EXHIBIT 13



















                          CAROLINA NATIONAL CORPORATION
                            Portions of Registrant's
                              2005 Annual Report to
                            Shareholders Incorporated
                       by Reference into 2005 Form 10-KSB



<PAGE>




                          CAROLINA NATIONAL CORPORATION


                    BUSINESS OF CAROLINA NATIONAL CORPORATION

Carolina National Corporation, (the "Company") is a bank holding company with no
operations other than those carried on by its wholly-owned subsidiary,  Carolina
National Bank and Trust Company (the "Bank").  The Company was organized in 2000
under the laws of South  Carolina for the purpose of becoming a holding  company
for the Bank.  The Bank  conducts  a general  banking  business  under a charter
granted by the Office of the  Comptroller  of the  Currency.  The Bank opened on
July 15, 2002.  The Bank  conducts its  activities  from its main office and two
full service  branch  offices and a loan  production  office in Columbia,  South
Carolina.

The Bank's business  primarily  consists of accepting deposits and making loans.
The Bank seeks deposit  accounts from  households  and businesses in its primary
market areas by offering a full range of savings accounts,  retirement  accounts
(including  Individual  Retirement  Accounts),  checking accounts,  money market
accounts,  and time certificates of deposit. It also makes primarily commercial,
real estate and installment loans, primarily on a secured basis, to borrowers in
and  around  Richland  County,   South  Carolina  and  makes  other  investments
authorized by Federal banking laws and regulations.  Residential  mortgage loans
are primarily made for the accounts of investors in the secondary  market. As of
December 31, 2005, the Bank employed 32 persons on a full time equivalent basis.
































<PAGE>


                          CAROLINA NATIONAL CORPORATION

                             Selected Financial Data

The following  selected financial data for the years ended December 31, 2005 and
2004 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  financial  statements  of the Company,  including the
accompanying notes, included elsewhere herein.

                                                               2005       2004
                                                               ----       ----
(Dollars in thousands)
Income Statement Data:
   Interest income ......................................   $  8,025   $  3,926
   Interest expense .....................................      2,953      1,206
                                                            --------   --------

   Net interest income ..................................      5,072      2,720
   Provision for loan losses ............................        550        506
                                                            --------   --------

   Net interest income after provision for loan losses ..      4,522      2,214

   Noninterest income ...................................        374        273
   Noninterest expense ..................................      3,902      3,148
                                                            --------   --------

   Income (loss) before income taxes ....................        994       (661)

   Income tax (benefit) .................................        347       (228)
                                                            --------   --------

     Net Income (loss) ..................................   $    647   $   (433)
                                                            ========   ========

Balance Sheet Data:
   Assets ...............................................   $164,857   $ 98,505
   Earning assets .......................................    160,511     95,433
   Securities (1) .......................................      3,501      3,362
   Loans (2) ............................................    139,152     90,304
   Allowance for loan losses ............................      1,882      1,332
   Deposits .............................................    135,746     86,094
   Shareholders' equity .................................     26,368     10,925

Per-Share Data:
   Earnings (loss) per-share - basic ....................   $   0.44   $   (.30)
   Earnings (loss) per share - diluted ..................       0.42          -
   Book value (period end) ..............................      10.86       7.65


----------------------

(1)  Marketable securities are all available for sale and recorded at their fair
     market value.  Nonmarketable  securities totaling $511,200 and $392,400 are
     included for 2005 and 2004, respectively.  These securities are recorded at
     cost.
(2)  Loans are stated at gross amounts before allowance for loan losses.


                                       2
<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.



                                       3
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                              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.  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, 2005, compared with year ended December 31, 2004

Net interest income  increased  $2,352,428 or 86.5% from $2,719,514 in 2004. The
increase  in net  interest  income was due  primarily  to an increase in average
earning assets, which increased  $44,692,342,  or 54.8%, due to continued growth
in the loan portfolio  during this second full year of  operations.  The primary
component  of  interest  income  was  interest  on  loans,  including  fees,  of
$7,654,084, as compared to $3,764,903 in 2004.

The Company's net interest  spread and net interest margin were 3.57% and 4.02%,
respectively,  in 2005 compared to 2.89% and 3.34%,  respectively,  in 2004. The
increase in net interest  spread was primarily  the result of a higher  interest
rate  environment.  Yields on all earning  assets  increased in 2005.  Yields on
average earning assets  increased from 4.82% in 2004 to 6.36% in 2005.  Rates on
average  interest-bearing  liabilities  were  2.79% and 1.93% for 2005 and 2004,
respectively.

The provision for loan losses was $550,362 in 2005 compared to $505,607 in 2004.
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  $100,806,  or 36.9%,  to  $373,682  in 2005 from
$272,876 in 2004.  The  increase  is  primarily  attributable  to an increase in
service  charges on deposit  accounts,  which  increased  $58,365,  or 43.9%, to
$191,393  for the year ended  December 31, 2005 due to the  increased  volume in
deposit accounts.  ATM network fees increased by $13,498 or 68.1% to $33,306 for
the year ended December 31, 2005, when compared to 2004 as a result of increased
usage.

Noninterest  expense  increased  $753,568,  or 23.9%, to $3,901,752 in 2005 from
$3,148,184 in 2004. Noninterest expenses increased in all categories as a result
of our continued growth.  Salaries and employee benefits  increased  $570,445 to
$2,323,102 for the year ended December 31, 2005.  This increase is  attributable
to normal pay  increases,  hiring of additional  staff to meet needs  associated
with our growth,  including the opening of a new branch at the end of 2005,  and
incentive  compensation  for  lenders  and  deposit  management  employees.  The
Company's  efficiency  ratio was 71.7% in 2005  compared to 105.2% in 2004.  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 $647,233 in 2005 compared to a net loss of $432,770 in 2004.  The
net income for the year reflects our continued growth, as average earning assets
increased from  $81,532,362 for the year ended December 31, 2004 to $126,224,704
for the year ended  December 31, 2005.  Return on average assets during 2005 was
0.50%  compared to a negative  return of 0.51% during 2004. Net income was after
income tax expense of $346,277 for 2005 and an income tax benefit of $228,631 in
2004,  respectively.  The  income  tax  expense,  or  benefit,  was  based on an
effective tax rate of 34%.


                                       4
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                               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.

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 and are then annualized. Average balances have been derived from the
daily balances throughout the periods indicated.

<TABLE>
<CAPTION>
                                                                   For the year ended                      For the year ended
                                                                    December 31, 2005                       December 31, 2004
                                                          ---------------------------------   --------------------------------------
                                                            Average    Income/      Yield/       Average      Income/        Yield/
(Dollars in thousands)                                      Balance    Expense        Rate       Balance      Expense          Rate
                                                          ----------  ---------  ----------   -----------  -----------    ----------
Assets:
   Earning Assets:
<S>        <C>                                            <C>         <C>             <C>     <C>          <C>               <C>
     Loans (1) .......................................    $  114,183  $   7,654       6.70%   $    71,713  $     3,765       5.25%
     Securities, taxable .............................         2,970         60       2.02          2,782           56       2.01
     Federal funds sold and other ....................         9,072        310       3.42          7,037          105       1.49
                                                          ----------  ---------               -----------  -----------
       Total earning assets ..........................       126,225      8,024       6.36         81,532        3,926       4.82
                                                          ----------  ---------               -----------  -----------
   Cash and due from banks ...........................         3,078                                1,669
   Premises and equipment ............................           723                                  625
   Other assets ......................................         2,099                                1,746
   Allowance for loan losses .........................        (1,600)                              (1,056)
                                                          ----------                          -----------
       Total assets ..................................    $  130,525                          $    84,516
                                                          ==========                          ===========
Liabilities:
   Interest-Bearing Liabilities:
     Interest-bearing
       transaction accounts ..........................    $    9,437  $       9      0.09%    $     5,202  $         9       0.17%
     Savings deposits ................................        25,817        581      2.25          22,906          380       1.66
     Time deposits ...................................        68,569      2,232      3.25          34,512          817       2.37
     Federal funds purchased .........................            -          -                          7           -
     Federal Home Loan Bank Advance ..................           258         12      4.65              -            -
     Other borrowings ................................         1,633        118      7.23              -            -
                                                          ----------  ---------               -----------  -----------
       Total interest-bearing liabilities ............       105,714      2,952      2.79          62,627        1,206       1.93
                                                          ----------  ---------               -----------  -----------
   Demand deposits ...................................        13,054                               10,551
   Accrued interest and other liabilities ............           792                                  461
   Shareholders' equity ..............................        10,965                               10,877
                                                          ----------                          -----------
       Total liabilities and
          shareholders' equity .......................    $  130,525                          $    84,516
                                                          ==========                          ===========
Net interest spread ..................................                                3.57%                                  2.89%
Net interest income ..................................                $   5,072                            $     2,720
                                                                      =========                            ===========
Net interest margin ..................................                                4.02%                                  3.34%
</TABLE>
-----------------
(1)  There  were no loans in  nonaccrual  status in 2005 or 2004.  The effect of
     fees recognized on loans in 2005 totaling $324,891 increased the annualized
     yield on loans by .28% from 6.42%.  The effect on the  annualized  yield on
     earning  assets in 2004 was an increase  of .19% from 5.06%.  The effect on
     net interest spread and net interest margin in 2005 was an increase of .28%
     and .28% from 3.26% and 3.73%, respectively.


                                       5
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                         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:

<TABLE>
<CAPTION>
                                                      2005 compared to 2004
                                                      ---------------------
                                                   Due to increase (decrease) in
(Dollars in thousands)                            Rate(1)   Volume(1)     Total
                                                  -------   ---------     -----
 Interest income:
<S>                                               <C>         <C>         <C>
   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
                                                  ======      ======      ======
</TABLE>
(1)Volume/rate  changes  have  been  allocated  to  each  category  based  on  a
consistent basis between rate and volume.

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.


                                       6
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                         Net Interest Income - continued

The  following  table sets forth the  Company's  interest  rate  sensitivity  at
December 31, 2005.

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 ..........................        $ 17,858       $        -        $        -       $        -         $ 17,858
  Loans .......................................          70,116            3,551            63,720            1,765          139,152
  Investment securities .......................           2,990                -                 -              571            3,501
                                                       --------         --------          --------         --------         --------
    Total earning assets ......................          90,964            3,551            63,720            2,276          160,511
                                                       --------         --------          --------         --------         --------
Liabilities
Interest-bearing liabilities:
  Interest-bearing deposits:
    Demand deposits ...........................          13,635                -                 -                -           13,635
    Savings deposits ..........................          27,583                -                 -                -           27,583
    Time deposits .............................          28,593           34,961            17,946                -           81,500
    FHLB Advance ..............................               -            1,000                 -                -            1,000
                                                       --------         --------          --------         --------         --------
      Total interest-bearing
         liabilities ..........................          69,811           35,961            17,946                -          123,718
                                                       --------         --------          --------         --------         --------
Period gap ....................................        $ 21,153         $(32,410)         $ 45,774         $  2,276         $ 36,793
                                                       ========         ========          ========         ========         ========
Cumulative gap ................................        $ 21,153         $(11,257)         $ 34,517         $ 36,793
                                                       ========          ========         ========         ========
Ratio of cumulative gap
  to total earning assets .....................            13.2%           (7.0%)             21.5%            22.9%
</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.

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.


                                       7
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                     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)  to meet the  present  and  foreseeable  risk
characteristics  of 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.

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.

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 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.  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.

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.



                                       8
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

               Provision and Allowance for Loan Losses - continued

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 years ended December 31, 2005 and 2004.

                            Allowance for Loan Losses

  (Dollars in thousands)                                    2005        2004
                                                            ----        ----
Total loans outstanding at end of period ................ $139,152    $ 90,304
                                                          ========    ========
Average loans outstanding ............................... $114,183    $ 71,713
                                                          ========    ========
Balance of allowance for loan losses
    at beginning of year ................................ $  1,332    $    827
Net loan losses .........................................        -           -
Provision for loan losses ...............................      550         505
                                                          --------    --------
Balance of allowance for loan losses at end of year ..... $  1,882    $  1,332
                                                          ========    ========
Allowance for loan losses to period end loans ...........     1.35%       1.47%

                              Nonperforming Assets

Nonperforming  Assets. There were no nonaccrual loans, loans past due 90 days or
more and still accruing interest,  or restructured loans at December 31, 2005 or
2004.

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. Potential problem loans are loans that are not included
in impaired loans  (nonaccrual loans or loans past due 90 days or more and still
accruing),  but about which  management  has become aware of  information  about
possible  credit problems of the borrowers that causes doubt about their ability
to comply with current  repayment  terms.  At December 31, 2005, the Company had
one criticized loan in the amount of $1,214,446 which is secured by real estate.
This loan,  and the results of its internal  review  process are  considered  in
determining  management's  assessment  of the adequacy of the allowance for loan
losses.

                                       9
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                         Noninterest Income and Expense

Noninterest  Income.  The largest  component of  noninterest  income was service
charges on deposit accounts,  which totaled $191,393 for the year ended December
31, 2005 and  $133,028 for the year ended  December  31,  2004.  The increase in
service  charges  on deposit  accounts  is due to an  increase  in the volume of
deposits in 2005.  Residential  mortgage origination fees increased from $99,502
for the year ended December 31, 2004 to $107,580 for the year ended December 31,
2005.  The increase was due to mortgage  refinancing in  anticipation  of higher
rates.

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

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

Noninterest  Expense.  Salaries  and  employee  benefits  comprised  the largest
component of noninterest expense which totaled $2,323,102 and $1,752,657 for the
years ended  December  31, 2005 and 2004,  respectively.  Salaries  and employee
benefits  increased as a result of new employees hired to assist with the growth
of the  Company,  including  the  opening  of a branch  at the end of 2005,  pay
raises, and incentive compensation for business development employees. Occupancy
and  furniture  and  equipment   expenses  increased  by  $48,022  and  $24,154,
respectively,  as a result of the new branch and overall  growth of the Company.
Other  operating  expenses  totaled  $1,103,578 and $992,631 for the years ended
December  31, 2005 and 2004,  respectively.  Data  processing  and related  fees
comprise one of the largest components of other operating  expenses.  These fees
increased from $226,311 for the year ended December 31, 2004 to $312,997 for the
year ended December 31, 2005. This increase was directly related to the increase
in the volume of accounts over the two periods.

The following table sets forth the primary components of noninterest expense for
the years ended December 31, 2005 and 2004.

  (Dollars in thousands)                                      2005         2004
                                                              ----         ----
  Salaries and employee benefits .....................       $2,323       $1,753
  Occupancy expense ..................................          304          256
  Advertising and marketing expense ..................           73           70
  Office supplies, forms, and stationery .............           83           58
  Data processing ....................................          313          226
  Professional fees ..................................          108          199
  Furniture and equipment expense ....................          171          147
  Telephone ..........................................           39           34
  Loan closing expenses ..............................           44           62
  Postage ............................................           33           13
  Other ..............................................          411          330
                                                             ------       ------
Total noninterest expense ............................       $3,902       $3,148
                                                             ======       ======

                                       10
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                                 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  $114,182,692  in 2005 and  $71,712,986 in 2004. At December 31,
2005 and 2004, total loans were $139,152,300 and $90,303,749, respectively.

The following table sets forth the composition of the loan portfolio by category
at December 31, 2005 and 2004 and highlights the Company's  general  emphasis on
mortgage lending.

Composition of Loan Portfolio

<TABLE>
<CAPTION>
  December 31,                                                   2005                          2004
                                                                 ----                          ----
                                                                     Percent of                       Percent of
  (Dollars in thousands)                               Amount          Total             Amount         Total
                                                       ------          -----             ------         -----
<S>                                                  <C>                <C>            <C>               <C>
  Commercial and industrial ......................   $  17,810          12.78%         $  11,490         12.69%
  Real estate:
    Mortgage-residential .........................      44,066          31.61             32,222         35.60
    Mortgage-nonresidential ......................      50,632          36.32             28,817         31.84
    Construction and land ........................      24,559          17.62             15,064         16.64
  Consumer .......................................       2,327           1.67              2,922          3.23
                                                     ---------         ------          ---------        ------
      Total loans ................................     139,394         100.00%           90,515         100.00%
                                                                       ======                           ======
  Allowance for loan losses ......................       1,882                            1,332
  Deferred loan fees .............................         242                              211
                                                     ---------                        ---------
      Net loans ..................................   $ 137,270                        $  88,972
                                                     =========                        =========
</TABLE>
The largest  component of loans in the Company's  loan  portfolio is real estate
mortgage  loans. At December 31, 2005, real estate mortgage loans totaled $119.0
million and represented 85.4% of the total loan portfolio. At December 31, 2004,
real estate  mortgage loans totaled $76.1 million and  represented  84.1% of the
total loan portfolio.


                                       11
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                           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 $44.1 million and $32.2 million at December
31, 2005 and 2004, 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 $50.6 million and $28.6
million at  December  31,  2005 and 2004,  respectively.  Construction  and land
loans,  which are  secured by either  commercial  or  residential  real  estate,
totaled  $24.5  million  and  $15.0  million  at  December  31,  2005 and  2004,
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  $17.8  million and $11.5 million at
December  31,  2005 and 2004,  respectively,  and  comprised  12.78% and 12.69%,
respectively, of the total portfolio.

At December 31, 2005,  consumer loans totaled $2.3 million and represented 1.67%
of the total loan portfolio. Consumer loans totaled $2.9 million at December 31,
2004 and represented 3.23% 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,  South  Carolina  area.  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.  Management
expects the area 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, 2005.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

<TABLE>
<CAPTION>
                                                                                 Over One
                                                                                   Year
  December 31, 2005                                            One Year           Through               Over
                                                               or Less           Five Years           Five Years             Total
                                                               -------           ----------           ----------             -----
<S>                                                         <C>                 <C>                 <C>                 <C>
Commercial and industrial ..........................        $ 13,829,271        $  3,929,757        $     50,594        $ 17,809,622
Real estate ........................................          44,857,699          48,000,467           1,598,095          94,456,261
Construction and Land ..............................          12,981,500          11,461,727             116,000          24,559,227
Consumer and other .................................           1,998,804             328,386                   -           2,327,190
                                                            ------------        ------------        ------------        ------------
                                                            $ 73,667,274        $ 63,720,337        $  1,764,689        $139,152,300
                                                            ============        ============        ============        ============
Loans maturing after one year with:
   Fixed interest rates ............................                                                                    $ 65,453,264
   Floating interest rates .........................                                                                          31,762
                                                                                                                        ------------
                                                                                                                        $ 65,485,026
                                                                                                                        ============
</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.


                                       12
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                           Earning Assets - continued

Investment  Securities.  The investment securities portfolio is also a component
of the Company's total earning assets.  Total securities  averaged $3,429,587 in
2005 and $3,226,243 in 2004. At December 31, 2005 and 2004, the total securities
portfolio was $3,500,888 and  $3,361,463,  respectively.  All marketable  equity
securities  were  designated  as  available  for  sale in 2005 and 2004 and were
recorded at their cost.  Nonmarketable  securities  which  totaled  $511,200 and
$392,400 at December 31, 2005 and 2004, respectively, were recorded at cost.

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

Fair Value of Securities
  December 31,                                              2005           2004
  ------------                                              ----           ----
 (Dollars in thousands)
U.S. government agencies .........................         $2,990         $2,969
Nonmarketable equity securities ..................            511            392
                                                           ------         ------
   Total investment securities ...................         $3,501         $3,361
                                                           ======         ======

The following  table sets forth the scheduled  maturities  and average yields of
securities available for sale at December 31, 2005.

Investment Securities Maturity Distribution and Yields

  December 31, 2005                                     Less than One Year
                                                        ------------------
  (Dollars in thousands)                              Amount           Yield
                                                      ------           -----
U.S. government agencies ......................       $2,990           2.00%
                                                      ======           ====

Nonmarketable  equity  securities (stock in the Federal Reserve Bank of Richmond
and the Federal Home Loan Bank of Atlanta) totaled $511,200 and $392,400 and had
yields of 6.76% and 4.68% at December 31, 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  $8,612,424  in 2005 and  $6,593,134  in 2004. At
December 31, 2005, there were $17,858,000 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.

                 Deposits and Other Interest-Bearing Liabilities

Average   interest-bearing   liabilities   totaled   $105,713,783  in  2005  and
$62,627,000 in 2004.

Deposits.   Average  total  deposits  totaled   $116,876,879   during  2005  and
$73,171,000  in 2004.  At  December  31,  2005 and  2004,  total  deposits  were
$135,745,710 and $86,093,924, respectively.


                                       13
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

           Deposits and Other Interest-Bearing Liabilities - continued

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

Deposits

<TABLE>
<CAPTION>
  December 31,                                                2005                             2004
                                                              ----                             ----
                                                                    Percent of                      Percent of
  (Dollars in thousands)                                 Amount     Deposits           Amount        Deposits
                                                         ------     --------           ------        --------
<S>                                                  <C>                 <C>      <C>                     <C>
  Noninterest-bearing demand deposits ............   $    13,028         10%      $     10,375            12%
  Interest-bearing demand deposits ...............        13,635         10              6,047             7
  Savings and money market accounts ..............        27,583         20             24,763            29
  Time deposits $100,000 and over ................        43,705         32             26,901            31
  Other time deposits ............................        37,795         28             18,008            21
                                                     -----------        ---       ------------           ---
     Total deposits ..............................   $   135,746        100%      $     86,094           100%
                                                     ===========        ===       ============           ===
</TABLE>

At December 31, 2005,  total  deposits had increased by  $49,651,786,  or 57.7%,
from  December  31,  2004.  The largest  increase  was in time  deposits,  which
increased  $36,590,470,  or 81.5%,  from December 31, 2004 to December 31, 2005.
This increase was attributable to the opening of new accounts during 2005 and an
expanded participation in the brokered certificate of deposit market.  Expressed
in    percentages,    noninterest-bearing    deposits    increased   25.6%   and
interest-bearing  demand  deposits  increased  125.5%.  At  December  31,  2005,
brokered deposits totaled $24,999,000 which represents a 30.3% increase over the
December 31, 2004 brokered deposits total of $19,183,000.

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 $92.0 million at December 31, 2005 and
$59.2 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 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,  2005,  is set forth in the
following table:


            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 ..   $    13,680    $     4,237  $     11,507   $  14,281  $    43,705
</TABLE>

         Approximately  31% of our time  deposits  over  $100,000 had  scheduled
maturities  within three months,  and 67% 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.


                                       14
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

           Deposits and Other Interest-Bearing Liabilities - continued

Notes Payable and Advances from Federal Home Loan Bank.  The Company  executed a
line of credit with Bank One (now Chase Bank) in 2004 that allows the Company to
borrow up to $7 million if certain  covenants are met. At December 31, 2005, the
line did not have a balance  due.  The average  balance of this note payable for
2005 was  $1,633,151.  The maximum  amount of this note payable at any month end
was  $2,850,000  in 2005 and the  weighted  average  interest  rate  was  7.23%.
Proceeds from the line were used to provide additional capital to the Bank until
permanent equity capital was raised in December, 2005 at which time the line was
repaid.  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, 2005, 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. This option
was  exercised in 2006.  Proceeds of  $9,700,000  from the public  offering were
contributed to the capital of the Bank, and the Bank repaid a loan of $2,850,000
to the Company, which in turn paid off a loan to Chase bank of $ 3,450,000.  The
balance of the public offerings proceeds are 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.


                                       15
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                               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, 2005, the Company
exceeded the adequately capitalized  requirement of the Federal Reserve, and the
subsidiary  bank  exceeded  the  well  capitalized  and  adequately  capitalized
requirement 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) ................      $18,994      13.18%      $11,525     8.00%      $14,406      10.00%
  Tier 1 capital (to risk-weighted assets) ...............       17,192      11.93%        5,762     4.00%        8,644       6.00%
  Tier 1 capital (to average assets) .....................       17,192      11.21%        6,133     4.00%        7,667       5.00%
The Company
  Total capital (to risk-weighted assets) ................      $26,890      18.63%      $11,545     8.00%      $   N/A        N/A
  Tier 1 capital (to risk-weighted assets) ...............       25,086      17.38%        5,773     4.00%          N/A        N/A
  Tier 1 capital (to average assets) .....................       25,086      17.87%        5,615     4.00%          N/A        N/A
</TABLE>

We have a credit facility with Chase Bank which will allow us to borrow up to $7
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, 2005, 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,
2005, the Bank had issued  commitments  to extend credit of $31,613,385  through
various types of commercial lending arrangements.  Approximately  $27,366,973 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, 2005.

<TABLE>
<CAPTION>
                                                           After One      After Three
                                                            Through         Through
                                             Within One      Three           Twelve        Within    Greater Than
                                               Month         Months          Months       One Year       One Year           Total
<S>                                         <C>            <C>             <C>            <C>          <C>            <C>
Unused commitments to extend credit .....   $    57,579    $ 1,247,737     $ 5,355,995    $ 6,661,311  $  23,833,722  $   30,495,033
Standby letters of credit ...............        10,000         45,852       1,062,500      1,118,352             -        1,118,352
                                            -----------    -----------     -----------    -----------  -------------  --------------
                                            $    67,579    $ 1,293,589     $ 6,418,495    $ 7,779,663  $  23,833,722  $   31,613,385
                                            ===========    ===========     ===========    ===========  =============  ==============
</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.

                                       16
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Management's Discussion and Analysis
                              or Plan of Operation

                           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.

                                                      2005            2004
                                                      ----            ----
     Return on average assets ...................    0.50%          (0.51%)
     Return on average equity ...................    5.90%          (3.98%)
     Equity to assets ratio .....................    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,
2005,  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.


                                       17
<PAGE>

             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,  2005  and  2004  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
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We conducted  our audits in  accordance  with  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 financial  statements  referred to above present fairly, in
all material respects,  the financial position of Carolina National Corporation,
as of  December  31, 2005 and 2004 and the  results of its  operations  and cash
flows for each of the years then ended, in conformity with accounting principles
generally accepted in the United States of America.



Elliott Davis, LLC
Columbia, South Carolina
February 15, 2006


                                       18
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                           December 31,
                                                                                                           ------------
                                                                                                   2005                    2004
                                                                                                   ----                    ----
Assets:
  Cash and cash equivalents:
<S>                                                                                          <C>                      <C>
    Cash and due from banks ......................................................           $   3,109,712            $   1,614,863
    Federal funds sold ...........................................................              17,858,000                1,767,000
                                                                                             -------------            -------------
        Total cash and cash equivalents ..........................................              20,967,712                3,381,863
                                                                                             -------------            -------------
  Investment securities:
    Securities available for sale ................................................               2,989,688                2,969,063
    Nonmarketable equity securities ..............................................                 511,200                  392,400
                                                                                             -------------            -------------
        Total investment securities ..............................................               3,500,888                3,361,463
                                                                                             -------------            -------------
  Loans receivable ...............................................................             139,152,300               90,303,749
    Less allowance for loan losses ...............................................               1,882,099                1,332,200
                                                                                             -------------            -------------
        Loans, net ...............................................................             137,270,201               88,971,549
                                                                                             -------------            -------------
  Premises, furniture and equipment, net .........................................                 923,858                  710,511
  Accrued interest receivable ....................................................                 649,818                  372,527
  Other assets ...................................................................               1,544,126                1,707,123
                                                                                             -------------            -------------
        Total assets .............................................................           $ 164,856,603            $  98,505,036
                                                                                             =============            =============
Liabilities:
  Deposits:
    Noninterest-bearing transaction accounts .....................................           $  13,027,867            $  10,374,841
    Interest-bearing transaction accounts ........................................              13,635,279                6,046,689
    Savings and money market .....................................................              27,582,626               24,762,926
    Time deposits $100,000 and over ..............................................              43,705,039               26,901,355
    Other time deposits ..........................................................              37,794,899               18,008,113
                                                                                             -------------            -------------
        Total deposits ...........................................................             135,745,710               86,093,924
  Advances from Federal Home Loan Bank ...........................................               1,000,000                        -
  Note payable ...................................................................                       -                  900,000
  Accrued interest payable .......................................................                 905,271                  289,089
  Other liabilities ..............................................................                 837,708                  296,909
                                                                                             -------------            -------------
        Total liabilities ........................................................             138,488,689               87,579,922
                                                                                             -------------            -------------
Commitments and contingencies (Notes 11 and 14)
Shareholders' equity:
  Preferred stock, 10,000,000 shares authorized, none issued .....................                       -                        -
  Common stock, no par value, 20,000,000 shares authorized;
    2,427,303 and 1,427,303 shares issued at December 31, 2005
    and 2004, respectively .......................................................              28,772,288               13,994,796
  Retained deficit ...............................................................              (2,397,568)              (3,044,801)
  Accumulated other comprehensive loss ...........................................                  (6,806)                 (24,881)
                                                                                             -------------            -------------
        Total shareholders' equity ...............................................              26,367,914               10,925,114
                                                                                             -------------            -------------
        Total liabilities and shareholders' equity ...............................           $ 164,856,603            $  98,505,036
                                                                                             =============            =============
</TABLE>

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


                                       19
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Consolidated Statements of Operations
                 For the years ended December 31, 2005 and 2004

<TABLE>
<CAPTION>
                                                                                                    2005                    2004
                                                                                                    ----                    ----
Interest income:
<S>                                                                                            <C>                      <C>
  Loans, including fees .........................................................              $ 7,654,084              $ 3,764,903
  Investment securities:
     Taxable ....................................................................                   60,000                   55,706
     Nonmarketable equity securities ............................................                   31,068                   20,777
  Federal funds sold ............................................................                  279,319                   84,337
                                                                                               -----------              -----------
        Total ...................................................................                8,024,471                3,925,723
                                                                                               -----------              -----------
Interest expense:
  Time deposits $100,000 and over ...............................................                1,256,654                  427,931
  Other deposits ................................................................                1,566,036                  777,637
  Note payable ..................................................................                  117,809                      512
  Other .........................................................................                   12,030                      129
                                                                                               -----------              -----------
        Total ...................................................................                2,952,529                1,206,209
                                                                                               -----------              -----------
Net interest income .............................................................                5,071,942                2,719,514
Provision for loan losses .......................................................                  550,362                  505,607
                                                                                               -----------              -----------
Net interest income after provision for loan losses .............................                4,521,580                2,213,907
                                                                                               -----------              -----------
Noninterest income:
  Service charges on deposit accounts ...........................................                  191,393                  133,028
  Residential mortgage origination fees .........................................                  107,580                   99,502
  Other .........................................................................                   74,709                   40,346
                                                                                               -----------              -----------
     Total noninterest income ...................................................                  373,682                  272,876
                                                                                               -----------              -----------
Noninterest expenses:
  Salaries and employee benefits ................................................                2,323,102                1,752,657
  Net occupancy .................................................................                  304,328                  256,306
  Furniture and equipment .......................................................                  170,744                  146,590
  Other operating ...............................................................                1,103,578                  992,631
                                                                                               -----------              -----------
     Total noninterest expense ..................................................                3,901,752                3,148,184
                                                                                               -----------              -----------
Income (loss) before income taxes ...............................................                  993,510                 (661,401)
Income tax expense (benefit) ....................................................                  346,277                 (228,631)
                                                                                               -----------              -----------
Net income (loss) ...............................................................              $   647,233              $  (432,770)
                                                                                               ===========              ===========
Earnings per share
Basic earnings (loss) per share .................................................              $       .44              $      (.30)
                                                                                               ===========              ===========
Diluted earnings (loss) per share ...............................................              $       .42              $      (.30)
                                                                                               ===========              ===========
Average shares outstanding - basic ..............................................                1,473,878                1,427,303
                                                                                               ===========              ===========
Average shares outstanding - diluted ............................................                1,552,982                1,454,788
                                                                                               ===========              ===========
</TABLE>

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

                                       20
<PAGE>

                          CAROLINA NATIONAL CORPORATION

      Condensed Consolidated Statements of Changes in Shareholders' Equity
                            and Comprehensive Income
                 For the years ended December 31, 2005 and 2004


<TABLE>
<CAPTION>
                                                                                                      Accumulated
                                                        Common Stock                                     Other
                                                        ------------                 Retained        Comprehensive
                                                  Shares           Amount            Deficit              Loss             Total
                                                  ------           ------            -------              ----             -----
<S>                                            <C>             <C>                <C>               <C>                <C>
Balance, December 31, 2003 ...........         1,427,303       $ 13,994,796       $ (2,612,031)     $           -      $ 11,382,765

Net loss .............................                 -                  -           (432,770)                            (432,770)

Other comprehensive loss,
  net of tax benefit .................                                                                    (24,881)          (24,881)
                                                                                                                       ------------
Comprehensive loss ...................                 -                  -                                                (457,651)
                                            ------------       ------------       ------------       ------------      ------------

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
                                            ============       ============       ============       ============      ============
</TABLE>

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


                                       21
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                      Consolidated Statements of Cash Flows
                 For the years ended December 31, 2005 and 2004

<TABLE>
<CAPTION>
                                                                                                    2005                   2004
                                                                                                    ----                   ----
Cash flows from operating activities:
<S>                                                                                          <C>                       <C>
  Net income (loss) ............................................................             $    647,233              $   (432,770)
  Adjustments to reconcile net loss to net cash
     provided by operating activities:
        Provision for loan losses ..............................................                  549,899                   505,607
        Depreciation and amortization expense ..................................                  165,184                   132,759
        Discount accretion and premium amortization ............................                        -                     2,131
        Deferred income tax expense (benefit) ..................................                  275,694                  (233,090)
        Increase in accrued interest receivable ................................                 (277,291)                 (155,463)
        Increase in accrued interest payable ...................................                  616,182                   191,908
        Decrease (increase) in other assets ....................................                 (115,247)                  445,750
        Increase in other liabilities ..........................................                  540,799                   145,934
                                                                                             ------------              ------------
           Net cash provided by operating activities ...........................                2,402,453                   602,766
                                                                                             ------------              ------------
Cash flows from investing activities:
  Purchases of securities available for sale ...................................                        -                (3,000,000)
  Purchases of nonmarketable equity securities .................................                 (118,800)                  (76,900)
  Calls or maturities of securities held to maturity ...........................                        -                 3,300,000
  Net increase in loans ........................................................              (48,848,551)              (35,372,884)
  Purchase of premises, furniture and equipment ................................                 (378,531)                 (345,828)
                                                                                             ------------              ------------
           Net cash used by investing activities ...............................              (49,345,882)              (35,495,612)
                                                                                             ------------              ------------
Cash flows from financing activities:
  Net increase in demand deposits, interest-bearing
     transaction accounts and savings accounts .................................               13,061,316                10,757,549
  Net increase in certificates of deposit and
     other time deposits .......................................................               36,590,470                24,690,719
  Increase (decrease) in federal funds purchased ...............................                        -                  (533,000)
  Increase in notes payable ....................................................                        -                   900,000
  Repayment of notes payable ...................................................                 (900,000)                        -
  Advances from Federal Home Loan Bank .........................................                1,000,000                         -
  Issuance of common stock, net ................................................               14,777,492                         -
                                                                                             ------------              ------------
        Net cash provided by financing activities ..............................               64,529,278                35,815,268
                                                                                             ------------              ------------
Net increase in cash and cash equivalents ......................................               17,585,849                   922,422
Cash and cash equivalents, beginning of year ...................................                3,381,863                 2,459,441
                                                                                             ------------              ------------
Cash and cash equivalents, end of year .........................................             $ 20,967,712              $  3,381,863
                                                                                             ============              ============
</TABLE>

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

                                       22
<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 and
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.  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 and small 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.

The Company's  investment  portfolio consists  principally of obligations of the
United States,  its agencies or its corporations.  In the opinion of Management,
there is no  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.


                                       23
<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  stockholders'  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, 2005 and 2004, the
Company's  investment in Federal Home Loan Bank stock was $241,200 and $122,400,
respectively.  The investment in Federal Reserve Bank stock totaled  $270,000 at
December 31, 2005 and 2004. 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, 2005, 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 present and foreseeable risk characteristics of the
current loan portfolio.  Management's  judgment is based on periodic and regular
evaluation of individual loans, the overall risk  characteristics of the various
portfolio segments,  and prevailing and anticipated 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 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.

                                       24
<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  $73,297  and  $69,505  were
included in the Company's results of operations for 2005 and 2004, 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 2005 and 2004
amounted to 35,765 and $24,706, respectively.

Stock-Based  Compensation - The Company has a stock-based employee  compensation
plan which is further  described  in Note 15. The Company  accounts for the plan
under the recognition and measurement  principles of Accounting Principles Board
("APB")  Opinion No. 25,  Accounting for Stock Issued to Employees,  and related
Interpretations.  No stock-based employee  compensation cost is reflected in net
income,  as all stock options  granted had an exercise price equal to the market
value of the  underlying  common stock on the date of grant.  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 15.
The  following  table  illustrates  the effect on net income (loss) and earnings
(losses)  per  share if the  Company  had  applied  the fair  value  recognition
provisions  of  Financial  Accounting  Standards  Board  ("FASB")  Statement  of
Financial  Accounting  Standards  ("SFAS") No. 123,  Accounting for  Stock-Based
Compensation,  to stock-based  employee  compensation for both the stock options
and stock warrants.


                                       25
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Stock-Based Compensation (continued)
                                                     Year Ended December 31,
                                                     -----------------------
                                                      2005             2004
                                                      ----             ----
Net income (loss), as reported ...............   $     647,233 $    (432,770)
Deduct: Total stock-based employee
  compensation expense determined
  under fair value based method
  for all awards, net of related tax effects .         (56,735)     (121,991)
                                                 -------------   -----------
Pro forma net income (loss) ..................   $     590,498 $    (554,761)
                                                 =============   ===========
Income (loss) per share:
  Basic - as reported ........................   $         .44   $     (0.30)
                                                 =============   ===========
  Basic - pro forma ..........................   $         .41   $     (0.39)
                                                 =============   ===========
  Diluted - as reported ......................   $         .42   $     (0.30)
                                                 =============   ===========
  Diluted - pro forma ........................   $         .38   $     (0.38)
                                                 =============   ===========

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
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.

Income  (loss)  Per Share - Basic  income  (loss)  per share  represents  income
available  to  shareholders  divided  by the  weighted-average  number of common
shares  outstanding  during  the  period.   Dilutive  loss  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 (loss).

The components of other comprehensive loss and related tax effects for the years
ended December 31, 2005 and 2004 are as follows:
<TABLE>
<CAPTION>
                                                                                                        2005                 2004
                                                                                                        ----                 ----
<S>                                                                                                   <C>                  <C>
Unrealized holding gains (losses) on securities available-for-sale .......................            $ 20,625             $(30,937)
Reclassification adjustment for losses realized in net income ............................                   -                    -
                                                                                                      --------             --------
Net unrealized losses on securities available-for-sale ...................................              20,625              (30,937)
Tax effect ...............................................................................              (2,550)               6,056
                                                                                                      --------             --------
Net-of-tax amount ........................................................................            $ 18,075             $(24,881)
                                                                                                      ========             ========
</TABLE>


                                       26
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

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 $2,336,347 and $1,014,301
for the years ended December 31, 2005 and 2004, respectively.

Income taxes paid for the years ended December 31, 2005 and 2004 totaled $17,980
and $5,346, 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.

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

In December  2004, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 123 (revised  2004),
"Share-Based  Payment"  ("SFAS  No.  123(R)").  SFAS  No.  123(R)  will  require
companies to measure all employee  stock-based  compensation awards using a fair
value method and record such expense in its financial  statements.  In addition,
the adoption of SFAS No. 123(R) requires  additional  accounting and disclosures
related to the  income  tax and cash flow  effects  resulting  from  share-based
payment  arrangements.  SFAS No.  123(R) is effective  beginning as of the first
annual  reporting  period  beginning  after  December 15, 2005.  SFAS No. 123(R)
allows  for  adoption   using  either  the  modified   prospective  or  modified
retrospective  methods.  The Company anticipates using the modified  prospective
method when this  statement is adopted in the first quarter of 2006. The Company
has evaluated the impact upon adoption of SFAS No. 123(R) and has concluded that
the adoption will not have a material impact on financial position or results of
operations upon adoption.

In April 2005,  the  Securities  and Exchange  Commission's  Office of the Chief
Accountant  and its Division of  Corporation  Finance  issued  Staff  Accounting
Bulletin ("SAB") No. 107 to provide  guidance  regarding the application of SFAS
No.  123(R).  SAB  No.  107  provides   interpretive  guidance  related  to  the
interaction  between SFAS No. 123(R) and certain SEC rules and  regulations,  as
well as the  staff's  views  regarding  the  valuation  of  share-based  payment
arrangements for public companies.  SAB No. 107 also reminds public companies of
the  importance  of  including  disclosures  within  filings  made  with the SEC
relating to the accounting for share-based  payment  transactions,  particularly
during the transition to SFAS No. 123(R). In December 2004, the FASB issued SFAS
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29."
The standard is based on the  principle  that  exchanges of  nonmonetary  assets
should  be  measured  based  on the  fair  value  of the  assets  exchanged  and
eliminates  the  exception  under ABP  Opinion No. 29 for an exchange of similar
productive assets and replaces it with an exception for exchanges of nonmonetary
assets  that do not  have  commercial  substance.  A  nonmonetary  exchange  has
commercial  substance  if the future  cash flows of the entity are  expected  to
change significantly as a result of the exchange.  The standard is effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.
The  adoption  of SFAS 153 is not  expected  to have a  material  impact  on the
Company's financial position or results of operations.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections  - a  replacement  of APB Opinion No. 20 and FASB  Statement No. 3."
SFAS No. 154  establishes  retrospective  application as the required method for
reporting a change in accounting principle, unless it is impracticable, in which
case the changes  should be applied to the latest  practicable  date  presented.
SFAS No. 154 also  requires that a correction of an error be reported as a prior
period adjustment by restating prior period financial  statements.  SFAS No. 154
is effective for  accounting  changes and  corrections  of errors made in fiscal
years beginning after December 15, 2005.


                                       27
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Recent  Accounting  Pronouncements  (continued) - In March 2004, the FASB issued
Emerging   Issues  Task  Force  ("EITF")   Issue  No.  03-1,   "The  Meaning  of
Other-Than-Temporary  Impairment and its  Application  to Certain  Investments."
This issue  addresses  the meaning of  other-than-temporary  impairment  and its
application  to investments  classified as either  available for sale or held to
maturity under SFAS No. 115 and it also provides  guidance on  quantitative  and
qualitative  disclosures.  The disclosure  requirements  in paragraph 21 of this
Issue were  effective for annual  financial  statements  for fiscal years ending
after December 15, 2003 and were adopted by the Company  effective  December 31,
2003.

The recognition and measurement guidance in paragraphs 6-20 of this Issue was to
be applied to  other-than-temporary  impairment evaluations in reporting periods
beginning  after June 15,  2004,  but was delayed by FASB action in October 2004
through the issuance of a proposed FASB Staff Position  ("FSP") on the issue. In
July  2005,  the FASB  issued  FSP FAS  115-1  and FAS  124-1--"The  Meaning  of
Other-Than-Temporary  Impairment and its  Application  to Certain  Investments."
This final guidance eliminated  paragraphs 10-18 of EITF-03-1  (paragraphs 19-20
have no material  impact on the  financial  position or results of operations of
the Company) and will be effective for other-than-temporary  impairment analysis
conducted  in periods  beginning  after  December  15,  2005.  The  Company  has
evaluated  the impact  that the  adoption of FSP FAS 115-1 and FAS 124-1 and has
concluded  that the  adoption  will  not have a  material  impact  on  financial
position and results of operations upon adoption.

In December 2005,  the FASB issued FSP SOP 94-6-1,  "Terms of Loan Products that
May Give Rise to a  Concentration  of Credit Risk." The  disclosure  guidance in
this FSP is effective for interim and annual  periods  ending after December 19,
2005.  The FSP states that the terms of certain  loan  products  may  increase a
reporting  entity's  exposure  to  credit  risk  and  thereby  may  result  in a
concentration  of credit risk as that term is used in SFAS No. 107, either as an
individual  product type or as a group of products with similar  features.  SFAS
No. 107 requires  disclosures  about each significant  concentration,  including
"information  about the (shared)  activity,  region, or economic  characteristic
that   identifies  the   concentration."   The  FSP  suggests   possible  shared
characteristics  on which  significant  concentrations  may be determined  which
include,  but are not  limited  to:  borrowers  subject to  significant  payment
increases,  loans with terms that permit  negative  amortization  and loans with
high loan-to-value ratios.

This FSP requires  entities to provide the disclosures  required by SFAS No. 107
for loan products that are  determined  to represent a  concentration  of credit
risk in accordance with the guidance of this FSP for all periods presented.  The
Company adopted this disclosure standard effective December 31, 2005.

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  2004  financial
statements were reclassified to conform with the 2005 presentation.



                                       28
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

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, 2005 and 2004, the requirement was
met by the cash balance in the account.

NOTE 3 - INVESTMENT SECURITIES

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>
   Securities of U.S. government agencies
     and corporations ............................    $  3,000,000     $        -     $    10,312    $  2,989,688
                                                      ============     ===========    ===========    ============
December 31, 2004
   Securities of U.S. government agencies
     and corporations ............................    $  3,000,000     $        -     $    30,937    $  2,969,063
                                                      ============     ===========    ===========    ============
</TABLE>

Securities of U.S.  government  agencies and  corporations  at December 31, 2005
consists of one security which matured on February 9, 2006.

The following table shows gross unrealized losses and fair value,  aggregated by
investment category,  and length of time that individual securities have been in
a continuous unrealized loss position, at December 31, 2005.

Securities Available for Sale
<TABLE>
<CAPTION>
                                           Less than             Twelve months
                                         twelve months               or more                     Total
                                         -------------               -------                     -----
                                                  Unrealized                Unrealized                Unrealized
                                     Fair value      losses    Fair value      losses    Fair value      losses
                                     ----------      ------    ----------      ------    ----------      ------
Securities of other U.S.
<S>                               <C>            <C>          <C>          <C>         <C>           <C>
  government agencies and
  corporations ................   $   2,989,688  $    10,312  $        -   $        -  $  2,989,688  $    10,312
                                  =============  ===========  ===========  =========== ============  ===========
</TABLE>

There were no securities with  unrealized  losses for more than twelve months at
December 31, 2005. At December 31, 2005 and 2004, no investment  securities were
pledged  as  collateral  to secure  public  deposits  or for other  purposes  as
required or permitted by law.

NOTE 4 - LOANS RECEIVABLE

Major  classifications  of loans  receivable  at December 31 are  summarized  as
follows:
                                                           December 31,
                                                           ------------
                                                       2005             2004
                                                       ----             ----
Mortgage loans on real estate:
   Residential 1-4 Family ................       $ 17,501,409       $ 12,419,144
   Multifamily ...........................                  -            222,617
   Commercial ............................         50,513,416         28,587,423
   Construction and land .................         24,559,227         15,063,632
   Second Mortgage Loans .................          1,384,798          1,368,602
   Equity Lines of Credit ................         25,056,638         18,229,803
                                                 ------------       ------------
                                                  119,015,488         75,891,221
Commercial and industrial ................         17,809,622         11,490,226
Consumer .................................          2,305,145          2,917,672
Other ....................................             22,045              4,630
                                                 ------------       ------------
      Total loans ........................       $139,152,300       $ 90,303,749
                                                 ============       ============

                                       29
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 4 - LOANS RECEIVABLE - continued

Transactions  in the  allowance  for  loan  losses  during  2005  and  2004  are
summarized below:

                                                      2005               2004
                                                      ----               ----
Balance, beginning of year ................       $ 1,332,200        $   826,593
Provision charged to operations ...........           550,362            505,607
Chargeoffs ................................              (463)                 -
                                                  -----------        -----------
     Balance, end of year .................       $ 1,882,099        $ 1,332,200
                                                  ===========        ===========

At December 31, 2005 and 2004,  the Bank had no loans in nonaccrual  status,  no
loans  past  due  ninety  days or  more  and  still  accruing  interest,  and no
restructured  loans.  At December 31, 2005, the Bank had one criticized  loan in
the amount of $1,214,446, which is secured by real estate.


NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT

Premises, furniture and equipment consisted of the following:

                                                              December 31,
                                                              ------------
                                                          2005             2004
                                                          ----             ----
Buildings ........................................     $  220,683     $  210,140
Leasehold improvements ...........................        276,282         92,562
Furniture and equipment ..........................        884,452        691,022
                                                       ----------     ----------
    Total ........................................      1,381,417        993,724
Less, accumulated depreciation ...................        457,559        283,213
                                                       ----------     ----------

  Premises, furniture and equipment, net .........     $  923,858     $  710,511
                                                       ==========     ==========

Depreciation  and  amortization  expense was $165,184 and $132,759 for the years
ended December 31, 2005 and 2004, respectively.


NOTE 6 - DEPOSITS

At December 31, 2005, the scheduled  maturities of  certificates of deposit were
as follows:

     Maturing In:                                              Amount
                                                           ---------------
        2006 ..........................................    $    63,553,673
        2007 ..........................................         14,381,725
        2008 ..........................................          3,564,540
                                                           ---------------
          Total .......................................    $    81,499,938
                                                           ===============

NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK

As of December  31,  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 Company has pledged liens on a portion of one to
four  family  revolving  loans.  The  aggregate   balance  of  these  loans  was
$24,019,419  at  December  31,  2005.  The  advance  is  subject  to  prepayment
penalties.


                                       30
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 8 - NOTE PAYABLE

On August 12,  2004,  the  Company  executed a line of credit with Bank One (now
Chase Bank) to borrow up to $7,000,000. The entire principal balance of any note
under the line of credit  was  scheduled  to be due  September  30,  2006,  with
interest payments due monthly. The interest rate on the note was 2.75% above the
30 day LIBOR  rate.  The note was secured by 100% of the Bank stock owned by the
Company.  Proceeds  from the note were used to  provide  capital to the Bank for
regulatory  purposes.  After a public offering of equity securities in December,
2005,  the  outstanding  balance  of the note along with  accrued  interest  was
repaid.  There was no outstanding  balance on this line of credit as of December
31, 2005.


NOTE 9 - OTHER OPERATING EXPENSES

Other  operating  expenses  for the years ended  December  31, 2005 and 2004 are
summarized below:

                                                           2005           2004
                                                           ----           ----
Professional fees ................................     $  107,682     $  199,392
Telephone expenses ...............................         39,346         34,048
Office supplies, stationery, and printing ........         83,215         57,802
Data Processing and related expenses .............        312,997        226,311
Advertising and public relations .................         73,297         69,505
Postage ..........................................         33,379         13,142
Other legal expenses .............................         43,942         55,485
Other ............................................        409,720        336,946
                                                       ----------     ----------
   Total .........................................     $1,103,578     $  992,631
                                                       ==========     ==========

NOTE 10 - INCOME TAXES

Income tax expense for 2005 and 2004 is summarized as follows:

                                                          2005             2004
                                                          ----             ----
  Current portion
    Federal ......................................     $  12,371   $          -
    State ........................................         2,735          6,843
                                                       ---------      ---------
       Total current .............................        15,106          6,843
                                                       ---------      ---------
  Deferred .......................................       328,622       (229,418)
                                                       ---------      ---------
  Income tax expense (benefit) ...................     $ 343,728      $(222,575)
                                                       =========      =========

Income tax expense is allocated as follows:
    To continuing operations .....................     $ 346,277      $(228,631)
    To shareholders' equity ......................        (2,549)         6,056
                                                       ---------      ---------
                                                       $ 343,728      $(222,575)
                                                       =========      =========


                                       31
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


NOTE 10 - INCOME TAXES - continued

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

                                                               December 31,
                                                               ------------
                                                          2005             2004
                                                          ----             ----
Deferred tax assets:
    Allowance for loan losses ..................      $  630,604      $  444,340
    Net operating loss carryforward ............         450,657         924,361
    Organization and start-up costs ............         123,675         206,125
    Loan origination costs .....................          82,376          67,809
    Other ......................................           3,172           1,761
                                                      ----------      ----------
       Total deferred tax assets ...............       1,290,484       1,644,396
                                                      ----------      ----------
Deferred tax liabilities:
    Accumulated depreciation ...................          49,584          72,325
    Available for sale securities ..............           3,507           6,056
                                                      ----------      ----------
       Total deferred tax liabilities ..........          53,091          78,381
                                                      ----------      ----------
       Net deferred tax asset ..................      $1,237,393      $1,566,015
                                                      ==========      ==========

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, 2005 management  believes it will fully
realize 100% of the Company's deferred tax asset.

The Company has a net operating loss for income tax purposes of $1,325,461 as of
December 31,  2005.  This net  operating  loss expires in the years 2021 through
2024.

A  reconciliation  between  the income tax  expense  and the amount  computed by
applying the Federal  statutory  rate of 34% for 2005 and 2004 to income  before
income taxes follows:

                                                            2005         2004
                                                            ----         ----
Tax expense (benefit) at statutory rate ..............   $ 337,793    $(224,876)
State income tax, net of federal income tax effect ...      18,432       (7,525)
Other ................................................      (9,948)       3,770
                                                         ---------    ---------
    Income tax expense (benefit) .....................   $ 346,277    $(228,631)
                                                         =========    =========

NOTE 11 - LEASES

The Company has entered into five 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 2015. 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.  Rent expense is  recognized on a straight line basis over the life of
the minimum lease term.

Rental expense under these operating lease  agreements was $198,740 and $175,180
for the years ended December 31, 2005 and 2004, respectively.

                                       32
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 11 - 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 in the
aggregate are:

     2006 ..................................................      $     211,576
     2007 ..................................................            126,898
     2008 ..................................................            123,300
     2009 ..................................................            123,300
     2010 ..................................................             91,675
     Thereafter ............................................            204,200
                                                                  -------------
     Total minimum future rental payments ..................      $     880,949
                                                                  =============


NOTE 12 - RELATED PARTY TRANSACTIONS

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, 2005 and 2004,  the Bank had related  party
loans totaling $3,476,375 and $2,591,200, respectively. During 2005, advances on
related party loans totaled $1,249,821, and repayments were $364,646.

As of December 31, 2005 and 2004,  deposits of directors and executive  officers
of the Company and their  immediate  families  and  business  interests  totaled
$2,741,681 and $2,707,199, respectively.


NOTE 13 - 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 14 - STOCK WARRANTS

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.  The
warrants  vested  one-third on July 15 of each 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, 2005 and 2004, 200,555 warrants
had been granted and all were exercisable.


                                       33
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 15 - 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 56,200 stock  options to its  employees.
Of these,  40,200 were  granted on July 15,  2002;  100 were granted on July 17,
2002;  200 were granted on September 6, 2002;  2,000 were granted on January 21,
2004;  1,500 were granted on January 31,  2004;  2,000 were granted on April 27,
2005;  200 were granted on May 9, 2005; and 10,000 were granted on June 6, 2005.
These options 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 2005 and 2004 have exercise  prices of $13.50 and $11.00,
respectively  per share and  terminate  ten years  after the date of grant.  The
weighted average grant date fair value was $3.30 in 2005 and $2.91 in 2004.

A summary of the status of the  Company's  stock options as of December 31, 2005
and 2004, and changes during each year is presented below:

<TABLE>
<CAPTION>
                                                                      2005                        2004
                                                                      ----                        ----
                                                                             Weighted                     Weighted
                                                                             Average                      Average
                                                                            Exercise                     Exercise
                                                                Shares        Price         Shares         Price
                                                                ------        -----         ------         -----
<S>                                                              <C>       <C>              <C>         <C>
     Outstanding at beginning of year .......................    90,301    $   10.01        105,201     $   10.00
     Granted ................................................    12,200        13.50          3,500         11.00
     Exercised ..............................................                                    -
     Forfeited ..............................................        -                      (18,400)        10.00
                                                                -------                     -------
     Outstanding at end of year .............................   102,501        10.43         90,301         10.01
                                                                =======                     =======
</TABLE>

Options  exercisable  at  December  31,  2005 and 2004 were  58,391 and  38,821,
respectively.  The  weighted-average  exercise price of these options was $10.00
and $10.00 in 2005 and 2004, respectively.

The following table summarizes information about stock options outstanding under
the Company's plan at December 31, 2005:
                                                    Outstanding      Exercisable
                                                    -----------      -----------
     Number of options ......................           102,501           58,391
     Weighted average remaining life ........        6.94 years       6.54 years
     Weighted average exercise price ........    $        10.43    $       10.00
     High exercise price ....................    $        13.50    $       10.00
     Low exercise price .....................    $        10.00    $       10.00


                                       34
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 16 - INCOME (LOSS) PER SHARE

Basic income  (loss) per share is computed by dividing net income  (loss) by the
weighted-average number of common shares outstanding.  Diluted loss per share is
computed by dividing net income (loss) 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.

                                                           2005          2004
                                                           ----          ----
Net income (loss) per share - basic computation:

Net income (loss) to common shareholders ..........   $   647,233   $  (432,770)
                                                      ===========   ===========

Average common shares outstanding - basic .........     1,473,878     1,427,303
                                                      ===========   ===========

Basic income (loss) per share .....................   $       .44   $     (0.30)
                                                      ===========   ===========

Net income (loss) per share - dilutive computation:

Net income (loss) to common shareholders ..........   $   647,233   $  (432,770)
                                                      ===========   ===========

Average common shares outstanding - basic .........     1,473,878     1,427,303

Incremental shares from assumed conversion of
   stock options ..................................        79,104        27,485
                                                      -----------   -----------

Average common shares outstanding - diluted .......     1,552,982     1,454,788
                                                      ===========   ===========

Diluted income (loss) per share ...................   $       .42   $     (0.30)
                                                      ===========   ===========


NOTE 17 - REGULATORY MATTERS

The Bank is subject to various regulatory capital  requirements  administered by
the federal banking agencies.  Failure to meet minimum capital  requirements can
initiate certain mandatory,  and 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.

                                       35
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 17 - REGULATORY MATTERS - continued

As of December 31, 2005,  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, 2005 and 2004.

<TABLE>
<CAPTION>
                                                                                                                     To Be Well-
                                                                                                                 Capitalized Under
                                                                                          For Capital            Prompt Corrective
                                                                   Actual              Adequacy Purposes         Action Provisions
                                                                   ------              -----------------         -----------------
                                                            Amount         Ratio      Amount        Ratio      Amount        Ratio
                                                            ------         -----      ------        -----      ------        -----
December 31, 2005
<S>                                                      <C>               <C>     <C>               <C>    <C>               <C>
  Total capital (to risk-weighted assets) ..........     $18,994,314       13.18%  $11,524,913       8.00%  $14,406,141       10.00%
  Tier 1 capital (to risk-weighted assets) .........      17,192,054       11.93     5,762,456       4.00     8,643,685        6.00
  Tier 1 capital (to average assets) ...............      17,192,054       11.21     6,133,447       4.00     7,666,809        5.00

December 31, 2004
  Total capital (to risk-weighted assets) ..........     $ 9,619,000       10.37%  $ 7,419,390       8.00%  $ 9,274,238       10.00%
  Tier 1 capital (to risk-weighted assets) .........       6,558,000        7.07     3,709,695       4.00     5,564,543        6.00
  Tier 1 capital (to average assets) ...............       6,558,000        6.88     3,813,280       4.00     4,766,600        5.00
</TABLE>

The Federal Reserve has similar  requirements  for bank holding  companies.  The
Company  was not  subject to these  requirements  in 2004  because  the  Federal
Reserve applies its guidelines on a bank-only  basis for bank holding  companies
with less than  $150,000,000  in consolidated  assets.  At December 31, 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%.  As of December
31, 2005, the Company exceeded those limits by a substantial margin. 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 18 - UNUSED LINES OF CREDIT

As of December  31,  2005,  the  Company had unused  lines of credit to purchase
federal funds from unrelated  banks totaling  $2,700,000.  These lines of credit
are available on a one to fourteen day basis for general corporate purposes.  As
of December 31, 2005, 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,  which meant  $16,468,565  was available as of December
31,  2005.  As of December 31, 2005,  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  $7,000,000  as of December  31, 2005.  As of December 31, 2005,  the
Company did not owe any balance on this line.

NOTE 19 - 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
$14.8 million.  Proceeds from the offering will be 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.

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, 2005 and 2004,  the Bank had no retained  earnings
available for dividends.


                                       36
<PAGE>

NOTE 20 - 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,
                                                           ------------
                                                      2005              2004
                                                      ----              ----

Commitments to extend credit .............        $30,495,033        $22,908,305
                                                  ===========        ===========

Standby letters of credit ................        $ 1,118,352        $   610,000
                                                  ===========        ===========


NOTE 21 - 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.


                                       37
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


NOTE 21 - 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.

Note  Payable - The fair value of the note  payable  approximates  its  carrying
value because it reprices periodically.

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,
                                                                                           ------------
                                                                            2005                                 2004
                                                                            ----                                 ----
                                                                Carrying         Estimated            Carrying            Estimated
Financial Assets:                                               Amount          Fair Value             Amount            Fair Value
                                                                ------          ----------             ------            ----------
<S>                                                         <C>                 <C>                 <C>                 <C>
  Cash and due from banks ..........................        $  3,109,712        $  3,109,712        $  1,614,863        $  1,614,863
  Federal funds sold ...............................          17,858,000          17,858,000           1,767,000           1,767,000
  Nonmarketable equity securities ..................             511,200             511,200             392,400             392,400
  Securities available for sale ....................           2,989,688           2,989,688           2,969,063           2,969,063
  Loans receivable .................................         139,152,300         137,089,994          90,303,749          90,234,148
  Accrued interest receivable ......................             649,818             649,818             372,527             372,527

Financial Liabilities:
  Demand deposit, interest-bearing
    transaction, and savings accounts ..............        $ 54,245,772        $ 54,245,772        $ 41,184,456        $ 41,184,456
  Certificates of deposit and other
    time deposits ..................................          81,499,938          81,051,780          44,909,468          45,007,388
  Advances from Federal Home
    Loan Bank ......................................           1,000,000             993,698                   -                   -
  Note payable .....................................                   -                   -             900,000             900,000
  Accrued interest payable .........................             905,271             905,271             289,089             289,089
</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 ...........................       $30,495,033       $          -       $22,908,305       $          -
  Standby letters of credit ..............................         1,118,352                  -           610,000                  -
</TABLE>


                                       38
<PAGE>


                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

NOTE 22 - 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,
                                                               ------------
                                                           2005           2004
                                                           ----           ----
Assets
   Cash ............................................   $ 7,844,259   $ 1,143,098
   Investment in banking subsidiary ................    18,478,989     8,140,318
   Loans receivable ................................       173,772     2,542,810
      Less allowance for loan losses ...............         2,600        11,000
                                                       -----------   -----------
      Loans, net ...................................       171,172     2,531,810
                                                       -----------   -----------
   Other assets ....................................             -        37,815
                                                       -----------   -----------
      Total assets .................................   $26,494,420   $11,853,041
                                                       ===========   ===========

Liabilities and shareholders' equity
   Other liabilities ...............................   $   126,506   $    27,927
   Note payable ....................................             -       900,000
   Shareholders' equity ............................    26,367,914    10,925,114
                                                       -----------   -----------
      Total liabilities and shareholders' equity ...   $26,494,420   $11,853,041
                                                       ===========   ===========

                       Condensed Statements of Operations
                 For the years ended December 31, 2005 and 2004

<TABLE>
<CAPTION>
                                                                                                       2005                  2004
                                                                                                       ----                  ----
<S>                                                                                                  <C>                  <C>
Income ..................................................................................            $ 174,500            $  73,446

Expenses
   Other expenses .......................................................................              119,696               14,353
                                                                                                     ---------            ---------
Income before income taxes and equity in
   undistributed income (losses) of banking subsidiary ..................................               54,804               59,093

   Income tax ...........................................................................               28,168                    -

   Equity in undistributed income (losses) of banking subsidiary ........................              620,597             (491,863)
                                                                                                     ---------            ---------
Net income (loss) .......................................................................            $ 647,233            $(432,770)
                                                                                                     =========            =========
</TABLE>

                                       39
<PAGE>

                          CAROLINA NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements


NOTE 22 - CAROLINA NATIONAL CORPORATION (PARENT COMPANY ONLY) - continued

                       Condensed Statements of Cash Flows
                 For the years ended December 31, 2005 and 2004


<TABLE>
<CAPTION>
                                                                                                     2005                  2004
                                                                                                     ----                  ----
Cash flows from operating activities:
<S>                                                                                             <C>                    <C>
  Net income (loss) ..................................................................          $    647,233           $   (432,770)
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
     Provision for loan losses .......................................................                (8,400)               (16,718)
     Increase (decrease) in other assets .............................................                37,815                (33,805)
     Equity in undistributed (income) losses of banking subsidiary ...................              (620,597)               491,863
     (Decrease) increase in other liabilities ........................................                98,579                 26,972
                                                                                                ------------           ------------
       Net cash provided by operating activities .....................................               154,630                 35,542
                                                                                                ------------           ------------

Cash flows from investing activities:
  Purchase of Bank stock .............................................................            (9,700,000)                     -
  Net decrease (increase) in loans ...................................................             2,369,039               (795,700)
                                                                                                ------------           ------------
       Net cash used by investing activities .........................................            (7,330,961)              (795,700)
                                                                                                ------------           ------------

Cash flows from financing activities:
  Proceeds from notes payable ........................................................                     -                900,000
  Repayments of notes payable ........................................................              (900,000)                     -
  Issuance of common stock, net ......................................................            14,177,492                      -
                                                                                                ------------           ------------
       Net cash provided by financing activities .....................................            13,277,492                900,000
                                                                                                ------------           ------------

Net (decrease) increase in cash and cash equivalents .................................             6,701,161                139,842

Cash and cash equivalents, beginning of year .........................................             1,143,098              1,003,256
                                                                                                ------------           ------------

Cash and cash equivalents, end of year ...............................................          $  7,844,259           $  1,143,098
                                                                                                ============           ============
</TABLE>

                                       40
<PAGE>

STOCK INFORMATION:

Our common stock currently  trades on the Nasdaq Capital Market under the symbol
"CNCP."  Prior to December  15,  2005,  our common stock was not traded over the
counter or on any exchange and there was no established trading market, although
management was aware of a few transactions  between  individuals.  The following
table shows the  reported  high and low sale prices of our common  stock for the
periods  indicated.  For periods prior to the fourth quarter of 2005, the prices
shown  are  from  the  limited  transactions  of  which  management  was  aware.
Management has not ascertained that any of these transactions were the result of
arm's length transactions between the parties, and because of the limited number
of shares involved,  the prices may not be indicative of the market value of the
common stock.  For the fourth  quarter of 2005, the  information  below reflects
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

                                                           Year Ended
                                                         December 31, 2004
                                                         -----------------
                                                  Low                      High
                                                  ---                      ----

      First Quarter.........................     $11.00                   $12.00
      Second Quarter........................      12.00                    12.00
      Third Quarter ........................      12.00                    12.50
      Fourth Quarter........................      12.50                    13.50
                                                           Year Ended
                                                         December 31, 2005
                                                         -----------------
                                                  Low                      High
                                                  ---                      ----

      First Quarter.........................     $13.50                   $13.50
      Second Quarter........................      13.50                    13.50
      Third Quarter ........................      13.50                    13.50
      Fourth Quarter........................      16.25                    18.46

As of December 31, 2005,  there were  approximately  1,970 holders of our common
stock.

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.


                                       41