EXHIBIT 13



















                          CAROLINA NATIONAL CORPORATION
                            Portions of Registrant's
                              2006 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2006 Form 10-KSB




<PAGE>

                          CAROLINA NATIONAL CORPORATION

                             Selected Financial Data

The following  selected  financial  data for the five years ending  December 31,
2006 is  derived  from the  financial  statements  and  other  data of  Carolina
National  Corporation (the Company).  The selected financial data should be read
in  conjunction  with the  consolidated  financial  statements  of the  Company,
including the accompanying notes, included elsewhere herein.

<TABLE>
<CAPTION>
                                                                      2006          2005         2003          2004          2002(3)
                                                                      ----          ----         ----          ----          -------
(Dollars in thousands except per share)
Income Statement Data:
<S>                                                                  <C>          <C>          <C>           <C>           <C>
   Interest income .............................................     $ 13,548     $  8,025     $  3,926      $  1,686      $    316
   Interest expense ............................................        5,543        2,953        1,206           511           164
                                                                     --------     --------     --------      --------      --------
                                                                                                  2,720         1,175           152
   Net interest income .........................................        8,005        5,072
   Provision for loan losses ...................................          603          550          506           676           152
                                                                     --------     --------     --------      --------      --------
                                                                                                  2,214           499             -
   Net interest income after provision for loan losses .........        7,402        4,522

   Noninterest income ..........................................          413          374          273           305           151
   Noninterest expense .........................................        4,779        3,902        3,148         2,631         1,503
                                                                     --------     --------     --------      --------      --------


   Income before income taxes ..................................        3,036          994         (661)       (1,827)       (1,352)

   Income tax expense (benefit) ................................        1,107          347         (228)         (616)         (719)
                                                                     --------     --------     --------      --------      --------
     Net income (loss) .........................................     $  1,929     $    647     $   (433)     $ (1,211)     $   (633)
                                                                     ========     ========     ========      ========      ========

Balance Sheet Data:
   Assets ......................................................     $208,912     $164,857     $ 98,716      $ 62,909      $ 32,810
   Earning assets ..............................................      204,232      160,511       95,644        58,648        30,586
   Securities (1) ..............................................          644        3,501        3,362         3,618         5,644
   Loans (2) ...................................................      194,785      139,152       90,515        55,030        10,145
   Allowance for loan losses ...................................        2,435        1,882        1,332           827           152
   Deposits ....................................................      175,582      135,746       86,094        50,646        20,152
   Shareholders' equity ........................................       30,593       26,368       10,925        11,383        12,594

Per-Share Data:
   Basic earnings (loss) .......................................     $   0.75     $   0.44     $  (0.30)     $  (0.85)     $  (0.91)
   Diluted earnings (loss) .....................................         0.73         0.42        (0.30)        (0.85)        (0.91)
   Book value (period end) .....................................        11.86        10.86         7.65          7.98          8.82

</TABLE>
----------------------
(1)  Marketable securities are all available for sale and recorded at their fair
     market  value.   Nonmarketable  securities  totaling  $644,400,   $511,200,
     $392,400, $315,500 and $270,500 are included for 2006, 2005, 2004, 2003 and
     2002, respectively. These securities are recorded at cost.
(2)  Loans are stated at gross amounts before allowance for loan losses.
(3)  From inception (July 15, 2002) through December 31, 2002.

                                       1
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                           Forward Looking Statements

This  report  contains  "forward-looking  statements"  within the meaning of the
securities   laws.   All   statements   that  are  not   historical   facts  are
"forward-looking  statements." You can identify these forward-looking statements
through  our  use of  words  such  as  "may,"  "will,"  "expect,"  "anticipate,"
"believe," "intend," "estimate," "project," "continue," "plan," or other similar
words.  Forward-looking  statements include,  but are not limited to, statements
regarding our future business prospects,  revenues, working capital,  liquidity,
capital  needs,  interest  costs,  income,   business  operations  and  proposed
services.

These forward-looking  statements are based on current  expectations,  estimates
and projections about our industry,  management's  beliefs, and assumptions made
by management. Such information includes, without limitation,  discussions as to
estimates,  expectations,  beliefs, plans, strategies, and objectives concerning
our  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 we are 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    our growth and our ability to maintain growth;

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

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

     o    the effects of competition from other financial institutions operating
          in our market area and  elsewhere,  including  institutions  operating
          locally,  regionally,  nationally and  internationally,  together with
          competitors   that  offer  banking  products  and  services  by  mail,
          telephone and computer and/or the Internet;

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

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

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




                                       2
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                              Basis of Presentation

The  following  discussion  should  be read in  conjunction  with the  Company's
Financial Statements and the Notes thereto and the other financial data included
elsewhere in this Annual  Report.  Some of the  financial  information  provided
below has been  rounded in order to  simplify  its  presentation.  However,  the
ratios  and  percentages  provided  below  are  calculated  using  the  detailed
financial information  contained in the Financial Statements,  the Notes thereto
and the other financial data included elsewhere in this Annual Report.


                              Results of Operations

Year ended  December 31, 2006,  compared  with year ended  December 31, 2005 Net
interest income increased  $2,933,714 or 57.8% from $5,071,942 in 2005.  Earning
assets  increased by  $43,720,935 , or 27.2% in 2006 over 2005 and that increase
was the primary  factor for the  increase in net  interest  income.  The Company
continued  to  experience  strong  loan  growth  in  2006  which  was  the  main
contributor to the increase in earning assets. The primary component of interest
income was interest on loans,  including  fees, of  $12,782,955,  as compared to
$7,654,084 in 2005.

The Company's net interest  spread and net interest margin were 3.47% and 3.97%,
respectively,  in 2006 compared to 3.57% and 4.02%,  respectively,  in 2005. The
decrease in net  interest  spread was  primarily  due to the maturity in 2006 of
long -term low rate  certificates  of deposits  purchased in prior years.  These
maturing  certificates  of deposits were renewed during 2006 at the then current
market  rate which was much  higher.  The  decrease in the net  interest  margin
during  2006 was also  primarily  due to the  maturity  of the  certificates  of
deposit previously  mentioned.  Yields on earning assets increased from 6.36% in
2005 to 7.73% in 2006.  Rates on  interest-bearing  liabilities  were  4.01% and
2.79% for 2006 and 2005, respectively.

The  provision  for loan losses was $603,355 in 2006,  resulting in an allowance
for  losses  of  1.25% of total  loans,  compared  to  $550,362  in 2005,  or an
allowance for losses of 1.35%.  The Company  continues to maintain the allowance
for loan losses at a level  management  believes to be sufficient to cover known
and inherent losses in the loan portfolio.

Noninterest  income  increased  $39,551,  or  10.6%,  to  $413,232  in 2006 from
$373,682 in 2005. The increase is primarily the result of an increase in service
charges on deposit accounts of $17,490,  or 9.1%, to $208,883 for the year ended
December  31,  2006,  and an increase in ATM network fees of $19,562 or 46.5% to
$61,647 for 2006, when compared to 2005 as a result of increased  usage.  Income
produced from mortgage loan sales was  essentially the same for years ended 2006
and 2005, as refinancing activity as well as home purchases declined during 2006
as a result of mortgage lending rate increases during the period.

Noninterest  expense  increased  $877,242,  or 22.5%, to $4,778,994 in 2006 from
$3,901,752 in 2005. Noninterest expenses increased in all categories as a result
of our continued growth.  Salaries and employee benefits increased  $97,658,  or
4.2%, to $2,420,760  for the year ended  December 31, 2006 as a result of normal
merit salary increases during the year. Occupancy expense increased by $105,776,
or 34.8%,  due the opening of our third full service branch location in November
2005 and a fourth  branch  location  in August  2006.  Furniture,  fixtures  and
equipment expenses  increased  $68,358,  or 40.0%, as purchases were required to
support  the  opening  of the  two  new  branches  previously  mentioned.  Other
operating expenses increased by $605,450, or 54.9%, in 2006 over 2005. The major
components  of the increase in other  operating  expenses  during 2006 over 2005
were; data processing expenses,  advertising expenses,  security expenses,  loan
fee expenses, and accounting and auditing. Data processing expenses increased by
$74,063  as  additional  costs  were  required  to  support  the two new  branch
locations as well as support the increase in  transaction  volume to support the
loan and deposit growth during 2006.  Advertising  expenses increased by $79,490
as several  promotional  campaigns as well as a grand opening ceremony were done
to announce the opening of our new branch  location in 2006.  Security  expenses
increased by $31,962 over the prior year,  which was almost entirely for support
of our two new branch  sites.  The  Company  realized a 40.0%  increase  in loan
growth during 2006, resulting in an increase of $73,045 in loan fee expenses and
a $37,646  increase in accounting and audit  expenses.  The Company uses outside
services to provide  support to supplement  its internal loan grading and review

                                       3
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

Results of Operations - continued

system.  Other categories realizing expense increases during 2006 as a result of
the opening of the two previously  mentioned branches were: postage and courier,
printing and supplies,  telephone and insurance.  The Company's efficiency ratio
was 56.8% in 2006 compared to 71.6% in 2005. The efficiency  ratio is defined as
noninterest  expense  divided by the sum of net interest  income and noninterest
income, net of gains and losses on sales of assets.

Net income was $1,929,182 in 2006 compared to net income of $647,233 in 2005, an
increase of 198.1%.  The net income for the year reflects our continued  growth,
as average  earning  assets  increased from $126,225 for the year ended December
31, 2005 to $181,086 for the year ended  December  31,  2006.  Return on average
assets  during 2006 was 1.04%  compared to a return of 0.50%  during  2005.  Net
income  was after  income  tax  expense  of  $1,107,357  for 2006 and income tax
expense of $346,277 in 2005,  respectively.  The income tax expense was based on
an effective tax rate of 34%.

                               Net Interest Income

General.  The largest  component of the Company's net income is its net interest
income, which is the difference between the income earned on assets and interest
paid on deposits and borrowings used to support such assets. Net interest income
is determined by the yields earned on the Company's  interest-earning assets and
the rates paid on its  interest-bearing  liabilities,  the  relative  amounts of
interest-earning  assets  and  interest-bearing  liabilities,  and the degree of
mismatch and the maturity and repricing  characteristics of its interest-earning
assets and interest-bearing  liabilities. Net interest income divided by average
interest-earning assets represents the Company's net interest margin.











                                       4
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                         Net Interest Income - continued

Average  Balances,  Income and  Expenses,  and Rates and Yields.  The  following
tables set forth, for the period indicated, information related to the Company's
average  balance sheet and its income and yields on average  earning  assets and
average  costs and rates of  liabilities.  Such  yields and rates are derived by
dividing income or expense by the average balance of the corresponding assets or
liabilities.  Average  balances  have  been  derived  from  the  daily  balances
throughout the periods indicated.

<TABLE>
<CAPTION>
Average Balances, Income and Expenses, and Rates
Year ended December 31,                               2006                            2005                          2004
                                                      ----                            ----                          ----


                                        Average     Income/   Yield/     Average    Income/   Yield/    Average    Income/    Yield/
(Dollars in thousands)                  Balance     Expense    Rate      Balance    Expense    Rate     Balance    Expense     Rate
                                        -------     -------    ----      -------    -------    ----     -------    -------     ----
Assets:
  Earning Assets:
<S>                                    <C>         <C>          <C>     <C>         <C>        <C>     <C>         <C>         <C>
    Loans (1) ......................   $ 165,430   $  12,783    7.71%   $ 114,183   $ 7,654    6.70%   $ 71,713    $ 3,765     5.25%
    Securities, taxable ............         935           9    0.95        2,970        60    2.02       2,782         56     2.01
    Federal funds sold and other ...      14,721         756    5.24        9,072       310    3.42       7,037        105     1.49
                                       ---------   ---------            ---------   -------            --------    -------

       Total earning assets ........     181,086      13,548    7.48      126,225     8,024    6.36      81,532      3,926     4.82
                                       ---------   ---------            ---------   -------            --------    -------
  Cash and due from banks ..........       3,421                            3,078                         1,669
  Premises and equipment ...........       1,056                              723                           625
  Other assets .....................       2,266                            2,099                         1,746
  Allowance for loan losses ........      (2,114)                          (1,600)                       (1,056)
                                       ---------                        ----------                     --------
    Total assets ...................   $ 185,715                        $ 130,525                      $ 84,516
                                       =========                        =========                      ========
Liabilities:
  Interest-bearing liabilities:
    Interest-bearing transaction
       accounts ....................   $  10,200   $      10    0.10%   $   9,437   $     9    0.09%   $  5,202    $   203     0.17%
    Savings deposits ...............      29,326       1,007    3.43       25,817       581    2.25      22,906        196     1.66
    Time deposits ..................      97,728       4,481    4.61       68,569     2,232    3.25      34,512      1,799     2.37
    Federal Funds purchased ........           -           -                    -         -                   7          -
    Federal Home Loan Bank
        Advance ....................       1,000          45    4.51          258        12    4.65           -          -
    Other borrowings ...............           1          -     5.84        1,633       118    7.23           -          -
                                       ---------   ---------            ---------   -------            --------    -------
         Total interest-bearing
           liabilities .............     138,255       5,543    4.01      105,714     2,952    2.79     62,627      1,206      1.93
                                       ---------   ---------            ---------   -------            --------    -------
  Demand deposits ..................      16,427                           13,054                        10,551
  Accrued interest and other
    liabilities ....................       1,308                              792                           461
  Shareholders' equity .............      29,725                           10,965                        10,877
                                       ---------                        ---------                      --------
       Total liabilities and
        shareholders' equity .......   $ 185,715                        $ 130,525                      $ 84,516
                                       =========                        =========                      ========
Net interest spread ................                            3.47%                          3.57%                           2.89%
Net interest income ................                $  8,005                        $ 5,072                        $ 2,720
                                                    ========                        =======                        =======
Net interest margin ................                            3.97%                          4.02%                           3.34%
</TABLE>

-----------------
 (1) There were $653,000  loans in nonaccrual  status in 2006, $0 in 2005 and $0
in 2004.  The  effect  of fees  recognized  on loans in 2006  totaling  $411,287
increased the  annualized  yield on loans by .25% from 7.46%.  The effect on the
annualized  yield on loans in 2005 was an increase  of .28% from 6.42%,  and the
effect on the  annualized  yield on loans in 2004 was an  increase  of .19% from
5.06%.  The effect on net  interest  spread in 2006 was a decrease  of .10% from
2005,  but an increase of .58% from 2004.  The net interest  margin  declined by
..05% in 2006 from 2005, but increased by .63% from 2004.


                                       5
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                         Net Interest Income - continued

Analysis of Changes in Net  Interest  Income.  Net  interest  income can also be
analyzed  in terms of the impact of  changing  rates and  changing  volume.  The
following  table  reflects  the extent to which  changes in  interest  rates and
changes in the volume of earning assets and  interest-bearing  liabilities  have
affected the Company's  interest income and interest  expense during the periods
indicated.  Information on changes in each category  attributable to (i) changes
due to volume (change in volume  multiplied by prior period rate),  (ii) changes
due to rates  (changes in rates  multiplied  by prior  period  volume) and (iii)
changes in  rate/volume  (change in rate  multiplied by the change in volume) is
provided as follows:

                                                    2006 compared to 2005
                                                    ---------------------
                                               Due to increase (decrease) in
(Dollars in thousands)                      Rate (1)     Volume(1)       Total
                                            --------     ---------       -----
Interest income:
   Loans .............................      $    29       $ 5,100       $ 5,129
   Securities, taxable ...............          (14)          (37)          (51)
   Federal funds sold and other ......          382            64           446
                                            -------       -------       -------
     Total interest income ...........          397         5,127         5,524
                                            -------       -------       -------
Interest expense:
   Interest-bearing deposits .........        1,092         1,583         2,675
   FHLB Advances .....................           (3)           36            33
   Other short-term borrowings .......            -          (118)         (118)
                                            -------       -------       -------
     Total interest expense ..........        1,089         1,501         2,590
                                            -------       -------       -------
       Net interest income ...........      $  (692)      $ 3,626       $ 2,934
                                            =======       =======       =======

                                                    2005 compared to 2004
                                                    ---------------------
                                               Due to increase (decrease) in
(Dollars in thousands)                      Rate (1)     Volume(1)       Total
                                            --------     ---------       -----
Interest income:
   Loans .............................      $1,238         $2,651         $3,889
   Securities, taxable ...............           -              4              4
   Federal funds sold and other ......         168             37            205
                                            ------         ------         ------
     Total interest income ...........       1,406          2,692          4,098
                                            ------         ------         ------
Interest expense:
   Interest-bearing deposits .........         532          1,084          1,616
   FHLB Advances .....................           -             12             12
   Other short-term borrowings .......         118              -            118
                                            ------         ------         ------
     Total interest expense ..........         650          1,096          1,746
                                            ------         ------         ------
       Net interest income ...........      $  756        $ 1,596        $ 2,352
                                            ======        =======        =======


(1) The effect of changes in  rate/volume  has been  determined  by applying the
amount of the  change in  average  rates to the  amount of the change in average
volumes,  and  allocated  to volume  and rate based on their  proportion  to the
absolute value of each.



                                       6
<PAGE>
                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                         Net Interest Income - continued

Interest Sensitivity.  The Company monitors and manages the pricing and maturity
of its assets and liabilities in order to diminish the potential  adverse impact
that  changes in  interest  rates  could have on its net  interest  income.  The
principal monitoring technique employed by the Company is the measurement of the
Company's  interest  sensitivity "gap", which is the positive or negative dollar
difference  between  assets and  liabilities  that are subject to interest  rate
repricing  within a given  period  of time.  Interest  rate  sensitivity  can be
managed by repricing  assets or liabilities,  selling  securities  available for
sale,  replacing an asset or liability  at maturity,  or adjusting  the interest
rate during the life of an asset or liability. Managing the amount of assets and
liabilities  repricing  in this same time  interval  helps to hedge the risk and
minimize the impact on net interest income of rising or falling interest rates.

The  following  table sets forth the  Company's  interest  rate  sensitivity  at
December 31, 2006.

Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                     After Three                           Greater
                                                        Within          Through             One              Than
                                                         Three           Twelve           Through            Five
  (Dollars in thousands)                                Months           Months          Five Years          Years          Total
                                                        ------           ------          ----------          -----          -----
Assets
Earning Assets:
<S>                                                    <C>            <C>               <C>              <C>                <C>
  Federal funds sold ..........................        $  8,803       $        -        $        -       $        -         $  8,803
  Loans .......................................          88,077            6,338            97,992            2,378          194,785
  Investment securities .......................               -                -                 -              644              644
                                                       --------         --------          --------         --------         --------
    Total earning assets ......................          96,880            6,338            97,992            3,022          204,232
                                                       --------         --------          --------         --------         --------
Liabilities
Interest-bearing liabilities:
  Interest-bearing deposits:
    Demand deposits ...........................          10,307                -                 -                -           10,307
    Savings deposits ..........................          34,972                -                 -           34,972
    Time deposits .............................          29,902           65,060            17,674                -          112,636
    FHLB Advance ..............................               -            1,000                 -                -            1,000
                                                       --------         --------          --------         --------         --------
      Total interest-bearing
         liabilities ..........................          75,181           66,060            17,674                -          158,915
                                                       --------         --------          --------         --------         --------
Period gap ....................................        $ 21,699         $(59,722)         $ 80,318         $  3,022         $ 45,317
                                                       ========         ========          ========         ========         ========
Cumulative gap ................................        $ 21,699         $(38,023)         $ 42,295         $ 45,317
                                                       ========         ========          ========         ========
Ratio of cumulative gap
  to total earning assets .....................            10.6%          (18.6%)             20.7%           22.2%
</TABLE>

The  above  table   reflects  the  balances  of   interest-earning   assets  and
interest-bearing  liabilities  at the  earlier of their  repricing  or  maturity
dates.  Overnight  federal funds are reflected at the earliest  pricing interval
due to the immediately available nature of the instruments.  Debt securities are
reflected at each instrument's ultimate maturity date. Scheduled payment amounts
of fixed rate  amortizing  loans are reflected at each  scheduled  payment date.
Scheduled  payment  amounts of variable rate  amortizing  loans are reflected at
each scheduled  payment date until the loan may be repriced  contractually;  the
unamortized  balance is  reflected at that point.  Interest-bearing  liabilities
with no  contractual  maturity,  such as savings  deposits and  interest-bearing
transaction  accounts,  are  reflected in the earliest  repricing  period due to
contractual  arrangements  which give the  Company the  opportunity  to vary the
rates paid on those deposits within a thirty-day or shorter  period.  Fixed rate
time  deposits,  principally  certificates  of deposit,  are  reflected at their
contractual  maturity  date.  The Federal Home Loan Bank advance is reflected at
its contractual maturity date.

                                       7
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                         Net Interest Income - continued

The Company  generally  would benefit from  increasing  market rates of interest
when it has an  asset-sensitive  gap position and  generally  would benefit from
decreasing market rates of interest when it is liability-sensitive.  The Company
is  cumulatively  asset  sensitive  over all periods except three through twelve
months.  However,  the Company's gap analysis is not a precise  indicator of its
interest sensitivity  position.  The analysis presents only a static view of the
timing  of  maturities   and  repricing   opportunities,   without  taking  into
consideration  that  changes  in  interest  rates do not  affect  all assets and
liabilities  equally.  Net interest income may be impacted by other  significant
factors in a given interest rate  environment,  including  changes in the volume
and mix of earning assets and interest-bearing liabilities.


                     Provision and Allowance for Loan Losses

General.  The provision for loan losses charged to operating  expenses  reflects
the amount deemed  appropriate  by  management to establish an adequate  reserve
(the  allowance  for loan losses) for the probable  loan losses  incurred in the
current  loan  portfolio.  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.  There  are  risks
inherent in making all loans, including risks with respect to the period of time
over which loans may be repaid,  risks  resulting  from  changes in economic and
industry conditions,  risks inherent in dealing with individual borrowers,  and,
in the case of a collateralized  loan, risks resulting from uncertainties  about
the future value of the collateral.  Management's  judgment is based on periodic
and regular evaluation of individual loans, the overall risk  characteristics of
the  various  portfolio  segments,   and  prevailing  and  anticipated  economic
conditions.

The  Company  accounts  for  impaired  loans in  accordance  with  Statement  of
Financial  Accounting  Standards ("SFAS") No. 114,  "Accounting by Creditors for
Impairment of a Loan". This statement  requires that all lenders value a loan at
the  loan's  fair  value if it is  probable  that the  lender  will be unable to
collect all amounts due according to the terms of the loan agreement. Fair value
may be determined  based upon the present  value of expected cash flows,  market
price of the loan, if available, or value of the underlying collateral. Expected
cash flows are required to be discounted at the loan's effective  interest rate.
SFAS  No.  114 was  amended  by SFAS  No.  118,  "Accounting  by  Creditors  for
Impairment of a Loan - Income Recognition and Disclosures," to allow a lender to
use existing methods for recognizing  interest income on an impaired loan and by
requiring additional disclosures about how a creditor recognizes interest income
on an impaired loan.


Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate  collection 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.  When this doubt does not exist,  cash
receipts are applied under the contractual  terms of the loan agreement first to
interest  income then to principal.  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.


Criticized  loans are loans that have  potential  weaknesses  that deserve close
attention  and which  could,  if  uncorrected,  result in  deterioration  of the
prospects  for  repayment or our credit  position at a future  date.  Classified
loans are loans that are  inadequately  protected  by the sound worth and paying
capacity of the borrower or any  collateral  and as to which there is a distinct
possibility or probability  that we will sustain a loss if the  deficiencies are
not corrected

                                       8
<PAGE>
                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

               Provision and Allowance for Loan Losses - continued


Based on its  analysis  of such  factors  management  assigns  specific  reserve
amounts for any significant classified loans and uses various percentages of the
aggregate amounts of groups of other classified loans,  criticized loans and the
different  categories of non-classified  loans. The percentages are set based on
management's  assessment  of the degree of credit  risk in each  category  after
reviewing  changes in lending  policies and procedures,  including  underwriting
standards  and  collection,  charge-off,  and  recovery  practices;  changes  in
national and local economic and business  conditions;  changes in the nature and
volume  of the  portfolio;  changes  in the  experience  and  depth  of  lending
management;  changes in the volume and severity of problem loans;  the effect of
external factors such as competition,  legal and regulatory  requirements;  and,
peer comparison.

Management's judgment about the adequacy of the allowance is based upon a number
of estimates and assumptions about present  conditions and future events,  which
management  believes to be  reasonable,  but which may not prove to be accurate.
Since the  Company has a limited  operating  history,  it relies  heavily on the
prior banking  experience of its  management  and peer group data in formulating
our estimates and assumptions.  Thus, there is a risk that charge-offs in future
periods  could  exceed  the  allowance  for  loan  losses  or  that  substantial
additional  increases  in the  allowance  for loan  losses  could  be  required.
Additions  to the  allowance  for loan losses  would result in a decrease of the
Company's net income and, possibly, its capital.

The following table sets forth certain information with respect to the Company's
allowance for loan losses and the  composition of charge-offs and recoveries for
the five years ended December 31, 2006.

<TABLE>
<CAPTION>
Allowance for Loan Losses
  (Dollars in thousands)                                       2006            2005          2004            2003            2002
                                                               ----            ----          ----            ----            ----
<S>                                                         <C>             <C>            <C>            <C>             <C>
Total loans outstanding at end of year ................     $ 194,785       $ 139,152      $  90,304      $  54,931       $  10,145
                                                            =========       =========      =========      =========       =========
Average loans outstanding .............................     $ 165,430       $ 114,183      $  71,713      $  30,412       $   4,653
                                                            =========       =========      =========      =========       =========
Balance of allowance for loan losses at
   beginning of year ..................................     $   1,882       $   1,332      $     827      $     152       $       -
Loans charged off:
   Commercial and industrial ..........................           (50)              -              -             (1)              -
Provision for loan losses .............................           603             550            505            676             152
                                                            ---------       ---------      ---------      ---------       ---------
Balance of allowance for loan losses at
   end of year ........................................     $   2,435       $   1,882      $   1,332      $     827       $     152
                                                            =========       =========      =========      =========       =========

Allowance for loan losses to period end loans .........          1.25%           1.35%          1.47%          1.50%           1.50%
</TABLE>











                                       9
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                              Nonperforming Assets

Nonperforming  Assets:  At  December  31,  2006,  the  Bank had  eight  loans in
nonaccrual status totaling $653,313.  Gross income that would have been recorded
for 2006 would have been $55,699 if these loans had remained current. $18,403 of
interest  income on these loans was included in net income for the period.  Five
of these loans on nonaccrual totaling $586,115 are secured by real estate and no
loss is  anticipated,  the remaining  three loans are secured by automobiles and
minimal to no loss is  anticipated  on them.  There were no loans in  nonaccrual
status as of December 31, 2005. Additionally,  as of December 31, 2006, the Bank
had one loan 90  days,  or more  past due in the  amount  of  $425,000  accruing
interest.  This loan is secured by real  estate and in process of being  brought
current with no loss  anticipated.  There were no loans 90 days or more past due
at December 31, 2005,  however,  the company did have one criticized loan in the
amount of $1,214,446 that was secured by real estate as of that date. There were
no loans in nonaccrual  status,  or 90 days or more past due for the years ended
December 31, 2004, 2003 and 2002.

The Company's policy with respect to nonperforming assets is as follows. Accrual
of interest  generally will be discontinued on a loan when management  believes,
after considering  economic and business  conditions and collection efforts that
the  borrower's  financial  condition is such that the collection of interest is
doubtful.  A delinquent loan will generally be placed in nonaccrual  status when
it becomes 90 days or more past due unless the estimated net realizable value of
collateral  exceeds the principal balance and accrued  interest.  When a loan is
placed in nonaccrual status, all interest which has been accrued on the loan but
remains  unpaid  will be  reversed  and  deducted  from  current  earnings  as a
reduction of reported interest income. No additional interest will be accrued on
the loan balance  until the  collection of both  principal and interest  becomes
reasonably  certain.  When  a  problem  loan  is  finally  resolved,  there  may
ultimately be an actual writedown or charge-off of the principal  balance of the
loan which would necessitate additional charges to earnings.

Potential  Problem  Loans:  Management  has  identified  and maintains a list of
potential  problem  loans.  These are loans that are not included in  nonaccrual
status, or loans that are past due 90 days or more and still accruing. 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.  At
December  31,  2006,  loans in the  amount  of  $1,592,879  were  determined  by
management to be potential problem loans.


                         Noninterest Income and Expense

Noninterest  Income The  largest  component  of  noninterest  income was service
charges on deposit accounts,  which totaled $208,883 for the year ended December
31, 2006 versus  $191,393  for the same period in 2005.  The increase in service
charges on deposit  accounts is  primarily  due to an  increase  in  noninterest
bearing  deposit  accounts  during the reporting  period.  Residential  mortgage
origination  fees,  another major component of noninterest  income,  contributed
$107,068  in income for 2006,  which was  essentially  the same as the  $107,580
realized for the year ended  December 31, 2005.  Mortgage  loan activity in both
new  loans and  refinancing  slowed  during  2006 as a result  of  increases  in
mortgage lending rates during the period.

The following  table sets forth the principal  components of noninterest  income
for the year ended December 31, 2006, 2005 and 2004.

  (Dollars in thousands)                                2006      2005      2004
                                                        ----      ----      ----
Residential mortgage origination fees ............      $107      $108      $100
Service charges on deposit accounts ..............       209       191       133
Other income .....................................        97        75        40
                                                        ----      ----      ----
   Total noninterest income ......................      $413      $374      $273
                                                        ====      ====      ====


                                       10
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                   Noninterest Income and Expense - continued

Noninterest  Expense.  Salaries  and  employee  benefits  comprised  the largest
component of  noninterest  expense  which  totaled  $2,421,000,  $2,323,000  and
$2,323,000 for the years ended December 31, 2006,  2005 and 2004,  respectively.
This  increase of $98,000 or 4.2% from 2005 to 2006 was  primarily the result of
merit increases to employees during the year. The increase of $570,000, or 32.5%
in 2005 over 2004 was  largely  due to new  employees  hired to assist  with the
growth of the Company,  including the opening of a new branch office during 2005
and incentive  compensation for business  development  employees.  Occupancy and
furniture and equipment  expenses  increased by $174,000,  or 36.7% in 2006 over
2005,  largely as a result of the addition of a new branch in the fourth quarter
of 2005 and an additional new branch location added in August 2006. The increase
in  occupancy  expense  of  $48,000,  or 18.8% in 2005  over 2004 was due to the
overall  growth of the  Company  during the  period  and the  opening of the new
branch in 2005. Other operating  expenses totaled  $1,709,000,  $1,103,000,  and
$1,275,000 for the years ended December 31, 2006,  2005 and 2004,  respectively.
Data processing and related fees comprise one of the largest components of other
operating  expenses.  These  fees  increased  from  $313,000  for the year ended
December  31,  2005 to  $387,000  for the year ended  December  31,  2006.  This
increase  was  mostly due to the  addition  of the two new  branches  previously
mentioned  and an increase in the volume of loan and deposit  accounts  over the
period.  Data  processing fees increased by $87,000 in 2005 over the same period
of 2004,  mostly due to increased  loan and deposit volume over the two periods,
coupled with the opening of a new branch in late 2005.

As can be seen in the table below we had sizable increases in such categories as
advertising,  professional  fees, loan closing expenses and other expenses.  The
increases  in  advertising  and other  expenses  were  directly  related  to the
addition of the two new branches  mentioned above. We engaged security  services
for each new branch location during 2005 and 2006, which resulted in an increase
in  expenses  in the other  expense  category.  Additionally,  the  company  had
multiple  promotional  activities as well as a grand opening ceremony in 2006 to
announce the opening of our newest branch  location in August 2006  resulting in
additional  expenses in the other  expense  category of  advertising  over 2005.
Advertising expenses for 2005 increased by $110,000 over 2004 as several deposit
acquisitions  campaigns  were made to  attempt to  attract  local  core  deposit
growth. Additionally, advertising to promote the opening of a new branch in 2005
contributed  to this  increase in  expenses.  The  increase in the loan  closing
expense and  professional  fees categories was the result of a 40.0% increase in
loans outstanding in 2006 over 2005 and a 54.1% increase in loans outstanding in
2005 over the same period of 2004.  The company  engages  outside  resources  to
review our loans and supplement our loan grading and review system.


The following table sets forth the primary components of noninterest expense for
the years ended December 31, 2006 and 2005.
    (Dollars in thousands)                           2006       2005       2004
                                                     ----       ----       ----
Salaries and employee benefits ................     $2,421     $2,323     $1,753
Net occupancy .................................        408        304        256
Furniture and equipment .......................        241        171        147
Advertising and marketing expense .............        153         73         70
Office supplies, stationery, and printing .....        109         83         34
Data processing ...............................        387        313        226
Professional fees and services ................        244        108        199
Telephone .....................................         51         39         34
Loan closing costs ............................        110         44         55
 Postage ......................................         45         33         13
Other .........................................        610        411        361
                                                    ------     ------     ------
 Total noninterest expense ....................     $4,779     $3,902     $3,148
                                                    ======     ======     ======


                                       11
<PAGE>
                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                                 Earning Assets

Loans.  Loans are the largest  category of earning assets and typically  provide
higher yields than the other types of earning assets.  Loans also entail greater
credit and liquidity risks than most of the Company's investment  securities and
short-term investments, which management attempts to control and counterbalance.
Loans averaged  $165,430,854  in 2006 and  $114,182,692 in 2005. At December 31,
2006 and 2005, total loans were $194,784,723 and $139,152,300, respectively.

The following table sets forth the composition of the loan portfolio by category
for the five years ended December 31, 2006 and highlights the Company's  general
emphasis on mortgage lending.

<TABLE>
<CAPTION>
Composition of Loan Portfolio
December 31,                                                 2006                      2005                      2004
                                                             ----                      ----                      ----
(Dollars in thousands)                                            Percent                  Percent                  Percent
                                                       Amount    of Total       Amount    of Total       Amount     f Total
                                                       ------    --------       ------    --------       ------     -------
<S>                                                  <C>           <C>        <C>           <C>        <C>           <C>
Commercial and industrial .......................    $ 20,363      10.44%     $ 17,810      12.78%     $ 11,490      12.69%
Real estate
  Mortgage-residential ..........................      54,438      27.90        44,066      31.61        32,241      35.60
  Mortgage-nonresidential .......................      73,320      37.58        50,632      36.32        43,862      31.84
    Construction and land .......................      44,709      22.92        24,559      17.62             -      16.64
Consumer ........................................       2,258       1.16         2,327       1.67         2,922       3.23
                                                     --------      -----      --------      -----      --------      -----
     Total loans ................................     195,088     100.00%      139,394     100.00%       90,515     100.00%
                                                     --------      -----      --------      -----      --------      -----
Allowance for loan losses .......................       2,435                    1,882                    1,332
                   Deferred loan fees ...........         303                      242                      211
                                                     --------                 --------                 --------
       Net loans ................................    $192,350                 $137,270                 $ 88,972
                                                     ========                 ========                 ========
</TABLE>


<TABLE>
<CAPTION>
December 31,                                                 2003                      2002
                                                             ----                      ----
(Dollars in thousands)                                            Percent                  Percent
                                                       Amount    of Total       Amount    of Total
                                                       ------    --------       ------    --------

<S>                                                  <C>            <C>       <C>           <C>
Commercial and industrial ........................   $ 9,680        17.59%    $ 2,418       23.83%
Real estate
  Mortgage-residential ...........................    28,368        51.55       4,792       47.24
  Mortgage-nonresidential ........................    15,252        27.72       2,734       26.95
   Construction and land .........................         -         -              -           -
 Consumer ........................................     1,730         3.14         201        1.98
                                                     -------        -----     -------       -----
     Total loans .................................    55,030       100.00%     10,145      100.00%
                                                                   ======                  ======
Allowance for loan losses ........................       827                      152
Deferred loan fees ...............................         -                        -
                                                     -------                  -------
     Net loans ...................................   $54,203                  $ 9.993
                                                     =======                  =======
</TABLE>

The largest  component of loans in the Company's  loan  portfolio is real estate
mortgage  loans. At December 31, 2006, real estate mortgage loans totaled $172.4
million and represented 88.4% of the total loan portfolio. At December 31, 2005,
2004, 2003 and 2002,  real estate  mortgage loans totaled $119.0 million,  $76.1
million,  $43.6 million,  and $7.5 million,  respectively.  Real estate mortgage
loans represented 85.4%, 84.1%, 79.3% and 74.2% for the years ended December 31,
2005, 2004, 2003 and 2002, respectively.


                                       12
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                           Earning Assets - continued

In the context of this  discussion,  a "real estate mortgage loan" is defined as
any loan secured by real estate,  regardless  of the purpose of the loan.  It is
common  practice for  financial  institutions  in the  Company's  market area to
obtain a security interest in real estate whenever possible,  in addition to any
other available collateral. This collateral is taken to reinforce the likelihood
of the ultimate repayment of the loan and tends to increase the magnitude of the
real estate loan portfolio.

Residential  mortgage  loans totaled $54.4 million and $44.1 million at December
31, 2006 and 2005, respectively.  Residential real estate loans consist of first
and  second   mortgages  on  single  or  multi-family   residential   dwellings.
Nonresidential  mortgage loans,  which include  commercial loans and other loans
secured by multi-family properties and farmland, totaled $73.3 million and $50.6
million at  December  31,  2006 and 2005,  respectively.  Construction  and land
loans,  which are  secured by either  commercial  or  residential  real  estate,
totaled  $44.7  million  and  $24.6  million  at  December  31,  2006 and  2005,
respectively. The demand for residential and commercial real estate loans in the
Columbia  market  continues to be strong due to the relatively low interest rate
environment.

Commercial  and  industrial  loans  totaled  $20.4  million and $17.8 million at
December  31,  2006 and 2005,  respectively,  and  comprised  10.44% and 12.78%,
respectively, of the total portfolio.

At December 31, 2006,  consumer loans totaled $2.3 million and represented 1.16%
of the total loan portfolio. Consumer loans totaled $2.3 million at December 31,
2005 and represented 1.67% of the total loan portfolio.

The Company's loan portfolio reflects the diversity of its market. The Company's
offices are located in the Columbia, and Myrtle Beach, South Carolina areas. The
economy of the Columbia metropolitan area is significantly influenced by offices
of state and federal government,  a major state university,  and a United States
Army  base  and  training  center  as  well  as  numerous  small  and  mid-sized
businesses, the Myrtle Beach market is mainly influenced by tourism.  Management
expects both areas to remain  stable with  continued  growth in the near future.
The diversity of the economy creates opportunities for all types of lending. The
Company does not engage in foreign lending.

The repayment of loans in the loan  portfolio as they mature is also a source of
liquidity for the Company.  The following  table sets forth the Company's  loans
maturing within specified intervals at December 31, 2006.

       Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

<TABLE>
<CAPTION>
                                                                                 Over One
                                                                                   Year
  December 31, 2006                                            One Year           Through             Over
                                                               or Less           Five Years         Five Years            Total
                                                               -------           ----------         ----------            -----
<S>                                                         <C>                 <C>                <C>
Commercial and industrial ..........................        $ 13,402,482        $  7,009,209       $                    $ 20,411,691
Real estate ........................................          56,609,843          68,420,090           2,377,361         127,407,694
Construction and Land ..............................          22,641,564          22,067,099                              44,708,663
Consumer and other .................................           1,761,429             495,246                   -           2,256,675
                                                            ------------        ------------        ------------        ------------
                                                            $ 94,415,318        $ 97,991,644        $  2,377,761        $194,784,723
                                                            ============        ============        ============        ============

Loans maturing after one year with:
   Fixed interest rates ............................                                                                    $100,147,525
   Floating interest rates .........................                                                                         222,000
                                                                                                                        ------------
                                                                                                                        $100,369,405
                                                                                                                        ============
</TABLE>

The  information  presented  in the  above  table is  based  on the  contractual
maturities  of the  individual  loans,  including  loans which may be subject to
renewal  at their  contractual  maturity.  Renewal  of such  loans is subject to
review and credit approval as well as modification of terms upon their maturity.
Consequently,  management  believes this treatment  presents fairly the maturity
and repricing structure of the loan portfolio shown in the above table.



                                       13
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                           Earning Assets - continued

Investment  Securities.  The investment securities portfolio is also a component
of the Company's total earning assets.  Total  securities  averaged  $935,000 in
2006 and $3,429,587 in 2005. At December 31, 2006 and 2005, the total securities
portfolio was $644,400 and $3,500,888,  respectively.  All marketable  available
for sale  securities  in 2006 and 2005 and were  carried at fair  market  value.
Nonmarketable  securities  which  totaled  $644,400 and $511,200 at December 31,
2006 and 2005, respectively, were recorded at cost.

The  following  table sets forth the fair  value of the  securities  held by the
Company at December 31, 2006, 2005, and 2004.

Fair Value of Securities available-for-sale
  December 31,                                       2006       2005       2004
                                                     ----       ----       ----
(Dollars in thousands)
U.S. government agencies and government
   sponsored enterprises ......................     $    -     $2,990     $2,969
Nonmarketable equity securities ...............        644        511        392
                                                    ------     ------     ------

   Total securities available-for-sale ........     $  644     $3,501     $3,361
                                                    ======     ======     ======


Nonmarketable  equity  securities (stock in the Federal Reserve Bank of Richmond
and  the  Federal  Home  Loan  Bank  of  Atlanta)  totaled  $644,400,  $511,200,
and$392,400  and had yields of 11.5%,  6.76%,  and 4.68% at December  31,  2006,
2005, and 2004, respectively.

Other attributes of the securities  portfolio,  including yields and maturities,
are  discussed  above in  "Analysis  of  Changes  in Net  Interest  Income"  and
"Interest Sensitivity."

Short-Term  Investments.  Short-term  investments,  which  consist  primarily of
federal  funds sold,  averaged  $9,072,000 in 2005 and  $14,721,000  in 2006. At
December 31, 2006, there was $8,803,000 in short-term  investments.  These funds
are an important source of the Company's liquidity.  Federal funds are generally
invested in an earning capacity on an overnight basis.











                                       14
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations


                 Deposits and Other Interest-Bearing Liabilities

Average   interest-bearing   liabilities   totaled   $138,255,000  in  2006  and
$105,714,000 in 2005.

Deposits.   Average  total  deposits  totaled   $137,254,000   during  2006  and
$116,877,000  in 2005.  At  December  31,  2006 and 2005,  total  deposits  were
$175,582,000 and $135,746,000, respectively.

The  following  table sets forth the  deposits  of the Company by category as of
December 31, 2006, 2005, and 2004.

<TABLE>
<CAPTION>
Deposits
  December 31,                                               2006                      2005                          2004
                                                             ----                      ----                          ----
                                                                Percent of                   Percent of                   Percent of
  (Dollars in thousands)                             Amount       Deposits       Amount       Deposits        Amount        Deposits
                                                     ------       --------       ------       --------        ------        --------
<S>                                                <C>                 <C>      <C>                 <C>      <C>                 <C>
Demand deposit accounts .....................      $ 17,667            10%      $ 13,028            10%      $ 10,375            12%
NOW accounts ................................        10,307             6         13,635            10          6,047             7
Savings and money market
accounts ....................................        34,971            20         27,583            20         24,763            29
Time deposits $100,000 and over .............        65,234            37         43,705            32         26,901            31
Other time deposits .........................        47,403            27         37,795            28         18,008            21
                                                   --------           ---       --------           ---       --------           ---
   Total deposits ...........................      $175,582           100%      $135,746           100%      $ 86,094           100%
                                                   ========           ===       ========           ===       ========           ===
</TABLE>

At December 31, 2006,  total  deposits had increased by  $39,836,000,  or 29.3%,
from December 31, 2005. Total deposit increased by $49,652,000, or 57.7% in 2005
over the same  period in 2004.  The largest  increase  for all years was in time
deposits,  which  increased  $31,136,000  or 38.2%,  from  December  31, 2005 to
December 31, 2006 and  $36,591,000,  or 81.5% from December 31, 2004 to December
31, 2005. This increase in 2006 over 2005 was attributable to the opening of new
accounts  during 2006 with the addition of our two new branches  which opened in
November of 2005 and August of 2006,  coupled with an expanded  participation in
the brokered  certificate of deposit market to support the 40.0% growth in loans
outstanding  during  2006.  The  increase  in 2005 over  2004 was the  result of
increased  focus on the attraction of deposit  accounts  during the period,  and
expanded  participation in the brokered certificate of deposit market to support
the 54% loan growth realized by the during the period. Expressed in percentages,
noninterest-bearing deposits increased 35.6% in 2006 over 2005 and 25.6% in 2005
over 2004;  interest-bearing  demand  deposits  decreased  by 24.4% in 2006 from
2005,  but increased  125.5% in 2005 over 2004.  At December 31, 2006,  brokered
deposits totaled $45,446,000 which represents a 81.8% increase over the December
31, 2005.  Brokered  deposits  total of  $24,999,000  at December 31, 2005,  and
increase of 29.3% from December 31, 2004.

Core  deposits,  which  exclude  certificates  of deposit of  $100,000  or more,
provide a relatively  stable  funding  source for our loan  portfolio  and other
earning  assets.  Our core deposits were $110.3 million at December 31, 2006 and
$92.0 million at December 31, 2005, and $68.1 million at December 31, 2004.

Deposits, and particularly core deposits,  have been a primary source of funding
and have  enabled us to meet  successfully  both our  short-term  and  long-term
liquidity  needs.  We  anticipate  that such  deposits  will  continue to be our
primary source of funding in the future. Our loan-to-deposit ratio was 102.5% at
December  31,  2006,  98.9% at December 31, 2005 and 96.8% at December 31, 2004.
The maturity  distribution  of our time  deposits  over $100,000 at December 31,
2006, is set forth in the following table:


                                       15
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations


           Deposits and Other Interest-Bearing Liabilities - continued

            Maturities of Certificates of Deposit of $100,000 or More

<TABLE>
<CAPTION>
                                                                             After Six
                                                              After Three      Through       After
                                               Within Three   Through Six       Twelve      Twelve
  (Dollars in thousands)                           Months         Months        Months      Months        Total
                                                   ------         ------        ------      ------        -----
<S>                                              <C>            <C>          <C>           <C>          <C>
  Certificates of deposit of $100 or more ...    $  16,967      $  6,737     $  24,673     $ 16,857     $  65,234
</TABLE>

         Approximately  26% of our time  deposits  over  $100,000 had  scheduled
maturities  within three months,  and 74% had  maturities  within twelve months.
Large  certificate  of  deposit  customers  tend to be  extremely  sensitive  to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits.

Notes Payable and Advances from Federal Home Loan Bank.  The Company  executed a
line of credit  agreement with Chase Bank in May 2006 that allows the Company to
borrow up to $10 million if certain  covenants are met, with a variable interest
rate of 30 day LIBOR plus 150 basis points.  This line of credit with Chase Bank
matures in May 2008.  At December  31,  2006,  no funds had been drawn from this
line of credit.  We also have credit  available at the Federal Home Loan Bank of
Atlanta  up to 10% of the  Bank's  total  assets  reported  at the  end of  each
previous quarter.  At December 31, 2006, we had drawn $1,000,000 on this line at
a fixed rate of 4.51% with a maturity date of March 27, 2007.


                                     Capital

In 2005, the Company  completed a public offering of 1,000,000  shares of common
stock at  $16.00  per  share.  As part of the  offering,  the  Company  gave the
underwriter  an option to purchase an additional  150,000 shares at the offering
price for a period of 45 days  which  was  exercised  in  January,  2006.  $11.2
million of the proceeds  from the sale of the stock was invested in the Bank and
the remaining  net proceeds  were retained by the Company for general  corporate
purposes.

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 possibly  additional  discretionary  actions by
regulators  that,  if  undertaken,  could have a  material  effect on the Bank's
financial  position.  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  classifications  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  ratios of Tier 1 and total  capital as a
percentage of assets and off-balance-sheet exposures,  adjusted for risk weights
ranging  from  0% to  100%.  Tier 1  capital  of the  Bank  consists  of  common
shareholders'  equity,  excluding  the  unrealized  gain or  loss on  securities
available-for-sale,  minus certain  intangible assets. The Bank's Tier 2 capital
consists of the  allowance  for loan  losses and  subordinated  debt  subject to
certain limitations.  Total capital for purposes of computing the capital ratios
consists  of the  sum of  Tier 1 and  Tier 2  capital.  The  regulatory  minimum
requirements are 4% for Tier 1 capital and 8% for total risk-based capital.

The Bank is also  required  to  maintain  capital  at a minimum  level  based on
quarterly  average  assets,  which  is  known as the  leverage  ratio.  Only the
strongest  banks are allowed to maintain  capital at the minimum  requirement of
3%. All others are subject to maintaining ratios 1% to 2% above the minimum.



                                       16
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                               Capital - continued

The Federal Deposit  Insurance  Corporation has established  risk-based  capital
requirements  for  banks  and  the  Federal  Reserve  has  established   similar
requirements  for bank holding  companies.  As of December 31, 2006, the Company
exceeded the adequately capitalized  requirement of the Federal Reserve, and the
subsidiary  bank  exceeded  the  well  capitalized  and  adequately  capitalized
requirement of the FDIC as shown in the following table.

<TABLE>
<CAPTION>
                                                                                      Capital Ratios
                                                                                      --------------
                                                                                   Adequately Capitalized        Well Capitalized
(Dollars in thousands)                                             Actual               Requirement                Requirement
                                                                   ------               -----------                -----------
                                                             Amount      Ratio       Amount      Ratio       Amount        Ratio
                                                             ------      -----       ------      -----       ------        -----
The Bank
<S>                                                          <C>        <C>         <C>          <C>        <C>            <C>
  Total capital (to risk-weighted assets) ..............     $23,537    11.57%      $16,280      8.00%      $20,350        10.00%
  Tier 1 capital (to risk-weighted assets) .............      21,105    10.37%        7,273      4.00%       11,343         6.00%
  Tier 1 capital (to average assets) ...................      21,105    10.27%        7,357      4.00%        9,413         5.00%
The Company
  Total capital (to risk-weighted assets) ..............     $32,161    15.79%      $16,298      8.00%      $   N/A          N/A
  Tier 1 capital (to risk-weighted assets) .............      29,726    14.59%        7,282      4.00%          N/A          N/A
  Tier 1 capital (to average assets) ...................      29,726    14.64%        7,295      4.00%          N/A          N/A
</TABLE>

We have a credit  facility  with  Chase Bank which will allow us to borrow up to
$10 million,  subject to a number of conditions,  which we could use to increase
the  total  regulatory  capital  of the  Bank  up to 50% of tier 1  capital.  At
December 31, 2006, we did not have any monies borrowed on this line of credit.

                             Off-Balance Sheet Risk

Through its  operations,  the Bank has made  contractual  commitments  to extend
credit in the ordinary course of its business activities.  These commitments are
legally   binding   agreements  to  lend  money  to  the  Bank's   customers  at
predetermined  interest  rates for a specified  period of time.  At December 31,
2006, the Bank had issued  commitments  to extend credit of $38,942,723  through
various types of commercial lending arrangements.  Approximately  $36,469,434 of
these commitments to extend credit had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments to extend credit at December 31, 2006.
<TABLE>
<CAPTION>
                                                          After One     After Three
                                                           Through        Through
                                          Within One        Three          Twelve          Within       Greater Than
                                             Month          Months          Months        One Year        One Year         Total
                                             -----          ------          ------        --------        --------         -----
Unused commitments
<S>                                      <C>             <C>             <C>             <C>             <C>             <C>
   to extend credit ................     $   844,967     $ 1,948,946     $ 8,301,334     $11,095,247     $26,278,522     $37,373,769
Standby letters of credit ..........       1,500,000          33,000          35,954       1,568,954               -       1,568,954
                                         -----------     -----------     -----------     -----------     -----------     -----------
                                         $ 2,344,967     $ 1,981,946     $ 8,337,288     $12,664,201     $26,278,522     $38,942,723
                                         ===========     ===========     ===========     ===========     ===========     ===========
</TABLE>

The Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on its credit evaluation of the borrower. Collateral varies but
may include  accounts  receivable,  inventory,  property,  plant and  equipment,
commercial and residential real estate.


                                       17
<PAGE>

                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations

                           Return on Equity and Assets

The following  table shows the return on average  assets (net income  divided by
average total  assets),  return on average equity (net income divided by average
daily  equity),  and equity to assets ratio  (average  daily  equity  divided by
average total assets) for the period indicated. Since its inception, the Company
has not paid cash dividends.

                                                    2006    2005     2004
                                                    ----    ----     ----
Return on average assets ........................   1.04%   0.50%   (0.51%)
Return on average equity ........................   6.49%   5.90%   (3.98%)
Equity to assets ratio ..........................  14.64%   8.40%   12.87%

                     Critical Accounting Policies

The Company has adopted various accounting policies which govern the application
of  accounting  principles  generally  accepted  in  the  United  States  in the
preparation of our financial statements. Its significant accounting policies are
described in the notes to the consolidated  financial statements at December 31,
2006,  included  in its  Annual  Report  to  Shareholders,  and  filed  with the
Company's  Annual Report on Form 10-KSB.  Certain  accounting  policies  involve
significant  judgments  and  assumptions  which  have a  material  impact on the
carrying value of certain assets and liabilities.  These accounting policies are
considered to be critical  accounting  policies.  The judgments and  assumptions
used 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,  actual results could differ from these judgments and estimates
which  could  have a  material  impact on the  carrying  values  of  assets  and
liabilities and results of operations.

Management  believes  the  allowance  for loan  losses is a critical  accounting
policy that  requires  the most  significant  judgments  and  estimates  used in
preparation of the consolidated  financial  statements.  Refer to the portion of
this  discussion  that addresses the allowance for loan losses for a description
of our processes and methodology for determining our allowance for loan losses.

                              Liquidity Management

Liquidity management involves monitoring the Company's sources and uses of funds
in order to meet its day-to-day cash flow requirements while maximizing profits.
Liquidity  represents  the  ability of a Company to convert  assets into cash or
cash  equivalents  without  significant  loss and to raise  additional  funds by
increasing liabilities.  Without proper liquidity management,  the Company would
not be able to perform the primary  function  of a  financial  intermediary  and
would, therefore, not be able to meet the needs of the communities it serves.

Liquidity  management  is made more  complex  because  different  balance  sheet
components are subject to varying  degrees of management  control.  For example,
the timing of maturities of the investment  portfolio is relatively  predictable
and subject to control at the time investment  decisions are made. However,  net
deposit  inflows and  outflows are far less  predictable  and are not subject to
nearly the same  degree of control.  The Company  also has the ability to obtain
funds from various financial institutions should the need arise.

                               Impact of Inflation

Unlike  most  industrial  companies,  the assets and  liabilities  of  financial
institutions  such as the Bank are  primarily  monetary  in  nature.  Therefore,
interest rates have a more significant  effect on the Bank's performance than do
the effects of changes in the general rate of inflation and change in prices. In
addition, interest rates do not necessarily move in the same direction or in the
same  magnitude as the prices of goods and  services.  As discussed  previously,
management seeks to manage the relationships  between interest  sensitive assets
and  liabilities  in order to protect  against wide interest rate  fluctuations,
including those resulting from inflation.


                                       18
<PAGE>


                          CAROLINA NATIONAL CORPORATION
           Management's Discussion and Analysis or Plan of Operations




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors
Carolina National Corporation
Columbia, South Carolina


We have  audited  the  accompanying  consolidated  balance  sheets  of  Carolina
National  Corporation  as  of  December  31,  2006  and  2005  and  the  related
consolidated  statements  of  operations,  changes in  shareholders'  equity and
comprehensive  income,  and cash flows for each of the years then  ended.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted  our audits in  accordance  with  standards  of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 Carolina National
Corporation,  as of December 31, 2006 and 2005 and the results of its operations
and its  cash  flows  for each of the  years  then  ended,  in  conformity  with
accounting principles generally accepted in the United States of America.



s/Elliott Davis, LLC
----------------------------
Elliott Davis, LLC
Columbia, South Carolina
March 16, 2007




                                       19
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                     2006                 2005
                                                                                                     ----                 ----
Assets:
  Cash and cash equivalents:
<S>                                                                                             <C>                   <C>
    Cash and due from banks ............................................................        $   3,232,394         $   3,109,712
    Federal funds sold .................................................................            8,803,000            17,858,000
                                                                                                -------------         -------------
        Total cash and cash equivalents ................................................           12,035,394            20,967,712
                                                                                                -------------         -------------
  Investment securities:
    Securities available for sale ......................................................                    -             2,989,688
    Nonmarketable equity securities ....................................................              644,400               511,200
                                                                                                -------------         -------------
        Total investment securities ....................................................              644,400             3,500,888
                                                                                                -------------         -------------
  Loans receivable .....................................................................          194,784,723           139,152,300
    Less allowance for loan losses .....................................................            2,434,900             1,882,099
                                                                                                -------------         -------------
        Loans, net .....................................................................          192,349,823           137,270,201
                                                                                                -------------         -------------
  Premises, furniture and equipment, net ...............................................            1,486,250               923,858
  Accrued interest receivable ..........................................................            1,119,030               649,818
  Other assets .........................................................................            1,276,905             1,544,126
                                                                                                -------------         -------------
        Total assets ...................................................................        $ 208,911,802         $ 164,856,603
                                                                                                =============         =============
Liabilities:
  Deposits:
    Noninterest-bearing transaction accounts ...........................................        $  17,666,870         $  13,027,867
    Interest-bearing transaction accounts ..............................................           10,307,063            13,635,279
    Savings and money market ...........................................................           34,971,834            27,582,626
    Time deposits $100,000 and over ....................................................           65,233,757            43,705,039
    Other time deposits ................................................................           47,402,659            37,794,899
                                                                                                -------------         -------------
        Total deposits .................................................................          175,582,183           135,745,710
  Advances from Federal Home Loan Bank .................................................            1,000,000             1,000,000
  Accrued interest payable .............................................................            1,531,840               905,271
  Other liabilities ....................................................................              204,804               837,708
                                                                                                -------------         -------------
        Total liabilities ..............................................................          178,318,827           138,488,689
                                                                                                -------------         -------------
Commitments and contingencies (Notes 10 and 12)
Shareholders' equity:
  Preferred stock, 10,000,000 shares authorized, none issued ...........................                    -                     -
  Common  stock, no par value, 20,000,000 shares authorized; 2,578,503 and
    2,427,303 shares issued at December 31, 2006
    and 2005, respectively .............................................................           31,061,361            28,772,288
  Retained deficit .....................................................................             (468,386)           (2,397,568)
  Accumulated other comprehensive loss .................................................                    -                (6,806)
                                                                                                -------------         -------------
        Total shareholders' equity .....................................................           30,592,975            26,367,914
                                                                                                -------------         -------------
        Total liabilities and shareholders' equity .....................................        $ 208,911,802         $ 164,856,603
                                                                                                =============         =============
</TABLE>

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



                                       20
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Consolidated Statements of Operations
                 For the years ended December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                                    2006                    2005
                                                                                                    ----                    ----
Interest income:
<S>                                                                                             <C>                      <C>
  Loans, including fees ..........................................................              $12,782,955              $ 7,654,084
  Investment securities:
     Taxable .....................................................................                    8,848                   60,000
     Nonmarketable equity securities .............................................                   74,390                   31,068
  Federal funds sold .............................................................                  681,979                  279,319
                                                                                                -----------              -----------
        Total ....................................................................               13,548,172                8,024,471
                                                                                                -----------              -----------
Interest expense:
  Time deposits $100,000 and over ................................................                2,614,004                1,256,654
  Other deposits .................................................................                2,883,333                1,566,036
  Note payable ...................................................................                        -                  117,809
  Other ..........................................................................                   45,179                   12,030
                                                                                                -----------              -----------
        Total ....................................................................                5,542,516                2,952,529
                                                                                                -----------              -----------
Net interest income ..............................................................                8,005,656                5,071,942
Provision for loan losses ........................................................                  603,355                  550,362
                                                                                                -----------              -----------
Net interest income after provision for loan losses ..............................                7,402,301                4,521,580
                                                                                                -----------              -----------
Noninterest income:
  Service charges on deposit accounts ............................................                  208,883                  191,393
  Residential mortgage origination fees ..........................................                  107,068                  107,580
  Advances from Federal Home Loan Bank ...........................................                   97,281                   74,709
                                                                                                -----------              -----------
     Total noninterest income ....................................................                  413,232                  373,682
                                                                                                -----------              -----------
Noninterest expenses:
  Salaries and employee benefits .................................................                2,420,760                2,323,102
  Net occupancy ..................................................................                  410,104                  304,328
  Furniture and equipment ........................................................                  239,102                  170,744
  Other operating ................................................................                1,709,028                1,103,578
                                                                                                -----------              -----------
     Total noninterest expense ...................................................                4,778,994                3,901,752
                                                                                                -----------              -----------
Income before income taxes .......................................................                3,036,539                  993,510
Income tax expense ...............................................................                1,107,357                  346,277
                                                                                                -----------              -----------
Net income .......................................................................              $ 1,929,182              $   647,233
                                                                                                ===========              ===========
Earnings per share
Basic earnings per share .........................................................              $       .75              $       .44
                                                                                                ===========              ===========
Diluted earnings per share .......................................................              $       .73              $       .42
                                                                                                ===========              ===========
Average shares outstanding - basic ...............................................                2,575,002                1,473,878
                                                                                                ===========              ===========
Average shares outstanding - diluted .............................................                2,659,265                1,552,982
                                                                                                ===========              ===========
</TABLE>

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


                                       21
<PAGE>

                          CAROLINA NATIONAL CORPORATION

           Consolidated Statements of Changes in Shareholders' Equity
                            and Comprehensive Income
                 For the years ended December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                                     Accumulated
                                                         Common Stock                                   Other
                                                         ------------              Retained         Comprehensive
                                                   Shares           Amount           Deficit         Income (Loss)          Total
                                                   ------           ------           -------         -------------          -----
<S>                                              <C>            <C>               <C>                <C>                <C>
Balance, December 31, 2004 .............         1,427,303      $ 13,994,796      $ (3,044,801)      $    (24,881)      $ 10,925,114

Issuance of common stock, net ..........         1,000,000        14,777,492                                             14,777,492

Net income .............................                                               647,233                              647,233

Other comprehensive income,
  net of tax ...........................                                                                    18,075            18,075
                                                                                                                        ------------

Comprehensive income ...................                                                                                     665,308
                                              ------------      ------------      ------------       ------------       ------------

Balance, December 31, 2005 .............         2,427,303      $ 28,772,288      $ (2,397,568)      $     (6,806)      $ 26,367,914
                                              ============      ============      ============       ============       ------------

Issuance of common stock, net ..........           150,000         2,245,344                                              2,245,344

Stock-based compensation ...............                              31,729                                                 31,729

Exercise of Options ....................             1,200            12,000                                                 12,000

Net income .............................                                              1,929,182                           1,929,182

Other comprehensive income,
  net of tax ...........................                                                                    6,806             6,806
                                                                                                                        ------------

Comprehensive income ...................                                                                                  1,935,988
                                              ------------      ------------      ------------       ------------       ------------

Balance, December 31, 2006 .............         2,578,503      $ 31,061,361      $   (468,386)     $           -       $ 30,592,975
                                              ============      ============      ============       ============       ============
</TABLE>

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


                                       22
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Consolidated Statements of Cash Flows
                 For the years ended December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                                 2006                      2005
                                                                                                 ----                      ----
Cash flows from operating activities:
<S>                                                                                          <C>                       <C>
  Net income ...................................................................             $  1,929,182              $    647,233
  Adjustments to reconcile net loss to net cash
     provided by operating activities:
        Provision for loan losses ..............................................                  603,355                   549,899
        Depreciation and amortization expense ..................................                  239,933                   165,184
        Deferred income tax expense ............................................                  630,179                   275,694
            Stock based Compensation Expense ...................................                   31,729                         -
        Increase in accrued interest receivable ................................                 (469,212)                 (277,291)
        Increase in accrued interest payable ...................................                  626,569                   616,182
            Loss on disposal of asset ..........................................                    7,200                         -
        Increase in other assets ...............................................                 (125,396)                 (115,247)
        (Decrease) increase in other liabilities ...............................                 (873,972)                  540,799
                                                                                             ------------              ------------
           Net cash provided by operating activities ...........................                2,599,567                 2,402,453
                                                                                             ------------              ------------
Cash flows from investing activities:
  Purchases of nonmarketable equity securities .................................                 (133,200)                 (118,800)
  Calls or maturities of securities held to maturity ...........................                3,000,000                         -
  Net increase in loans ........................................................              (55,682,977)              (48,848,551)
  Purchase of premises, furniture and equipment ................................                 (809,525)                 (378,531)
                                                                                             ------------              ------------
           Net cash used by investing activities ...............................              (53,625,702)              (49,345,882)
                                                                                             ------------              ------------
Cash flows from financing activities:
  Net increase in demand deposits, interest-bearing
     transaction accounts and savings accounts .................................                8,699,995                13,061,316
  Net increase in certificates of deposit and
     other time deposits .......................................................               31,136,478                36,590,470
  Repayment of notes payable ...................................................                        -                  (900,000)
  Advances from Federal Home Loan Bank .........................................                        -                 1,000,000
   Proceeds from exercise of stock options .....................................                   12,000                         -
  Issuance of common stock, net ................................................                2,245,344                14,777,492
                                                                                             ------------              ------------
        Net cash provided by financing activities ..............................               42,093,817                64,529,278
                                                                                             ------------              ------------
Net increase (decrease) in cash and cash equivalents ...........................               (8,932,318)               17,585,849
Cash and cash equivalents, beginning of year ...................................               20,967,712                 3,381,863
                                                                                             ------------              ------------
Cash and cash equivalents, end of year .........................................             $ 12,035,394              $ 20,967,712
                                                                                             ============              ============
</TABLE>

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



                                       23
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization - Carolina  National  Corporation (the Company) was incorporated on
February 14, 2000,  to be a bank holding  company for Carolina  National  Bank &
Trust  Company (the Bank).  Carolina  National  Bank & Trust  Company  commenced
business on July 15, 2002.  The  principal  business  activity of the Bank is to
provide banking  services to domestic  markets,  principally in Richland County,
South Carolina and loan production office in Horry County,  South Carolina.  The
Bank is chartered  under the National  Bank Act, and its deposits are insured by
the  Federal  Deposit  Insurance   Corporation  up  to  applicable  limits.  The
consolidated financial statements include the accounts of the parent company and
its wholly-owned  subsidiary after  elimination of all significant  intercompany
balances and transactions.

Management's Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial  statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.

Material  estimates that are  particularly  susceptible  to  significant  change
relate to the  determination  of the  allowance  for losses on loans,  including
valuation  allowances  for  impaired  loans,  and the  valuation  of real estate
acquired  in  connection  with  foreclosures  or in  satisfaction  of loans.  In
connection  with the  determination  of the  allowances  for losses on loans and
valuation of foreclosed real estate,  management obtains independent  appraisals
for significant  properties.  Management must also make estimates in determining
the estimated useful lives and methods for depreciating premises and equipment.

While  management  uses available  information to recognize  losses on loans and
foreclosed  real estate,  future  additions to the  allowances  may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an  integral  part of their  examination  process,  periodically  review  the
Company's  allowances  for  losses on loans and  foreclosed  real  estate.  Such
agencies may require the Company to recognize  additions to the allowances based
on their  judgments  about  information  available  to them at the time of their
examination.  Because  of these  factors,  it is  reasonably  possible  that the
allowances for losses on loans and foreclosed real estate may change  materially
in the near term.

Concentrations of Credit Risk - Financial instruments, which potentially subject
the Company to  concentrations  of credit  risk,  consist  principally  of loans
receivable,  investment  securities,  federal  funds sold and  amounts  due from
banks.

The Company makes loans to  individuals,  small and medium sized  businesses for
various personal and commercial  purposes  primarily within the Columbia,  South
Carolina  metropolitan area. The Company's loan portfolio is not concentrated in
loans  to any  single  borrower  or a  relatively  small  number  of  borrowers.
Additionally,  Management is not aware of any concentrations of loans to classes
of  borrowers  or  industries  that  would be  similarly  affected  by  economic
conditions.

In  addition  to  monitoring  potential  concentrations  of loans to  particular
borrowers or groups of borrowers,  industries and geographic regions, management
monitors  exposure to credit risk from  concentrations  of lending  products and
practices such as loans that subject borrowers to substantial  payment increases
(e.g.  principal  deferral periods,  loans with initial  interest-only  periods,
etc), and loans with high loan-to-value  ratios.  Management has determined that
there is no concentration of credit risk associated with its lending policies or
practices.  Additionally,  there are industry  practices  that could subject the
Company to  increased  credit risk should  economic  conditions  change over the
course of a loan's life. For example,  the Company makes variable rate loans and
fixed rate  principal-amortizing  loans with maturities  prior to the loan being
fully paid (i.e.,  balloon  payment  loans).  These loans are  underwritten  and
monitored to manage the associated risks.  Therefore,  management  believes that
these particular practices do not subject the Company to unusual credit risk.

As of  December  31,  2006,  the company had no  available  for sale  investment
securities.  At December 31, 2005 the Company's  investment  portfolio consisted
principally  of   obligations  of  the  United  States,   its  agencies  or  its
corporations.   In  the  opinion  of  management,   this  did  not  represent  a
concentration of credit risk in its investment portfolio. The Company places its
deposits and  correspondent  accounts  with and sells its federal  funds to high
quality   institutions.   Management   believes   credit  risk  associated  with
correspondent accounts is not significant.



                                       24
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Securities  Available-for-Sale  - Securities  available-for-sale  are carried at
amortized  cost and  adjusted  to  estimated  market  value by  recognizing  the
aggregate  unrealized gains or losses in a valuation  account.  Aggregate market
valuation  adjustments  are  recorded  in  shareholders'  equity net of deferred
income taxes.  Reductions  in market value  considered by management to be other
than temporary are reported as a realized loss and a reduction in the cost basis
of the security.  The adjusted cost basis of investments  available-for-sale  is
determined by specific  identification and is used in computing the gain or loss
upon sale.

Nonmarketable  Equity Securities - Nonmarketable  equity securities  include the
cost of the  Company's  investment  in the stock of the Federal  Reserve Bank of
Richmond  and the Federal  Home Loan Bank of Atlanta.  The stocks have no quoted
market value and no ready  market  exists.  Investment  in the Federal Home Loan
Bank is a condition of borrowing  from the Federal Home Loan Bank, and the stock
is pledged to collateralize such borrowings.  At December 31, 2006 and 2005, the
Company's  investment in Federal Home Loan Bank stock was $374,400 and $241,200,
respectively.  The investment in Federal Reserve Bank stock totaled  $270,000 at
December 31, 2006 and 2005. Dividends received on these stocks are included as a
separate component of interest income.

Loans Receivable - Loans are stated at their unpaid principal balance.  Interest
income is  computed  using the simple  interest  method and is  recorded  in the
period earned. Fees earned on loans are amortized over the life of the loan.

When  serious  doubt  exists as to the  collectibility  of a loan or when a loan
becomes  contractually  90 days past due as to principal  or interest,  interest
income is generally  discontinued  unless the estimated net realizable  value of
collateral  exceeds the principal  balance and accrued  interest.  When interest
accruals are discontinued, income earned but not collected is reversed.

The Company  identifies  impaired loans through its normal  internal loan review
process.  Loans  on  the  Company's  problem  loan  watch  list  are  considered
potentially impaired loans. These loans are evaluated in determining whether all
outstanding  principal  and interest are expected to be collected in  accordance
with the  contractual  terms.  Loans are not  considered  impaired  if a minimal
payment  delay occurs and all amounts  due,  including  accrued  interest at the
contractual interest rate for the period of delay, are expected to be collected.
At December 31, 2006, management has determined that the Company had no impaired
loans.

Allowance for Loan Losses - 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  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,  and prevailing economic  conditions.  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.

Impaired  Loans - The  Bank  accounts  for  impaired  loans in  accordance  with
Financial  Accounting  Standards Board (FASB) Statement of Financial  Accounting
Standard  (SFAS) No. 114,  "Accounting  by Creditors for  Impairment of a Loan."
This statement requires that all lenders value loans at the loan's fair value if
it is  probable  that the  lender  will be unable to  collect  all  amounts  due
according to the terms of the loan agreement. Fair value may be determined based
upon the present  value of expected  cash flows,  market  price of the loan,  if
available,  or value of the  underlying  collateral.  Expected  cash  flows  are
required to be discounted at the loan's  effective  interest rate.  SFAS No. 114
was  amended  by SFAS No.  118 to allow a lender  to use  existing  methods  for
recognizing  interest  income on an impaired  loan and by  requiring  additional
disclosures about how a creditor recognizes interest income on an impaired loan.

Under SFAS No. 114, as amended by SFAS No. 118, 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. When this doubt does not
exist,  cash  receipts  are  applied  under  the  contractual  terms of the loan
agreement first to interest income then to principal.



                                       25
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Impaired Loans (continued) - 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.

Premises, Furniture and Equipment - Premises, furniture and equipment are stated
at cost,  less  accumulated  depreciation.  The  provision for  depreciation  is
computed by the  straight-line  method,  based on the estimated useful lives for
buildings  of 40  years  and  for  furniture  and  equipment  of 5 to 10  years.
Leasehold  improvements  are amortized  over the life of the lease.  The cost of
assets sold or otherwise  disposed of and the related allowance for depreciation
are eliminated from the accounts and the resulting gains or losses are reflected
in the income  statement when incurred.  Maintenance  and repairs are charged to
current expense. The costs of major renewals and improvements are capitalized.

Residential  Loan  Origination  Fees  -  The  Company  offers  residential  loan
origination  services to its customers in its immediate  market area.  The loans
are offered on terms and prices offered by the Company's  correspondents and are
closed in the name of the correspondents. The Company receives fees for services
it provides in conjunction with the origination  services it provides.  The fees
are recognized at the time the loans are closed by the Company's correspondent.

Income Taxes - Income taxes are the sum of amounts  currently  payable to taxing
authorities  and the net changes in income taxes payable or refundable in future
years.  Income  taxes  deferred  to future  years  are  determined  utilizing  a
liability   approach.   This  method  gives  consideration  to  the  future  tax
consequences  associated with differences  between financial  accounting and tax
bases of certain assets and liabilities  which are principally the allowance for
loan  losses,  depreciable  premises  and  equipment,  and  net  operating  loss
carryforwards.

Advertising  Expense -  Advertising  and public  relations  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 expended in the period in which the direct mailings are
sent.  Advertising  and public  relations  costs of $152,788  and  $73,297  were
included in the Company's results of operations for 2006 and 2005, respectively.

Retirement  Benefits - The Company has a 401(k) Plan in place for the benefit of
all  eligible  employees.  The Company  contributes  to the Plan  annually  upon
approval by the Board of Directors.  The amount of the contributions  made is at
the  discretion  of the Board.  Contributions  made to the Plan in 2006 and 2005
amounted to $49,594 and $35,765, respectively.




                                       26
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Stock-Based  Compensation - The Company has a stock-based employee  compensation
plan which is further  described  in Note 14.  For the year ended  December  31,
2005,  the  Company   utilized  the  intrinsic  value  method  under  Accounting
Principles Board Opinion No. 25,  "Accounting for Stock Issued to Employees" (as
amended) ("APB 25").  Under the intrinsic value method  prescribed by APB 25, no
compensation  cost was  recognized for the Company's  stock options  because the
option exercise price equaled the market price on the grant date.

Effective  January 1, 2006,  the Company  adopted SFAS No. 123  (revised  2004),
"Share-Based  Payment" ("SFAS No. 123 (R)"). SFAS No. 123(R),  requires that the
fair value of share-based  payments to employees,  including  stock options,  be
recognized as compensation expense in the statement of operations.

In adopting SFAS No. 123(R), the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the fair
value recognition method.  Under the modified  prospective method,  compensation
cost is  recognized  from the adoption  date  forward for all new stock  options
granted and for any outstanding  unvested awards as if the fair value method had
been  applied  to those  awards as of the date of  grant.  The  following  table
illustrates the effect on net income and earnings per share as if the fair value
based method had been  applied to all  outstanding  and unvested  awards in each
period.

In addition,  the Company has  outstanding  stock  warrants which were issued to
directors  of the  Bank in  connection  with  the  organization  of the  Bank as
described in Note 13. The following  table  illustrates the effect on net income
and  earnings  per share if the Company  had applied the fair value  recognition
provisions of SFAS No. 123(R), to stock-based employee compensation for both the
stock options and stock warrants in 2006 and 2005.

<TABLE>
<CAPTION>
                                                                                                     Year Ended December 31,
                                                                                                     -----------------------
                                                                                                  2006                     2005
                                                                                                  ----                     ----
<S>                                                                                        <C>                        <C>
Net income, as reported ......................................................             $      1,929,182           $     647,233
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects .................................                      (31,729)                (56,735)
Add:  Amount of stock-based compensation included
   in net income as reported .................................................                       31,729                       -
                                                                                           ----------------             -----------
Pro forma net income including stock based cost
  based on the fair value method .............................................             $      1,929,182           $     590,498
                                                                                           ================             ===========
        Income per share:
  Basic - as reported ........................................................             $            .75             $       .44
                                                                                           ================             ===========
  Basic - pro forma ..........................................................             $            .75             $       .41
                                                                                           ================             ===========
  Diluted - as reported ......................................................             $            .73             $       .42
                                                                                           ================             ===========
  Diluted - pro forma ........................................................             $            .73             $       .38
                                                                                           ================             ===========
</TABLE>

In calculating the pro forma disclosures, the fair value of options and warrants
granted is  estimated  as of the date  granted  using the  Black-Scholes  option
pricing model with the following weighted-average assumptions used for grants in
2006;  dividend  yield of 0  percent;  expected  volatility  of  19.88  percent;
risk-free  interest  rate of 4.93  percent;  and expected  life of 7 years.  The
assumptions  used for  grants in 2005;  dividend  yield of 0  percent,  expected
volatility  of 24.98  percent;  risk-free  interest  rate of 4.05  percent;  and
expected life of 7 years.



                                       27
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Income  Per  Share - Basic  income  per share  represents  income  available  to
shareholders divided by the weighted-average number of common shares outstanding
during the period.  Dilutive income per share reflects  additional common shares
that would have been  outstanding if dilutive  potential  common shares had been
issued. Potential common shares that may be issued by the Company relate to both
outstanding  warrants and stock  options and are  determined  using the treasury
stock method.

Comprehensive  Income - Accounting  principles generally require that recognized
revenue,  expenses, gains and losses be included in net income. Although certain
changes  in assets  and  liabilities,  such as  unrealized  gains and  losses on
available-for-sale  securities,  are  reported  as a separate  component  of the
equity  section of the balance  sheet,  such items,  along with net income,  are
components of comprehensive income.

The  components  of other  comprehensive  income and related tax effects for the
years ended December 31, 2006 and 2005 are as follows:
<TABLE>
<CAPTION>
                                                                                                        2006                  2005
                                                                                                        ----                  ----
<S>                                                                                                  <C>                   <C>
   Unrealized holding gains on securities available-for-sale ...........................             $ 10,312              $ 20,625
   Reclassification adjustment for losses realized in net income .......................                    -                     -
                                                                                                     --------              --------
   Net unrealized gains on securities available-for-sale ...............................               10,312                20,625
   Tax effect ..........................................................................               (3,506)               (2,550)
                                                                                                     --------              --------
   Net-of-tax amount ...................................................................             $  6,806              $ 18,075
                                                                                                     ========              ========
</TABLE>

Statement of Cash Flows - For purposes of reporting  cash flows in the financial
statements,  the  Company  considers  certain  highly  liquid  debt  instruments
purchased with a maturity of three months or less to be cash  equivalents.  Cash
equivalents  include  amounts due from banks and federal funds sold.  Generally,
federal funds are sold for one-day periods.

Interest paid on deposits and other borrowings totaled $4,915,947 and $2,952,529
for the years ended December 31, 2006 and 2005, respectively.

Income  taxes  paid for the  years  ended  December  31,  2006 and 2005  totaled
$732,688 and $17,980, respectively.

Changes in the valuation account of securities available-for-sale, including the
deferred tax effects,  are considered  noncash  transactions for purposes of the
statement  of cash  flows  and are  presented  in  detail  in the  notes  to the
financials.

Off-Balance-Sheet  Financial  Instruments - In the ordinary  course of business,
the Company enters into  off-balance-sheet  financial instruments  consisting of
commitments to extend credit and letters of credit. These financial  instruments
are  recorded  in the  financial  statements  when they  become  payable  by the
customer.


                                       28
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent  Accounting  Pronouncements  -  The  following  is a  summary  of  recent
authoritative pronouncements:

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of Liabilities,"  with respect to the accounting for separately
recognized servicing assets and servicing liabilities.  SFAS No. 156 requires an
entity to  recognize  a  servicing  asset or  servicing  liability  each time it
undertakes  an  obligation  to  service a  financial  asset by  entering  into a
servicing  contract;  requires all separately  recognized  servicing  assets and
servicing  liabilities to be initially  measured at fair value,  if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption,  permits a one-time reclassification of available-for-sale  securities
to trading  securities by entities with  recognized  servicing  rights,  without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some  manner as  offsetting  the  entity's  exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value;  and requires  separate  presentation of servicing assets
and servicing  liabilities  subsequently measured at fair value in the statement
of financial position and additional  disclosures for all separately  recognized
servicing assets and servicing liabilities.  An entity should adopt SFAS No. 156
as of the  beginning of its first fiscal year that begins  after  September  15,
2006.  The Company  does not  believe  the  adoption of SFAS No. 156 will have a
material impact on its financial position, results of operations or cash flows.

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

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

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined  Benefit  Pension and Other  Postretirement  Plans" ("SFAS 158"),  which
amends  SFAS  87 and  SFAS  106 to  require  recognition  of the  overfunded  or
underfunded  status of pension  and other  postretirement  benefit  plans on the
balance  sheet.  Under  SFAS 158,  gains and  losses,  prior  service  costs and
credits,  and any remaining  transition  amounts under SFAS 87 and SFAS 106 that
have  not  yet  been  recognized  through  net  periodic  benefit  cost  will be
recognized in accumulated other comprehensive income, net of tax effects,  until
they are amortized as a component of net periodic cost. The measurement  date --
the date at which the  benefit  obligation  and plan  assets are  measured -- is
required  to be the  company's  fiscal  year  end.  SFAS  158 is  effective  for
publicly-held  companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after  December 15, 2008.  The Company does not have a defined  benefit  pension
plan. Therefore,  SFAS 158 will not impact the Company's financial conditions or
results of operations.

In  September,  2006,  The FASB ratified the  consensuses  reached by the FASB's
Emerging  Issues Task Force ("EITF")  relating to EITF 06-4  "Accounting for the
Deferred   Compensation  and  Postretirement   Benefit  Aspects  of  Endorsement
Split-Dollar  Life  Insurance   Arrangements."   EITF  06-4  addresses  employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability  for future  benefits in accordance  with SFAS No. 106,  "Employers'
Accounting  for  Postretirement  Benefits  Other Than  Pensions",  or Accounting
Principles Board ("APB") Opinion No. 12, "Omnibus  Opinion--1967".  EITF 06-4 is
effective for fiscal years  beginning  after December 15, 2007.  Entities should
recognize  the effects of  applying  this Issue  through  either (a) a change in


                                       29
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

accounting principle through a cumulative-effect adjustment to retained earnings
or to other  components  of equity or net assets in the  statement  of financial
position  as of the  beginning  of the  year  of  adoption  or (b) a  change  in
accounting principle through retrospective application to all prior periods. The
Company does not believe the  adoption of EITF 06-4 will have a material  impact
on its financial position, results of operations and cash flows.

In September 2006, the FASB ratified the consensus reached related to EITF 06-5,
"Accounting for Purchases of Life  Insurance--Determining  the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4,  Accounting for
Purchases  of Life  Insurance."  EITF 06-5  states  that a  policyholder  should
consider  any  additional  amounts  included  in the  contractual  terms  of the
insurance  policy other than the cash surrender  value in determining the amount
that could be realized under the insurance contract.  EITF 06-5 also states that
a policyholder should determine the amount that could be realized under the life
insurance   contract   assuming   the   surrender  of  an   individual-life   by
individual-life  policy (or certificate by certificate in a group policy).  EITF
06-5 is  effective  for fiscal years  beginning  after  December  15, 2006.  The
Company does not believe the  adoption of EITF 06-5 will have a material  impact
on its financial position, results of operations or cash flows.

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

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

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations and cash flows.




                                       30
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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

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

Reclassifications   -  Certain  captions  and  amounts  in  the  2005  financial
statements were reclassified to conform with the 2006 presentation.


NOTE 2 - CASH AND DUE FROM BANKS

The Company is required to maintain cash balances with The Bankers Bank to cover
all cash letter transactions. At December 31, 2006 and 2005, the requirement was
met by the cash  balance in the account.  The Bank is also  required to maintain
average reserve  balances,  computed by applying  prescribed  percentages to its
various  types of deposits,  either at the bank,  or on deposit with the Federal
Reserve Bank. At December 31, 2006 and 2005, these required reserves were met by
vault cash.

NOTE 3 - INVESTMENT SECURITIES
The Company had no  investment  securities  available  for sale at December  31,
2006.  At  December  31, 2005  securities  available-for-sale  consisted  of the
following:

<TABLE>
<CAPTION>
                                                                                     Gross Unrealized
                                                              Amortized              ----------------                    Estimated
                                                                 Cost               Gains               Losses           Fair Value
                                                                 ----               -----               ------           ----------
December 31, 2005
<S>                                                           <C>                 <C>                 <C>                 <C>
Government sponsored enterprises ...................          $3,000,000          $        -          $   10,312          $2,989,688
                                                              ==========          =========           ==========          ==========
</TABLE>

Securities of government sponsored  enterprises at December 31, 2005 consists of
one security which matured on February 9, 2006.

At  December  31,  2006 and 2005,  no  investment  securities  were  pledged  as
collateral  to secure  public  deposits  or for other  purposes  as  required or
permitted by law.




                                       31
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


NOTE 4 - LOANS RECEIVABLE

Major classifications of loans receivable are summarized as follows:

                                                          December 31,
                                                          ------------
                                                     2006               2005
                                                     ----               ----
Mortgage loans on real estate:
   Residential 1-4 Family ................       $ 24,574,431       $ 17,501,409
   Multifamily ...........................            937,203                  -
   Commercial ............................         73,015,515         50,513,416
   Construction and Land .................         44,708,663         24,559,227
   Second Mortgage Loans .................          1,498,413          1,384,798
   Equity Lines of Credit ................         27,429,465         25,056,638
                                                 ------------       ------------
                                                  172,163,690        119,015,488
Commercial and industrial ................         20,363,359         17,809,622
Consumer .................................          2,257,674          2,305,145
Other ....................................                  -             22,045
                                                 ------------       ------------
      Total loans ........................       $194,784,723       $139,152,300
                                                 ============       ============

Transactions  in the  allowance  for  loan  losses  during  2006  and  2005  are
summarized below:

                                                            December 31,
                                                            ------------
                                                      2006               2005
                                                      ----               ----
Balance, beginning of year ...............       $ 1,882,099        $ 1,332,200
Provision charged to operations ..........           603,355            550,362
Chargeoffs ...............................           (50,554)              (463)
                                                 -----------        -----------
     Balance, end of year ................       $ 2,434,900        $ 1,882,099
                                                 ===========        ===========

At December 31, 2006,  the Bank had eight loans in  nonaccrual  status  totaling
$653,313.  Five of these loans on  nonaccrual  totaling  $586,115 are secured by
real estate and no loss is anticipated, the remaining three loans are secured by
automobiles  and minimal to no loss is anticipated on them.  There were no loans
in nonaccrual status as of December 31, 2005.  Additionally,  as of December 31,
2006,  the Bank had one loan 90 days, or more past due in the amount of $425,000
accruing  interest.  This loan is secured by real estate and in process of being
brought current with no loss  anticipated.  There were no loans 90 days, or more
past due at December 31, 2005.

NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT

Premises, furniture and equipment consisted of the following:

                                                              December 31,
                                                              ------------
                                                          2006             2005
                                                          ----             ----
Buildings ........................................     $  220,683     $  220,683
Leasehold improvements ...........................        829,317        276,282
Furniture and equipment ..........................      1,116,731        884,452
                                                       ----------     ----------
    Total ........................................      2,166,731      1,381,417
Less, accumulated depreciation ...................        680,481        457,559
                                                       ----------     ----------
  Premises, furniture and equipment, net .........     $1,486,250     $  923,858
                                                       ==========     ==========

Depreciation  and  amortization  expense was $240,753 and $175,505 for the years
ended December 31, 2006 and 2005, respectively.


                                       32
<PAGE>
                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 6 - DEPOSITS

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

     Maturing In:                                      Amount
     ------------                                      ------
       2007                                         $ 94,962,230
       2008                                           13,747,939
       2009                                            3,893,247
       2010                                               33,000
                                                    ------------
         Total                                      $112,636,416
                                                    ============

NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK

As of December 31, 2006 and 2005, the Bank had one advance from the Federal Home
Loan Bank in the amount of $1,000,000.  The advance has a fixed interest rate of
4.51% and matures on March 27, 2007.  Interest is paid monthly and  principal is
due at maturity.  As collateral,  the Bank has pledged liens on a portion of one
to four family revolving loans and second mortgage loans. The aggregate  balance
of these loans was  $27,429,465  at December 31, 2006. The advance is subject to
prepayment penalties.

NOTE 8 - OTHER OPERATING EXPENSES

Other  operating  expenses  for the years ended  December  31, 2006 and 2005 are
summarized below:

                                                           2006           2005
                                                           ----           ----
Professional fees ................................     $  243,911     $  107,682
Telephone expenses ...............................         51,273         39,346
Office supplies, stationery, and printing ........        108,608         83,215
Data processing and related expenses .............        387,059        312,997
Advertising and public relations .................        152,788         73,297
Postage ..........................................         44,805         33,379
Other legal expenses .............................         26,126         43,942
Other ............................................        694,458        409,720
                                                       ----------     ----------
   Total .........................................     $1,709,028     $1,103,578
                                                       ==========     ==========

NOTE 9 - INCOME TAXES

Income tax expense for the years ended  December 31, 2006 and 2005 is summarized
as follows:

                                                        2006             2005
                                                        ----             ----
  Current portion
    Federal ....................................    $   387,807     $    12,371
    State ......................................         89,371           2,735
                                                    -----------     -----------
       Total current ...........................        477,178          15,106
                                                    -----------     -----------
  Deferred .....................................        626,672         328,622
                                                    -----------     -----------
  Income tax expense ...........................    $ 1,103,850     $   343,728
                                                    ===========     ===========

Income tax expense is allocated as follows:
    To continuing operations ...................    $ 1,107,357     $   346,277
    To shareholders' equity ....................         (3,507)         (2,549)
                                                    -----------     -----------
                                                    $ 1,103,850     $   343,728
                                                    ===========     ===========



                                       33
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 9 - INCOME TAXES - continued

The gross  amounts of deferred tax assets and deferred  tax  liabilities  are as
follows:

                                                            December 31,
                                                            ------------
                                                          2006             2005
                                                          ----             ----
Deferred tax assets:
    Allowance for loan losses ..................      $  478,120      $  630,604
    Net operating loss carryforward ............           2,539         450,657
    Organization and start-up costs ............          41,226         123,675
    Loan origination costs .....................         103,631          82,376
    Other ......................................          26,269           3,172
                                                      ----------      ----------
       Total deferred tax assets ...............         651,785       1,290,484
                                                      ----------      ----------
Deferred tax liabilities:
    Accumulated depreciation ...................          14,612          49,584
    Available for sale securities ..............               -           3,507
       Prepaids ................................          26,452               -
                                                      ----------      ----------
       Total deferred tax liabilities ..........          41,604          53,091
                                                      ----------      ----------
       Net deferred tax asset ..................      $  610,721      $1,237,393
                                                      ==========      ==========

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, 2006 management  believes it will fully
realize 100% of the Company's deferred tax asset.

The Company has a net state operating loss for income tax purposes of $76,943 as
of December 31, 2006. This net operating loss expires in the year 2026.

A  reconciliation  between  the  income  tax  expense  allocated  to  continuing
operations and the amount computed by applying the Federal statutory rate of 34%
for 2006 and 2005 to income before income taxes follows:

                                                          2006           2005
                                                          ----           ----
Tax expense at statutory rate .......................   $1,032,423   $  337,793
State income tax, net of federal income tax effect ..       58,985       18,432
Other ...............................................       15,949       (9,948)
                                                        ----------   ----------
    Income tax expense ..............................   $1,107,357   $  346,277
                                                        ==========   ==========


NOTE 10 - LEASES

The Company has entered into nine separate  lease  agreements  for properties in
Richland County, South Carolina for branch banking and mortgage operations.  The
leases have various  initial terms and expire on various dates through 2022. The
lease  agreements  generally  provide that the Bank is  responsible  for ongoing
repairs  and  maintenance,  insurance  and real  estate  taxes.  The leases also
provide for renewal  options and certain  scheduled  increases in monthly  lease
payments.  The Company has also entered into two separate  month to month leases
for loan production  offices.  One lease is for property located in Horry County
at a rate of $400 per month and is  cancelable  with 90 days  notice.  The other
lease is for property  located in Richland  County at a rate monthly of $438 and
is cancelable with 30 days notice.

Rental expense under these operating lease  agreements was $264,849 and $229,639
for the years ended December 31, 2006 and 2005, respectively.

                                       34
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 10 - LEASES - continued


Minimal future rental  payments  under  non-cancelable  operating  leases having
remaining  terms in excess of one year,  for each of the next five  years and in
the aggregate are:

    2007 ...............................................    $  333,268
    2008 ...............................................       507,226
    2009 ...............................................       507,226
    2010 ...............................................       475,601
    2011 ...............................................       472,726
    Thereafter .........................................     2,539,756
                                                            ----------
    Total minimum future rental payments ...............    $4,835,803
                                                            ==========

NOTE 11 - RELATED PARTY TRANSACTIONS

Certain parties  (principally  certain  directors and executive  officers of the
Company, their immediate families and business interests) were loan customers of
and had other  transactions  in the  normal  course of  business  with the Bank.
Related party loans are made on substantially the same terms, including interest
rates  and  collateral,   as  those   prevailing  at  the  time  for  comparable
transactions with unrelated persons and do not involve more than the normal risk
of collectibility.  As of December 31, 2006 and 2005, the Bank had related party
loans totaling $3,830,686 and $3,476,375, respectively. During 2006, advances on
related party loans totaled $892,038, and repayments were $534,727. During 2005,
advances  on  related  party  loans  totaled  $1,249,821,  and  repayments  were
$364,646.

As of December 31, 2006 and 2005,  deposits of directors and executive  officers
of the Company and their immediate  families totaled  $7,056,904 and $2,741,681,
respectively.

The Bank maintains a month to month lease on property in Richland County,  South
Carolina for one of its loan production  offices with a company that is owned by
one of its directors.  The lease payment is $438 per month,  which is considered
to be fair market value, and can be cancelled with 30 days notice.


NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company may from time to time be subject to claims and lawsuits  which arise
primarily in the ordinary  course of  business.  Management  is not aware of any
legal  proceedings  which would have a material  adverse effect on the financial
position or operating results of the Company.


NOTE 13 - STOCK WARRANTS

The  organizers  of the Company,  including  all of the directors of the Company
received stock  warrants  giving them the right to purchase two shares for every
three shares they  purchased in the initial  offerings of the  Company's  common
stock at a price of $10 per share. One third of the warrants vested each July 15
of 2003,  2004 and 2005 and expire on July 15, 2012.  Warrants held by directors
of the Company will expire 90 days after the director ceases to be a director or
officer of the Company (365 days if due to death or disability). At December 31,
2006 and  2005,  warrants  for  200,555  shares  had been  granted  and all were
exercisable.   The  aggregate  intrinsic  value  of  warrants   outstanding  and
exercisable as of December 31, 2006 was $1,596,418.  No warrants vested in 2006.
The total fair value of the warrants vesting in 2005 was $185,849.


                                       35
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 14 - STOCK COMPENSATION PLAN

Under the terms of an employment  agreement with the Company's  Chief  Executive
Officer (CEO), stock options were granted to him as part of his compensation and
benefits package. Under the agreement,  the CEO was granted 64,701 stock options
on July 15, 2002.  These  options vest at a rate of 20% per year for five years,
beginning  with the grant date. The options have an exercise price of $10.00 per
share and terminate ten years after the date of grant.

The Company has also granted a total of 62,100 stock  options to its  employees.
Of these,  40,500 were granted in 2002; 3,500 were granted in 2004;  12,200 were
granted in 2005 and 5,900 were granted in 2006.  These  options will vest 30% at
the end of three years, 30% at the end of four years, and 40% at the end of five
years.  Years will be measured from the grant dates.  The options issued in 2006
have an exercise  price of $18.49 and the options  issued in 2005 have  exercise
prices of $13.50 per share.  All issued  options  terminate  ten years after the
date of grant. The weighted average grant date fair value of options granted was
$6.60 in 2006 and $3.30 in 2005.  The  aggregate  intrinsic  value of  exercised
options in 2006 was $9,636.  The  aggregate  fair value of options  exercised in
2006 was $3,336.  No options  were  exercised  in 2005.  As of December 31, 2006
there was $57,869 of total unrecognized  compensation cost related to non vested
share-base  compensation  arrangements  granted  under  the  plan.  That cost is
expected to be  recognized  over a weighted  average  period of 4.79 years.  The
total fair value of the shares vested  during the years ended  December 31, 2006
and 2005 was $51,069 and $54,405, respectively.

A summary of the status of the  Company's  stock options as of December 31, 2006
and 2005, and changes during each year is presented below:
<TABLE>
<CAPTION>
                                                                      2006                        2005
                                                                      ----                        ----
                                                                            Weighted                     Weighted
                                                                             Average                      Average
                                                                            Exercise                     Exercise
                                                                Shares        Price         Shares         Price
                                                                ------        -----         ------         -----
<S>                                                             <C>        <C>               <C>        <C>
     Outstanding at beginning of year .....................     102,501    $   10.43         90,301     $   10.01
     Granted ..............................................       5,900        18.49         12,200         13.50
     Exercised ............................................       1,200        10.00             -
     Forfeited ............................................      12,900        13.07             -
                                                                -------                     -------
     Outstanding at end of year ...........................      94,301        10.55        102,501         10.43
                                                                =======                     =======
</TABLE>

The following table summarizes information about stock options outstanding under
the Company's plan at December 31, 2006:
                                                    Outstanding     Exercisable
                                                    -----------     -----------
Number of options ..........................            94,301           76,761
Weighted average remaining life ............        5.85 years       5.54 years
Weighted average exercise price ............       $     10.55    $      10.00
High exercise price ........................       $     18.49    $      10.00
Low exercise price .........................       $     10.00    $      10.00
Aggregate Intrinsic Value ..................       $   699,355    $    611,018


                                                                      Weighted -
                                                                       Average
                                                                      Grant-Date
                                                       Shares         Fair Value
                                                       ------         ----------
Nonvested at January 1, 2006 ....................      44,110          $   2.95
Granted .........................................       5,900          $   6.60
Vested ..........................................     (19,570)         $   2.78
Forfeited .......................................      12,900          $   3.53
                                                      -------
Nonvested at December 31, 2006
                                                       17,540          $   3.89
                                                      =======


                                       36
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 15 - INCOME PER SHARE

Basic   income  per  share  is   computed   by   dividing   net  income  by  the
weighted-average  number of common shares outstanding.  Diluted income per share
is  computed  by dividing  net income by the  weighted-average  number of common
shares  outstanding  and dilutive  common share  equivalents  using the treasury
stock method.  Dilutive common share equivalents  include common shares issuable
upon exercise of outstanding stock warrants and stock options.

                                                          2006            2005
                                                          ----            ----
Net income per share - basic computation:

Net income to common shareholders ................     $1,929,182     $  647,233
                                                       ==========     ==========

Average common shares outstanding - basic ........     $2,575,002      1,473,878
                                                       ==========     ==========

Basic income per share ...........................     $      .75     $      .44
                                                       ==========     ==========

Net income per share - dilutive computation:

Net income to common shareholders ................     $1,929,182     $  647,233
                                                       ==========     ==========

Average common shares outstanding - basic ........      2,575,002      1,473,878

Incremental shares from assumed conversion of
   Stock warrants and  options ...................         84,263         79,104
                                                       ----------     ----------

Average common shares outstanding - diluted ......      2,659,265      1,552,982
                                                       ==========     ==========

Diluted income per share .........................     $      .73     $      .42
                                                       ==========     ==========


NOTE 16 - 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 possibly  additional  discretionary  actions by
regulators  that, if undertaken,  could have a direct adverse material effect on
the Bank's  financial  condition.  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  ratios of Tier 1 and total  capital as a
percentage of assets and off-balance-sheet exposures,  adjusted for risk weights
ranging  from 0% to 100%.  For the  Bank,  Tier 1  capital  consists  of  common
shareholders'  equity,  excluding  the  unrealized  gain or  loss on  securities
available-for-sale,  minus  certain  intangible  assets.  For the  Bank,  Tier 2
capital consists of the allowance for loan losses and subordinated  debt subject
to certain  limitations.  Total  capital for purposes of  computing  the capital
ratios consists of the sum of Tier 1 and Tier 2 capital.  The regulatory minimum
requirements are 4% for Tier 1 and 8% for total risk-based capital.

The Bank is also required to maintain  capital at a minimum level based on total
assets,  which is known as the  leverage  ratio.  Only the  strongest  banks are
allowed to  maintain  capital at the minimum  requirement  of 3%. All others are
subject to maintaining ratios 1% to 2% above the minimum.


                                       37
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 16 - REGULATORY MATTERS - continued

As of December 31, 2006,  the most recent  notification  from the Bank's primary
regulator categorized it as well-capitalized  under the regulatory framework for
prompt  corrective  action.  There are no conditions  or events that  management
believes have changed the Bank's category.

The following  table  summarizes the capital  amounts and ratios of the Bank and
the regulatory minimum requirements at December 31, 2006 and 2005.

<TABLE>
<CAPTION>
                                                                                                                  To Be Well-
                                                                                                              Capitalized Under
(Dollars in Thousands)                                                                    For Capital         Prompt Corrective
                                                                       Actual           Adequacy Purposes     Action Provisions
                                                                       ------           -----------------     -----------------
                                                                 Amount       Ratio     Amount      Ratio     Amount        Ratio
                                                                 ------       -----     ------      -----     ------        -----
December 31, 2006
<S>                                                             <C>           <C>      <C>           <C>     <C>           <C>
  Total capital (to risk-weighted assets) ................      $23,537       11.57%   $16,280       8.00%   $20,350       10.00%
  Tier 1 capital (to risk-weighted assets) ...............       21,105       10.37%     7,273       4.00%    11,343        6.00%
  Tier 1 capital (to average assets) .....................       21,105       10.27%     7,357       4.00%     9,413        5.00%

December 31, 2005
  Total capital (to risk-weighted assets) ................      $18,994       13.18%   $11,524       8.00%   $14,406       10.00%
  Tier 1 capital (to risk-weighted assets) ...............       17,192       11.93%     5,762       4.00%     8,643        6.00%
  Tier 1 capital (to average assets) .....................       17,192       11.21%     6,133       4.00%     7,666        5.00%
</TABLE>

 At December 31, 2006 and 2005 the Company was required to have a total  capital
to  risk-weighted  assets  ratio  of  at  least  8.00%,  a  Tier  1  capital  to
risk-weighted  assets  ratio of at least  4.00% and a Tier 1 capital  to average
assets  ratio  of at  least  4.00%.  The  Company  exceeded  those  limits  by a
substantial  margin for both 2006 and 2005.  The Federal  Reserve  expects  bank
holding  companies  with higher  levels of risks,  or that are  experiencing  or
anticipating significant growth, to maintain capital well above the minimums.

NOTE 17 - UNUSED LINES OF CREDIT

As of December  31,  2006,  the  Company had unused  lines of credit to purchase
federal funds from unrelated  banks totaling  $6,200,000.  These lines of credit
are available on a one to fourteen day basis for general corporate purposes.  As
of December 31, 2006, we had not drawn on these lines of credit. The Company has
a line of credit to borrow  funds from the  Federal  Home Loan Bank up to 10% of
the Bank's total assets as, which meant $20,869,168 was available as of December
31,  2006.  As of December 31, 2006,  the Bank had  obtained  advances  totaling
$1,000,000.  The  Company  also had a line of credit to borrow  funds from Chase
Bank up to  $10,000,000  as of December 31, 2006.  As of December 31, 2006,  the
Company did not owe any balance on this line.

NOTE 18 - SHAREHOLDERS' EQUITY

Stock Offering - On December 15, 2005,  the Company closed on a secondary  stock
offering  whereby  1,000,000 shares of the Company's stock were issued at $16.00
per share. Net proceeds after deducting  underwriter discounts and expenses were
approximately  $14.8  million.  Proceeds  from the  offering  are being  used to
support the growth of the Company. As part of the offering, the Company gave the
underwriter  an option to purchase an additional  150,000 shares at the offering
price  for a period  of 45  days.  This  option  was  exercised  in 2006 and the
additional proceeds from the sale of this purchase option are also being used to
support the growth of the Company.

Restriction  on Dividends - The ability of the Company to pay cash  dividends is
dependent upon  receiving cash in the form of dividends from the Bank.  However,
there are  restrictions  on the  ability  of the Bank to  transfer  funds to the
Company in the form of cash dividends,  loans, or advances.  The approval of the
Office of the Comptroller of the Currency is required to pay dividends in excess
of the Bank's net profits (as defined)  for the current  year plus  retained net
profits (as defined) for the preceding two years, less any required transfers to
surplus.  As of December  31, 2006 and 2005,  the Bank had no retained  earnings
available for dividends.


                                       38
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with  off-balance-sheet  risk in
the normal  course of business  to meet the  financing  needs of its  customers.
These financial  instruments consist of commitments to extend credit and standby
letters of credit.  Commitments  to extend  credit are  agreements  to lend to a
customer as long as there is no violation of any  condition  established  in the
contract. Commitments generally have fixed expiration dates or other termination
clauses  and may require  payment of a fee. A  commitment  involves,  to varying
degrees,  elements  of credit  and  interest  rate risk in excess of the  amount
recognized in the balance  sheet.  The Company's  exposure to credit loss in the
event of  nonperformance  by the other party to the instrument is represented by
the contractual notional amount of the instrument. Since certain commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company uses the same credit
policies in making commitments to extend credit as it does for  on-balance-sheet
instruments.  Standby  letters of credit are conditional  commitments  issued to
guarantee a customer's  performance  to a third party and have  essentially  the
same credit risk as other lending facilities.

Collateral  held for  commitments to extend credit and standby letters of credit
varies  but  may  include  accounts  receivable,   inventory,  property,  plant,
equipment and income-producing commercial properties.

The  following  table  summarizes  the  Company's   off-balance-sheet  financial
instruments whose contract amounts represent credit risk:

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

Commitments to extend credit .............        $37,373,769        $30,495,033
                                                  ===========        ===========

Standby letters of credit ................        $ 1,568,954        $ 1,118,352
                                                  ===========        ===========


NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair  value of a  financial  instrument  is the amount at which the asset or
obligation could be exchanged in a current  transaction between willing parties,
other than in a forced or liquidation  sale.  Fair value estimates are made at a
specific  point in time based on relevant  market  information  and  information
about  the  financial  instruments.   Because  no  market  value  exists  for  a
significant portion of the financial instruments, fair value estimates are based
on  judgments  regarding  future  expected  loss  experience,  current  economic
conditions,  risk  characteristics of various financial  instruments,  and other
factors.

The following  methods and  assumptions  were used to estimate the fair value of
significant financial instruments:

Cash and Due from Banks - The carrying  amount is a reasonable  estimate of fair
value.

Federal  Funds  Sold -  Federal  funds  sold are for a term of one day,  and the
carrying amount approximates the fair value.

Investment Securities - For securities available-for-sale, fair value equals the
carrying  amount  which  is the  quoted  market  price.  The  carrying  value of
nonmarketable  equity  securities  approximates  the fair  value  since no ready
market exists for the stocks.

Loans receivable - For certain  categories of loans, such as variable rate loans
which are repriced  frequently  and have no  significant  change in credit risk,
fair values are based on the carrying amounts.  The fair value of other types of
loans is estimated by discounting  the future cash flows using the current rates
at which similar loans would be made to borrowers  with similar  credit  ratings
and for the same remaining maturities.


                                       39
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS - continued

Deposits - The fair value of demand deposits, savings, and money market accounts
is the  amount  payable  on demand at the  reporting  date.  The fair  values of
certificates of deposit are estimated  using a discounted cash flow  calculation
that  applies  current  interest  rates to a  schedule  of  aggregated  expected
maturities.

Advances  from Federal Home Loan Bank - The fair value of fixed rate  borrowings
are  estimated  using a  discounted  cash  flow  calculation  that  applies  the
Company's current borrowing rate from the Federal Home Loan Bank.

Accrued  Interest   Receivable  and  Payable  -  The  carrying  value  of  these
instruments is a reasonable estimate of fair value.

Off-Balance-Sheet   Financial   Instruments  -  The  carrying  amount  for  loan
commitments and standby letters of credit which are off-balance-sheet  financial
instruments  approximates  the fair value since the  obligations  are  typically
based on current market rates.

The  carrying  values  and  estimated  fair  values of the  Company's  financial
instruments are as follows:

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                           ------------
                                                                         2006                                      2005
                                                                         ----                                      ----
                                                               Carrying          Estimated            Carrying           Estimated
Financial Assets:                                               Amount           Fair Value            Amount            Fair Value
                                                                ------           ----------            ------            ----------
<S>                                                         <C>                 <C>                 <C>                 <C>
  Cash and due from banks ..........................        $  3,232,394        $  3,232,394        $  3,109,712        $  3,109,712
  Federal funds sold ...............................           8,803,000           8,803,000          17,858,000          17,858,000
  Nonmarketable equity securities ..................             644,400             644,400             511,200             511,200
  Securities available for sale ....................                   -                   -           2,989,688           2,989,688
  Loans receivable .................................         194,784,723         191,695,691         139,152,300         137,089,994
  Accrued interest receivable ......................           1,119,030           1,119,030             649,818             649,818

Financial Liabilities:
  Demand deposit, interest-bearing
    transaction, and savings accounts ..............        $ 62,945,767        $ 62,945,766        $ 54,245,772        $ 54,245,772
  Certificates of deposit and other
    time deposits ..................................         112,636,416         112,748,370          81,499,938          81,051,780
  Advances from Federal Home
    Loan Bank ......................................           1,000,000             997,632           1,000,000             993,698
  Note payable .....................................                   -                   -
  Accrued interest payable .........................           1,531,840           1,531,840             905,271             905,271
</TABLE>

<TABLE>
<CAPTION>
                                                                 Notional         Estimated          Notional       Estimated
                                                                  Amount          Fair Value           Amount       Fair Value
                                                                  ------          ----------           ------       ----------
Off-Balance Sheet Financial Instruments:
<S>                                                            <C>                   <C>             <C>                <C>
  Commitments to extend credit ...........................     $37,373,769           $   -           $30,495,033        $ -
  Standby letters of credit ..............................       1,568,954               -             1,118,352          -
</TABLE>


                                       40
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 21 - CAROLINA NATIONAL CORPORATION (PARENT COMPANY ONLY)

Presented  below are the condensed  financial  statements for Carolina  National
Corporation (Parent Company Only).

                            Condensed Balance Sheets

                                                              December 31,
                                                              ------------
                                                          2006             2005
                                                          ----             ----
Asset
   Cash ............................................   $ 8,401,148   $ 7,844,259
   Investment in banking subsidiary ................    21,971,702    18,478,989
   Loans receivable ................................       168,527       173,772
      Less allowance for loan losses ...............         2,600         2,600
                                                       -----------   -----------
      Loans, net ...................................       165,927       171,172
                                                       -----------   -----------
   Other assets ....................................        54,198             -
                                                       -----------   -----------
      Total assets .................................   $30,592,975   $26,494,420
                                                       ===========   ===========

Liabilities and shareholders' equity
   Other liabilities ...............................   $         -   $   126,506
   Shareholders' equity ............................    30,592,975    26,367,914
                                                       -----------   -----------
      Total liabilities and shareholders' equity ...   $30,592,975   $26,494,420
                                                       ===========   ===========


                       Condensed Statements of Operations
                 For the years ended December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                                     2006                    2005
                                                                                                     ----                    ----
<S>                                                                                             <C>                      <C>
Income ............................................................................             $    13,899              $   174,500

Expenses
   Other expenses .................................................................                 112,705                  119,696
                                                                                                -----------              -----------

Income (loss) before income taxes and equity in
   undistributed income of banking subsidiary .....................................                 (98,806)                  54,804

   Income tax .....................................................................                  42,081                   28,168

   Equity in undistributed income of banking subsidiary ...........................               1,985,907                  620,597
                                                                                                -----------              -----------

Net income ........................................................................             $ 1,929,182              $   647,233
                                                                                                ===========              ===========
</TABLE>


                                       41
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 21 - CAROLINA NATIONAL CORPORATION (PARENT COMPANY ONLY) - continued


                       Condensed Statements of Cash Flows

                 For the years ended December 31, 2006 and 2005

<TABLE>
<CAPTION>
                                                                                                   2006                    2005
                                                                                                   ----                    ----
Cash flows from operating activities:
<S>                                                                                            <C>                     <C>
  Net income .......................................................................           $  1,929,182            $    647,233
  Adjustments to reconcile net income to net cash
    provided by operating activities:
     Provision for loan lsses ......................................................                      -                  (8,400)
       Stock based compensation expense ............................................                 31,729                       -
     Increase (decrease) in other assets ...........................................                (54,198)                 37,815
     Equity in undistributed income of banking subsidiary ..........................             (1,985,907)               (620,597)
     (Decrease) increase in other liabilities ......................................               (126,506)                 98,579
                                                                                               ------------            ------------
       Net cash provided by (used for) operating activities ........................               (205,700)                154,630
                                                                                               ------------            ------------

Cash flows from investing activities:
  Purchase of Bank stock ...........................................................                      -              (9,700,000)
   Capital contribution to subsidiary bank .........................................             (1,500,000)
  Net increase in loans ............................................................                  5,245               2,369,039
                                                                                               ------------            ------------
       Net cash used by operating activities .......................................             (1,494,755)             (7,330,961)
                                                                                               ------------            ------------

Cash flows from financing activities:
  Proceeds from exercise of stock options ..........................................                 12,000                       -
  Repayments of notes payable ......................................................                      -                (900,000)
  Issuance of common stock, net ....................................................              2,245,344              14,777,492
                                                                                               ------------            ------------
       Net cash provided by financing activities ...................................              2,257,344              13,877,492
                                                                                               ------------            ------------

Net increase in cash and cash equivalents ..........................................                556,889               6,701,161

Cash and cash equivalents, beginning of year .......................................              7,844,259               1,143,098
                                                                                               ------------            ------------

Cash and cash equivalents, end of year .............................................           $  8,401,148            $  7,844,259
                                                                                               ============            ============
</TABLE>



                                       42
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                                 CORPORATE DATA


ANNUAL MEETING:

The Annual Meeting of Shareholders  of Carolina  National  Corporation,  will be
held at 11:00 a.m. on May 7, 2007 at the Marriott  Hotel,  1200 Hampton  Street,
Columbia, South Carolina.

CORPORATE OFFICE:                                 CORPORATE COUNSEL:


1350 Main Street                                  Haynsworth Sinkler Boyd, P.A.
Columbia, South Carolina 29201                    1201 Main Street, Suite 2200
Phone (803) 779-0411                              Post Office Box 11889
Fax (803) 779-0722                                Columbia, South Carolina 29211

STOCK TRANSFER AGENT:                             INDEPENDENT AUDITORS:

Registrar and Transfer Company                    Elliott Davis, LLC
10 Commerce Drive                                 1901 Main Street, Suite 1650
Cranford, New Jersey 07016                        Post Office Box 2227
                                                  Columbia, South Carolina 29202




















                                       43
<PAGE>


STOCK INFORMATION:

The  Common  Stock of  Carolina  National  Corporation  was listed on the NASDAQ
exchange under the symbol "CNCP" in December, 2006. Prior to December, 2005, the
stock was not  listed on any  exchange.  Prior to  listing  in 2005,  all of the
trades  during  2005 of which  management  is aware were at $13.50 per share and
occurred  during the first three quarters of the year.  However,  management has
not  ascertained  that  these  transactions  are  the  result  of  arm's  length
negotiations  between the parties,  and because of the limited  number of shares
involved,  these prices may not be  indicative of the market value of the common
stock.  The  following  table shows the  reported  high and low bid sales of our
common stock reported Nasdaq Capital Market for the periods shown.

                                                           Year Ended
                                                        December 31, 2005
                                                        -----------------
                                                      Low                High
                                                      ---                ----
Fourth Quarter ...........................        $   16.25          $   18.46

                                                           Year Ended
                                                        December 31, 2006
                                                        -----------------
                                                      Low                High
                                                      ---                ----

First Quarter ............................        $   16.80          $   18.19

Second Quarter ...........................            17.50              20.48

Third Quarter ............................            17.56              19.99

Fourth Quarter ...........................            17.50              18.97


The ability of Carolina National  Corporation to pay cash dividends is dependent
upon receiving cash in the form of dividends from Carolina National Bank & Trust
Company.  However, there are restrictions on the ability of the Bank to transfer
funds to the Company in the form of cash dividends.  All of the Bank's dividends
to the Company  are payable  only from the  undivided  profits of the Bank.  The
Company has not declared or paid  dividends  since its inception and, to support
the Company's  continuing need for capital to support  anticipated  asset growth
and market expansion,  management does not expect to declare or pay dividends in
the near future.  The Company has approximately 1,800 shareholders of record.

FORM 10-KSB

The  Company  will  furnish  copies of the Annual  Report on Form 10-KSB free of
charge upon  written  request to Roger  Whaley,  President  and Chief  Executive
Officer,  Carolina  National  Corporation,  1350 Main  Street,  Columbia,  South
Carolina  29201.  Copies  of the  Form  10-KSB  may  also be  obtained  from the
Securities and Exchange Commission's website at www.sec.gov.



                                       44