve months or more.  None of these  securities are expected to have a loss of
principal at final maturity.  The Company believes it is more likely than not it
will  hold  these  securities  until  such  time as the  value  recovers  or the
securities  mature.  All of the Company's  municipal bonds were in an unrealized
gain  position as of December 31,  2009.  During  2008,  the Company  recognized
other-than-temporary-impairment  on the FNMA preferred stock of $606,054, net of
tax,   based  on  analysis   under  FSP  115-1  and  FNMA's  being  placed  into
conservatorship  by the U.S.  Treasury  Department.  The  Company  sold the FNMA
preferred  stock in 2009 at an  additional  loss of  $58,788.  The  table  below
summarizes,   by  investment  category,  the  length  of  time  that  individual
securities have been in a continuous loss position as of December 31, 2009.

<TABLE>
<CAPTION>
                                                                                                                    Total Unrealized
                                                           Less than Twelve Months            Over Twelve Months          Losses
                                                           -----------------------            ------------------          ------
                                                           Gross                              Gross
                                                        Unrealized                          Unrealized
                                                          Losses            Fair Value        Losses    Fair Value
                                                          ------            ----------        ------    ----------
<S>                                                    <C>                 <C>                 <C>          <C>          <C>
Government sponsored
     enterprise bonds ........................         $   191,026         $ 5,898,728         $  -         $  -         $   191,026
Mortgage-backed securities ...................              57,812           7,727,556            -            -              57,812
Municipal bonds ..............................                   -                   -            -            -                   -
                                                       -----------         -----------         ----         ----         -----------
           Total .............................         $   248,838         $13,626,284         $  -         $  -         $   248,838
                                                       ===========         ===========         ====         ====         ===========
</TABLE>

         At  December  31,  2009  and  2008,  securities  with a fair  value  of
$22,889,893 and $18,440,430,  respectively, were pledged to collateralize public
deposits,  sweep  accounts,  advances from the FHLB, and repurchase  agreements.
During 2009, the Company sold  securities  with a fair value of $10,752,749  and
recognized a net gain on the sale of those securities of $299,063. There were no
sales of securities for the years ended December 31, 2008 or 2007.
                                                                     (Continued)


                                       40
<PAGE>

NOTE 4 - INVESTMENT SECURITIES, Continued

         The  amortized  cost and fair value of securities at December 31, 2009,
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, 2009
                                                          -----------------
                                                    Amortized           Fair
                                                       Cost             Value
                                                       ----             -----

Due after one through five years ...........       $ 2,430,513       $ 2,486,061
Due after five through ten years ...........         9,785,027         9,691,469
After ten years or no maturity .............        16,443,253        16,724,613
                                                   -----------       -----------

    Total investment securities ............       $28,658,793       $28,902,143
                                                   ===========       ===========

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

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

                                                          December 31,
                                                          ------------
                                                   2009                  2008
                                                   ----                  ----

Commercial .............................      $  14,974,286       $  18,596,972
Real estate - construction .............         53,827,245          49,669,669
Real estate - mortgage .................         67,614,913          60,866,234
Consumer ...............................          1,346,807           2,048,818
                                              -------------       -------------

Loans, gross ...........................        137,763,251         131,181,693

Less allowance for loan losses .........         (2,695,337)         (1,698,563)
                                              -------------       -------------

Loans, net .............................      $ 135,067,914       $ 129,483,130
                                              =============       =============

         As of December 31, 2009,  approximately $82.4 million or 59.8% of total
gross loans were variable rate loans.

         The FHLB has a blanket lien on certain types of the Company's  loans as
collateral for FHLB advance borrowings. See Note 10. The Reserve Bank has a lien
on certain other loan types should the Bank borrow from the Discount Window.  As
of December 31, 2009 there were no  borrowings  from the Discount  Window of the
Reserve Bank.

         At December 31, 2009 the Bank had  non-accrual  loans of $9.7  million,
which are considered to be impaired.  This amount includes 27 loans and one line
of credit,  all of which are  collateral  dependent.  These loans are secured by
real  estate,  and  were in the  process  of  foreclosure  or  other  collection
processes as of December 31, 2009. If these loans had been current,  the Company
would  have  recorded  additional  interest  income  of  $292,943  in 2009.  All
previously  accrued but  uncollected  income on these loans has been  eliminated
from the accompanying  consolidated statements of income (loss). Included in the
allowance  for loan  losses are special  reserves  of $165,771  related to these
loans. The Company charged-off $224,271 related to impaired loans in 2009.

         As of  December  31,  2009,  the Bank has  restructured  another  $4.05
million of loans  that are  performing  in  accordance  with their  restructured
terms, but are deemed to be impaired due to the changes in their terms.  Average
impaired  loans in 2009  (average  loans on  nonaccrual or loans 90 days or more
delinquent as to principal or interest payments) were $7.3 million.  At December
31, 2008 the Company held nonaccrual loans in the amount of $2.4 million.

                                                                     (Continued)


                                       41
<PAGE>

NOTE 5 - LOANS, Continued

         Activity in the allowance for loan losses for the years ended  December
31, 2009, 2008, and 2007 is summarized in the table below.

<TABLE>
<CAPTION>
                                                                                             Year ended December 31,
                                                                                             -----------------------
                                                                                2009                  2008                 2007
                                                                                ----                  ----                 ----
<S>                                                                         <C>                   <C>                   <C>
Allowance for loan losses, beginning of year .....................          $ 1,698,563           $ 1,293,130           $ 1,199,999
Provision for loan losses ........................................            2,955,000               815,000               196,636
Charge-offs ......................................................           (1,958,726)             (685,166)             (103,505)
Recoveries .......................................................                  500               275,599                     -
                                                                            -----------           -----------           -----------

Allowance for loan losses, end of year ...........................          $ 2,695,337           $ 1,698,563           $ 1,293,130
                                                                            ===========           ===========           ===========
</TABLE>


NOTE 6 - PROPERTY AND EQUIPMENT

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

                                                            December 31,
                                                            ------------
                                                      2009              2008
                                                      ----              ----

Land and improvements ......................      $ 1,468,480       $ 1,468,480
Bank premises ..............................        4,271,773         4,271,773
Furniture, equipment and software ..........        1,531,250         1,527,107
Vehicles ...................................           58,005            58,005
                                                  -----------       -----------
        Property and equipment .............        7,329,508         7,325,365
Accumulated depreciation ...................       (2,038,305)       (1,774,090)
                                                  -----------       -----------
    Property and equipment, net ............      $ 5,291,203       $ 5,551,275
                                                  ===========       ===========

         Depreciation  expense for the years ended December 31, 2009,  2008, and
2007, amounted to $265,520, $282,574, and $286,257,  respectively.  Depreciation
is charged to  operations  over the  estimated  useful lives of the assets.  The
estimated  useful  lives and methods of  depreciation  for the  principal  items
follow:

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


NOTE 7- OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

         The Company has acquired a significant number of real estate properties
in settlement of loans via the foreclosure process. A summary of the activity in
other real estate owned follows:
                                                             December 31,
                                                             ------------
                                                        2009             2008
                                                        ----             ----

Beginning balance ............................     $   575,000      $    69,000
Additions from foreclosures ..................       8,691,617          951,761
Write downs of value .........................               -          (30,017)
Sales ........................................      (2,553,669)        (415,744)
                                                   -----------      -----------
        Ending other real estate owned .......     $ 6,712,948      $   575,000
                                                   ===========      ===========

         The  Company  recognized  a net  loss  of  $228,547  on  all  types  of
repossessed  collateral  for the year ended  December  31,  2009.  In 2008,  the
Company  recognized a gain on the sale of repossessed  collateral of $3,464.  In
2007, the Company recognized a loss of $9,672 on repossessed collateral.


                                       42
<PAGE>

NOTE 8 - DEPOSITS

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

                                                          December 31,
                                                          ------------
                                                    2009                2008
                                                    ----                ----

Noninterest bearing ......................       $ 11,234,486       $ 10,069,125
Interest bearing:
     NOW accounts ........................         13,308,457         13,013,071
     Money market accounts ...............         10,760,323          7,286,130
     Savings .............................         37,317,247         13,848,956
     Time, less than $100,000 ............         28,516,218         36,554,096
     Time, $100,000 and over .............         51,244,543         41,810,196
                                                 ------------       ------------

        Total deposits ...................       $152,381,274       $122,581,574
                                                 ============       ============

         Interest   expense  on  time   deposits   greater  than   $100,000  was
approximately  $1.3 million in 2009,  $1.3 million in 2008,  and $1.2 million in
2007.  Securities issued by government  sponsored  enterprises with an amortized
cost of $1.7  million  and $2.0  million  (fair  value of $1.7  million and $2.1
million) in 2009 and 2008,  respectively,  were pledged as collateral for public
funds.

         At December 31, 2009 the  scheduled  maturities of time deposits are as
follows:

                                 2010                     $ 53,300,355
                                 2011                       15,810,966
                                 2012                        3,402,484
                                 2013                        2,781,458
                  2014 and thereafter                        4,465,498
                                                          ------------
                                                          $ 79,760,761
                                                          ============


NOTE 9 - CUSTOMER REPURCHASE AGREEMENTS

         Customer repurchase agreements consist of the following:

                                                            December 31,
                                                            ------------
                                                       2009             2008
                                                       ----             ----
Sweep accounts .............................        $  587,802        $1,432,619
Retail repurchase agreements ...............         2,669,200         3,150,000
                                                    ----------        ----------
                                                    $3,257,002        $4,582,619
                                                    ==========        ==========

         The Bank enters into sweep and retail  repurchase  agreements  with its
customers.  The sweep  agreements  generally mature  overnight.  At December 31,
2009,  the  Bank had six  retail  repurchase  agreements  that  mature  in 2010.
Securities issued by government sponsored  enterprises with an amortized cost of
$3,262,097 and $5,644,221 (fair value of $3,276,795 and $5,905,715) were pledged
as collateral for the sweep accounts and repurchase agreements,  at December 31,
2009 and 2008, respectively.


                                       43
<PAGE>

NOTE 10 -  BORROWINGS FROM FEDERAL HOME LOAN BANK OF ATLANTA

         At December 31, 2009 and 2008,  the Bank had a line of credit to borrow
funds from the FHLB in the amount of 10% of the Bank's  assets.  Funds  borrowed
from the FHLB are  collateralized  by a lien on certain of the Bank's  available
for sale securities and loans. At December 31, the Bank had advances outstanding
as follows:

<TABLE>
<CAPTION>
                           December 31,
                           ------------
                      2009           2008        Interest Rate     Maturity Date              Terms
                      ----           ----        -------------     -------------              -----
<S>                <C>            <C>                <C>                <C>            <C>
                   $3,000,000     $         -        1.07%              1/10/2011           Fixed rate
                            -       3,500,000         .46               1/14/2009      Variable rate credit
                    1,500,000       1,500,000        2.73               3/16/2010           Fixed rate
                    1,500,000       1,500,000        2.84               9/16/2010           Fixed rate
                    1,000,000       1,000,000        2.72               1/25/2011           Fixed rate
                      177,778         222,222        4.49              12/01/2013      Fixed rate, amortizing
                      168,519         207,408        4.89               4/14/2014      Fixed rate, amortizing
                      396,875         464,375        4.78               7/27/2015      Fixed rate, amortizing
                    2,000,000       2,000,000        3.52               1/16/2018      Fixed rate, convertible
                   ----------     -----------

                   $9,743,172     $10,394,005
                   ==========     ===========
</TABLE>


         The Company's  convertible  advance from the FHLB is  convertible  to a
variable rate  instrument at the option of the FHLB on January 16, 2013.  During
2009 the highest  balance as of any month end for  borrowings  from the FHLB was
$9.8  million.  The  average  rate paid on advances  during 2009 was 2.78%.  The
average  balance of FHLB  advances for 2009 was $8.6 million.  During 2008,  the
highest  balance  as of any  month  end for  borrowings  from the FHLB was $10.4
million.  The average rate paid on advances  during 2008 was 3.28%.  The average
balance of FHLB advances for 2008 was $7.0 million.

NOTE 11 - BROKER REPURCHASE AGREEMENTS

         Broker  repurchase   agreements  consist  of  two  separate  borrowings
totaling $5.0 million.  These borrowings carry fixed rates of interest with call
features. The agreements mature as follows: $3.0 million maturing on January 15,
2015,  callable by the broker quarterly after January 15, 2012, and $2.0 million
maturing  on January  15,  2013,  callable  by the broker  quarterly,  beginning
January 10, 2010.  Securities with fair value of $6.0 million and amortized cost
of $5.7 million collateralize the agreements. During 2009 the highest balance as
of any month end for  broker  repurchase  agreements  was $5.0  million  and the
average  balance  for 2009 was $5.0  million.  The  average  rate paid on broker
repurchase  agreements during 2009 was 3.53%. During 2008 the highest balance as
of any month end for  broker  repurchase  agreements  was $5.0  million  and the
average  balance  for 2008 was  $4,836,066.  The  average  rate  paid on  broker
repurchase agreements during 2008 was 3.53%.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

         The Bank may  become  party to  litigation  and  claims  arising in the
normal  course of business.  As of December 31,  2009,  there was no  litigation
pending other than foreclosure actions initiated by the Bank.

         The  Company  expects to enter into a five-year  contract  with a data,
item, and ATM processing  service.  Minimum monthly costs for these services are
currently  approximately  $20,000.  Minimum  monthly  costs are not  expected to
increase substantially under the new contract. Volume-related costs may increase
as volume increases.

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

         From time to time the Bank may guarantee  merchant credit card accounts
on behalf of certain customers. At December 31, 2009 the total amount guaranteed
by the Bank related to merchant credit card accounts was immaterial.

         Refer to Note 16  concerning  financial  instruments  with off  balance
sheet risk.


                                       44
<PAGE>

NOTE 13 - LINES OF CREDIT

         At December 31, 2009, the Bank had lines of credit to purchase  federal
funds totaling  $4,100,000 from unrelated  banks.  One line is a  collateralized
line and the other is an uncollateralized  line. The interest rate varies daily.
These lines of credit are available on a short-term basis for general  corporate
purposes of the Bank.  The lenders have reserved the right to withdraw the lines
at their  option.  There were no  balances  outstanding  under these lines as of
December 31, 2009.  $1.8 million was outstanding on a line of credit at December
31, 2008.

NOTE 14 - INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                  Year ended December 31,
                                                                                  -----------------------
                                                                  2009                        2008                     2007
                                                                  -----                       ----                     ----
<S>                                                   <C>                <C>     <C>                 <C>    <C>                 <C>
Tax expense (benefit) at statutory rate ...........   $(741,544)         (34)%   $  70,623           34%    $ 823,815           34%
Increase (decrease) in taxes resulting from:
     State income taxes, net of federal benefit ...           -            -         7,789            4        48,471            2
     Tax-exempt investments .......................     (78,845)          (5)      (75,249)         (36)      (31,835)          (1)
     Increase in cash value of life insurance .....     (23,849)          (2)      (24,171)         (12)      (23,277)          (1)
     Other ........................................      24,501            2         3,408            2        (6,942)          (1)
                                                      ---------          ---     ---------          ---     ---------          ---
Income tax provision ..............................   $(819,737)         (39)%   $ (17,600)          (8)%   $ 810,232           33%
                                                      =========          ===     =========          ===     =========          ===
</TABLE>

         The income tax effects of cumulative temporary  differences at December
31, 2009 and 2008 are as follows:
<TABLE>
<CAPTION>
                                                                                                          2009                2008
                                                                                                          ----                ----
Deferred tax assets:
<S>                                                                                                    <C>                  <C>
        Allowance for loan losses ........................................................             $704,559             $513,045
        Other than temporary impairment ..................................................                    -              312,210
        Stock based compensation .........................................................               37,036               22,627
        Other ............................................................................              148,957               25,921
                                                                                                       --------             --------
                                                                                                        890,552              873,803
                                                                                                       --------             --------
Deferred tax liabilities:
        Unrealized net gain on securities available for sale .............................               82,739               24,577
        Depreciation .....................................................................               68,414               82,658
        Prepaid expenses .................................................................               25,531               32,401
                                                                                                       --------             --------
                                                                                                        176,684              139,636
                                                                                                       --------             --------
               Net deferred tax asset ....................................................             $713,868             $734,167
                                                                                                       ========             ========
</TABLE>

         The net deferred taxes are included in other assets in the consolidated
balance  sheets.  Deferred  tax  assets  represent  the  future  tax  benefit of
deductible  differences and, if it is more likely than not that a tax asset will
not be  realized,  a valuation  allowance  is  required  to reduce the  recorded
deferred tax assets to net realizable  value.  As of December 31, 2009 and 2008,
no valuation allowance was deemed necessary.

         The following  summary of the  provision for income taxes  includes tax
deferrals  that arise from temporary  differences in the  recognition of certain
items of revenue and expense for tax and financial reporting purposes:
<TABLE>
<CAPTION>
                                                                                               Year ended December 31,
                                                                                               -----------------------
                                                                                  2009                  2008                 2007
                                                                                  ----                  ----                 ----
<S>                                                                            <C>                   <C>                   <C>
Income taxes currently payable (receivable) .......................            $(781,874)            $ 436,176             $ 805,724
Deferred income tax provision (benefit) ...........................              (37,863)             (453,776)                4,508
                                                                               ---------             ---------             ---------
        Income tax provision (benefit) ............................            $(819,737)            $ (17,600)            $ 810,232
                                                                               =========             =========             =========
</TABLE>

         The  Company has  analyzed  the tax  positions  taken or expected to be
taken in its tax returns and concluded it has no liability  related to uncertain
tax positions in accordance with FIN 48.

                                       45
<PAGE>


NOTE 15 - RELATED PARTY TRANSACTIONS

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

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

<TABLE>
<CAPTION>
                                                                                          Year ended December 31,
                                                                                          -----------------------
                                                                             2009                   2008                    2007
                                                                             ----                   ----                    ----
<S>                                                                     <C>                     <C>                     <C>
Balance, beginning of year .................................            $ 5,958,663             $ 6,443,949             $ 5,835,997
New loans or lines of credit ...............................              2,588,627               1,272,822               4,470,962
Payments on loans or lines of credit .......................               (908,891)             (1,758,108)             (3,863,010)
                                                                        -----------             -----------             -----------
Balance, end of year .......................................            $ 7,638,399             $ 5,958,663             $ 6,443,949
                                                                        ===========             ===========             ===========
</TABLE>

         Deposits by directors, executive officers, and their related interests,
at December 31, 2009 and 2008 were $2,306,089 and $2,911,291, respectively.

NOTE 16 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

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

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

         Commitments  to extend  credit are  agreements to lend to a customer as
long as there is no  violation  of any  material  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may  require  the  payment of a fee. At December  31, 2009 and 2008,
unfunded  commitments  to extend  credit were $17.6  million and $21.9  million,
respectively,  and outstanding letters of credit were approximately $660,000 and
$1.1  million,  respectively.  At December  31, 2009,  the unfunded  commitments
consisted  of $17.3  million at variable  rates and $304,600 at fixed rates with
$10.4 million  expiring  within one year.  The Bank  evaluates  each  customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit,  is based on management's
credit  evaluation of the borrower.  Collateral  varies but may include accounts
receivable,  inventory,  property,  plant  and  equipment,  and  commercial  and
residential real estate.

         Fair values of off balance sheet lending  commitments are based on fees
currently  charged to enter into  similar  agreements,  taking into  account the
remaining terms of the agreements and the counterparties'  credit standing,  and
were immaterial in 2009 and 2008.

         The  Bank   offers   an   automatic   overdraft   protection   product.
Approximately  $1.2 million of  overdraft  protection  is  available  under this
product as of December  31, 2009.  The Bank  expects that much of this  capacity
will not be utilized.  During 2009 the average  balance of total demand  deposit
overdrafts was $20,177.


NOTE 17 - EMPLOYEE BENEFIT PLAN

         The Company  sponsors a Simple IRA Plan for the benefit of all eligible
employees.   The  Bank  contributes  up  to  three  percent  of  the  employee's
compensation.  Employer  contributions  made to the Plan in 2009, 2008, and 2007
amounted to $53,458, $54,828, and $47,934, respectively.


                                       46
<PAGE>

NOTE 18 - STOCK OPTION PLANS

         In 1999,  the Board of  Directors  awarded  options  (the  "Organizers'
Options") to purchase 4,000 shares of the Company's  common stock to each of the
organizing  directors  of the  Company  and the Bank  (an  aggregate  of  40,000
shares).  These  options  had an  exercise  price of $10.00 per share and became
exercisable  in one-third  increments  each year beginning on December 14, 2000.
The  Organizers'  Options  were set to expire  ten years from the date of grant,
unless  they  terminated  sooner as a result  of the  holder's  ceasing  to be a
director.  Pursuant to the option  agreements as further  discussed  below,  the
total number of such options  outstanding and the exercise price was adjusted as
a result of the stock dividends  discussed in Note 19 below. During 2009 options
to purchase  14,172  shares of the Company's  common stock were  exercised at an
exercise  price of $5.84 per share.  As of  December  14,  2009,  the  remaining
unexercised Organizers' Options expired.

         In 2003, the Company's  shareholders  approved the Cornerstone  Bancorp
2003 Stock Option Plan (the "2003 Plan"),  which reserved  125,000 shares of the
Company's  common stock for issuance upon  exercise of options.  Pursuant to the
2003 Plan as further discussed below, the number of shares reserved for issuance
has been  increased  to  192,162  shares as a result of the 10% stock  dividends
declared from 2004 to 2007 and a 5% stock  dividend in 2009 as discussed in Note
19 below.  Employees and Directors are eligible to participate in the 2003 Plan,
which  has a term of 10  years.  Awards  under the 2003 Plan must be made by the
Board of Directors or by a Committee of Directors  designated by the Board at an
exercise  price equal to the fair market value of the Company's  common stock on
the date of grant.  During 2009,  15,600 options to purchase  common shares were
granted and none were exercised. During 2009, 3,866 options that fully vested in
2008 were forfeited. As of December 31, 2009, 106,255 options to purchase common
shares remain outstanding under the 2003 Plan. See Note 1 for more information.

         A summary of the activity in the plans is presented below:

<TABLE>
<CAPTION>
                                                                              Weighted Average        Aggregate
                                                             Shares           Exercise Price(1)    Intrinsic Value(2)
                                                             ------           -----------------    ------------------

<S>                                                          <C>                     <C>                  <C>
Outstanding at December 31, 2006 .......................     123,516                 $8.19
                                                             -------
Granted (3) ............................................      32,383                  8.98
Exercised ..............................................     (27,306)                 6.43
Forfeited or expired ...................................      (1,320)                10.62
                                                              -------
Outstanding at December 31, 2007 .......................     127,273                  8.74
Granted ................................................      19,200                 11.90
Exercised ..............................................      (8,396)                 9.29
Forfeited or expired ...................................      (6,265)                12.20
                                                              -------
Outstanding at December 31, 2008 .......................     131,812                  9.46

Granted (3) ............................................      22,241                  9.45
Exercised ..............................................     (14,172)                 5.64
Forfeited or expired ...................................     (33,626)                 6.39
                                                             -------
Outstanding at December 31, 2009 .......................     106,255                 10.49
                                                             =======


Options exercisable at end of year .....................      59,254                  9.82                $     -

Shares available for grant .............................      59,487
</TABLE>

(1)    The  weighted  average  exercise  price has been  adjusted to reflect 10%
       stock  dividends  declared by the Company's  Board of Directors  annually
       from 2002 through 2007 and a 5% stock dividend  declared by the Company's
       Board of Directors in 2009.
(2)    The  aggregate  intrinsic  value of a stock  option  in the  table  above
       represents  the total  pre-tax  intrinsic  value (the amount by which the
       current market value of the  underlying  stock exceeds the exercise price
       of the option). At December 31, 2009 the amount represents the value that
       would have been  received by the option  holders  had all option  holders
       exercised  their  options  on that date.  This  amount  changes  based on
       changes in the market value of the Company's  common  stock.  At December
       31,  2009 the  OTCBB  quoted  price  was  $4.10.  Therefore,  none of the
       Company's options had intrinsic value as of that date.
(3)    Granted  options  include new grants as well as  adjustments  of previous
       grants as a result of 10% stock dividends declared by the Company's Board
       of Directors  annually from 2002 through 2007 and a 5% stock  dividend in
       2009.

         Options granted after 2005 vest over a five-year  period,  according to
the option agreements.  All options granted prior to 2006 have fully vested. The
weighted  average life of options  outstanding  was 6.39 years and 5.03 years at
December  31,  2009 and  2008,  respectively.  Expense  related  to stock  based

                                       47
<PAGE>

compensation  recorded in the  accompanying  consolidated  statements  of income
(loss) was $72,464,  $56,172,  and $40,797 for the years ended 2009,  2008,  and
2007, respectively.  There were 38,911 non-vested options outstanding (estimated
fair value of $234,926) at the  beginning of 2009.  During 2009,  9,746  options
vested  (estimated  fair value of  $59,787),  and 15,600  options  were  granted
(estimated fair value of $81,432). After giving effect to the five percent stock
dividend  declared in 2009,  at December 31,  2009,  47,001  non-vested  options
(estimated fair value of $265,606) were outstanding.

NOTE 19 - DIVIDENDS

         The Company paid a 5% stock dividend in 2009 to  shareholders of record
on May 12,  2009.  The Company paid cash  dividends of $597,471 in May 2008.  No
other cash dividends have been paid. The Company's  payment of cash dividends is
within  the  discretion  of its  Board of  Directors,  and is  dependent  on the
Company's  receiving cash dividends from the Bank.  Federal banking  regulations
restrict  the amount of dividends  that the Bank can pay to the Company.  Future
dividend  policy will depend on the Company's  earnings,  capital  requirements,
financial condition and other factors considered relevant by the Company's Board
of  Directors.  The  Company's  Board of  Directors  declared  10 percent  stock
dividends to  shareholders  of record on May 8, 2007, May 9, 2006, May 10, 2005,
May 11, 2004, March 17, 2003 and on April 30, 2002.

NOTE 20 - 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 adjusted  total assets ("Tier 1 leverage  ratio").  Management
believes,  as of December  31,  2009,  that the Bank meets all capital  adequacy
requirements to which it is subject.

         As of December 31, 2009,  the most recent  notification  of the banking
regulators  categorized  the  Bank  as well  capitalized  under  the  regulatory
framework for prompt  corrective  action.  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
                                                                    ------                 -------                   -------
                                                                                   (Dollars in thousands)
                                                              Amount       Ratio       Amount        Ratio     Amount         Ratio
                                                              ------       -----       ------        -----     ------         -----
As of December 31, 2009
<S>                                                           <C>            <C>       <C>            <C>      <C>            <C>
Total Capital (to risk weighted assets) ...............       $19,730        12.8%     $12,366        8.0%     $15,458        10.0%
Tier 1 Capital (to risk weighted assets) ..............        17,788        11.5        6,183        4.0        9,274         6.0
Tier 1 leverage ratio .................................        17,788         9.2        7,702        4.0        9,627         5.0

As of December 31, 2008
Total Capital (to risk weighted assets) ...............       $20,366        14.4%     $11,314        8.0%     $14,144        10.0%
Tier 1 Capital (to risk weighted assets) ..............        18,667        13.2        5,657        4.0        8,486         6.0
Tier 1 leverage ratio .................................        18,667        12.1        6,161        4.0        7,702         5.0
</TABLE>

         The Company is also subject to capital adequacy guidelines  established
by the Reserve Bank,  which establish the minimum ratios for capital adequacy as
they apply to the Bank.  For 2009 and 2008,  the Company's  capital  amounts and
ratios were at least as great as shown above for the Bank.

         Because the Bank had a relatively high level of nonperforming assets at
December 31, 2009 and recorded a substantial  loss for 2009, the OCC may require
the  Bank to  maintain  capital  ratios  in  excess  of  those  shown to be well
capitalized  in the table above.  The OCC may also seek the Bank's  agreement to
take other specified actions intended to reduce the risks faced by the Bank. The
OCC has the  authority  to enforce such an  agreement  with  various  regulatory
actions.

                                       48
<PAGE>

NOTE 21 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         The estimated fair values of the Company's  financial  instruments were
as follows:
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                            ------------
                                                                                 2009                             2008
                                                                                 ----                             ----
                                                                    Carrying             Fair           Carrying           Fair
                                                                     Amount             Value            Amount            Value
                                                                     ------             -----            ------            -----
Financial Assets
<S>                                                               <C>               <C>               <C>               <C>
      Cash and due from banks ..............................      $  4,369,596      $  4,369,596      $  3,820,227      $  3,820,227
      Federal funds sold ...................................         1,670,000         1,670,000           140,000           140,000
      Investment securities ................................        30,044,193        30,044,193        20,790,754        20,790,754
      Loans, gross .........................................       137,763,251       139,365,487       131,181,693       132,967,973
      Cash surrender value of life insurance policies ......         1,838,663         1,838,663         1,768,520         1,768,520
Financial Liabilities
      Deposits .............................................       152,381,274       150,540,716       122,581,574       122,334,482
      Fed Funds purchased and customer sweeps ..............           587,802           587,802         3,242,619         3,242,619
      Customer repurchase agreements .......................         2,669,200         2,766,397         3,150,000         3,235,288
      Borrowings from FHLB .................................         9,743,172         9,925,595        10,394,005        10,581,424
      Broker repurchase agreements .........................         5,000,000         5,182,105         5,000,000         5,135,404
</TABLE>

         The Company adopted a new accounting  standard on January 1, 2008 which
requires  disclosure of the levels of inputs used in  determining  fair value of
the  Company's  assets  measured at fair  value,  including  available  for sale
securities and other real estate owned. The table below presents the balances of
assets  measured at fair value on a  recurring  or  nonrecurring  basis by level
within the hierarchy of inputs that may be used to measure fair value.
<TABLE>
<CAPTION>
                                                                                         December 31,2009
                                                                                         ----------------
                                                                 Total              Level 1            Level 2            Level 3
                                                                 -----              -------            -------             -------
<S>                                                           <C>                 <C>                 <C>                <C>
Investment securities, recurring ....................         $30,044,193         $22,552,129         $6,350,014         $ 1,142,050
                                                              ===========         ===========         ==========         ===========
Other real estate owned, nonrecurring ...............         $ 6,712,945         $         -         $        -         $ 6,712,948
                                                              ===========         ===========         ==========         ===========
Impaired loans, nonrecurring ........................         $13,793,781         $         -         $        -         $13,793,781
                                                              ===========         ===========         ==========         ===========
<CAPTION>
                                                                                         December 31, 2008
                                                                                         -----------------
<S>                                                           <C>                 <C>                 <C>                <C>
Investment securities, recurring ....................         $20,790,754         $13,604,839         $6,071,765         $ 1,114,150
                                                              ===========         ===========         ==========         ===========
Other real estate owned, nonrecurring ...............         $   575,000         $         -         $        -         $   575,000
                                                              ===========         ===========         ==========         ===========
Impaired loans, nonrecurring ........................         $ 2,357,610         $         -         $        -         $ 2,357,610
                                                              ===========         ===========         ==========         ===========
</TABLE>

NOTE 22 - PARENT COMPANY INFORMATION

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

Condensed Balance Sheets
                                                              December 31,
                                                              ------------
                                                           2009           2008
                                                           ----           ----
Assets
      Cash and interest bearing deposits ...........   $    94,502   $   371,668
      Investment in subsidiary .....................    17,949,044    18,770,624
      Other assets .................................         9,720         9,005
                                                       -----------   -----------
        Total Assets ...............................   $18,053,266   $19,151,297
                                                       ===========   ===========
Liabilities And Shareholders' Equity
      Accrued expenses .............................   $    13,861   $    14,350
      Shareholders' equity .........................    18,039,405    19,136,947
                                                       -----------   -----------
        Total Liabilities and Shareholders' Equity .   $18,053,266   $19,151,297
                                                       ===========   ===========

                                                                     (Continued)
                                       49
<PAGE>

NOTE 22 - PARENT COMPANY INFORMATION, Continued

Condensed Statements Of Income
<TABLE>
<CAPTION>
                                                                                              Year ended December 31,
                                                                                              -----------------------
                                                                                   2009                2008                 2007
                                                                                   ----                ----                ----
Income
<S>                                                                           <C>                  <C>                  <C>
     Interest .......................................................         $     4,645          $    19,117          $    35,893

Expenses
     Sundry .........................................................              58,893               56,063               55,164
                                                                              -----------          -----------          -----------
          Loss before equity in undistributed net
               income (loss) of bank subsidiary .....................             (54,248)             (36,946)             (19,271)

          Equity in undistributed net income (loss) of
               subsidiary ...........................................          (1,307,026)             262,262            1,632,024
                                                                              -----------          -----------          -----------
       Net income (loss) ............................................         $(1,361,274)         $   225,316          $ 1,612,753
                                                                              ===========          ===========          ===========
</TABLE>

Condensed Statements Of Cash Flows
<TABLE>
<CAPTION>
                                                                                              Year ended December 31,
                                                                                              -----------------------
                                                                                    2009                2008                2007
                                                                                    ----                ----                ----
Operating Activities
<S>                                                                             <C>                 <C>                 <C>
    Net income (loss) ..................................................        $(1,361,274)        $   225,316         $ 1,612,753
         Adjustments to reconcile net income to net cash
             provided by (used for) operating activities
         Equity in undistributed net (income) loss of
             subsidiary ................................................          1,307,026            (262,262)         (1,632,024)
         Decrease (increase) in other assets ...........................               (715)                  2              62,476
         Increase (decrease) in accrued expenses .......................               (489)                343              (7,697)
                                                                                -----------         -----------         -----------
                   Net cash used for operating activities ..............            (55,452)            (36,601)             35,508
                                                                                -----------         -----------         -----------
Investing Activities
    Investment in bank subsidiary ......................................           (299,999)                  -             (70,000)
                                                                                -----------         -----------         -----------
Financing Activities
       Cash dividend paid ..............................................                  -            (597,471)                  -
       Cash paid in lieu of fractional shares ..........................             (1,715)                  -              (2,231)
       Exercise of stock options, net of tax ...........................             80,000              81,833             184,439
                                                                                -----------         -----------         -----------
                   Net cash provided (used) by financing
                      activities .......................................             78,285            (515,638)            182,208
                                                                                -----------         -----------         -----------
           Net increase (decrease) in cash .............................           (277,166)           (552,239)            147,716
Cash, beginning of year ................................................            371,668             923,907             776,191
                                                                                -----------         -----------         -----------
Cash, end of year ......................................................        $    94,502         $   371,668         $   923,907
                                                                                ===========         ===========         ===========
</TABLE>

NOTE 23 - EVALUATION OF SUBSEQUENT EVENTS

         In accordance  with FASB ASC 855,  "Subsequent  Events,"  issued in May
2009 and effective for periods ending after June 15, 2009,  management performed
an evaluation to determine  whether or not there have been any subsequent events
since the balance sheet date.

                                       50