United States Securities and Exchange Commission

Washington, D.C. 20549

Form SB-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

(Amendment No. ____)

CORNERSTONE BANCORP
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)

South Carolina 6021 57-1077978
- ----------------------------- --------------------------- -------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

1670 East Main Street, Easley, South Carolina 29640 (864) 306-1444
- --------------------------------------------------------------------------------
(Address and telephone number of principal executive offices)

1670 East Main Street, Easley, South Carolina 29640 (864) 306-1444
- --------------------------------------------------------------------------------
(Address of principal place of business)

Copies to:
Mr. J. Rodger Anthony George S. King, Jr., Esquire
Chief Executive Officer Suzanne Hulst Clawson, Esquire
Cornerstone Bancorp Haynsworth Sinkler Boyd, P.A.
1670 East Main Street 1201 Main Street, Suite 2200
Easley, South Carolina 29640 Columbia, South Carolina 29201
(864) 306-1444 (803) 540-7819
(Name, address and telephone number of
agent for service)

Approximate date of proposed sale to the public: As soon as possible after
effectiveness of this Registration Statement.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]

CALCULATION OF REGISTRATION FEE

Title of each Proposed Proposed maximum
class of securities Amount to be maximum offering aggregate offering Amount of
to be registered registered price per unit price registration fee
---------------- ---------- -------------- ----- ----------------

Common Stock 445,000 shares $13.50 $6,007,500.00 $707.08

The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

Prospectus

CORNERSTONE BANCORP

445,000 Shares

Common Stock

$13.50 per Share

Cornerstone Bancorp is the holding company for Cornerstone National
Bank, its wholly-owned subsidiary.

We are offering 445,000 shares of our common stock for a purchase price
of $13.50 per share. The minimum purchase is 100 shares.

No underwriters or compensated selling agents are currently involved in
this offering, and we plan to sell the common stock directly to the public
solely through the efforts of our officers and directors.

Our stock is not traded or listed on any national securities exchange
or market, and there currently is no known market for our stock. We have no
present plans to have our stock listed on an exchange.

Please make subscription checks payable to "Cornerstone Bancorp." This
offering will terminate on ____________, 2005 (unless we extend the termination
date to no later than ____________, 2005), or it may be terminated earlier if
all of the shares are sold. You must purchase at least 100 shares to participate
in this offering. No minimum amount of stock is required to be sold in this
offering, and subscription funds will not be escrowed. See "OFFERING AND METHOD
OF SUBSCRIPTION."

The purchase of these securities involves risks. See "RISK FACTORS,"
beginning on page 4 to read about factors you should consider before making a
decision about whether to invest in our common stock.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

The shares of common stock we are offering are not savings accounts or
deposits. They will NOT be insured by the Federal Deposit Insurance Corporation
or any other government agency or company.

Per Share Total(1)
--------- --------

Public offering price.............................................. $ 13.50 $ 6,007,500
Underwriting discounts and commissions............................. -0- -0-
------- -----------
Proceeds, before expenses, to Cornerstone Bancorp.................. $ 13.50 $ 6,007,500

(1) This is the amount of proceeds before deduction of expenses associated with
this offering payable by Cornerstone Bancorp. Such expenses are estimated
at $60,000.

The Date of this Prospectus is __________, 2005

TABLE OF CONTENTS

Page

SUMMARY...........................................................................................................1
SUMMARY CONSOLIDATED FINANCIAL INFORMATION........................................................................3
RISK FACTORS......................................................................................................4
FORWARD LOOKING STATEMENTS........................................................................................8
OFFERING AND METHOD OF SUBSCRIPTION...............................................................................8
USE OF PROCEEDS...................................................................................................9
PRO FORMA CAPITALIZATION.........................................................................................10
DIVIDENDS........................................................................................................10
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS..........................................................11
BUSINESS OF CORNERSTONE BANCORP AND CORNERSTONE NATIONAL BANK....................................................11
SERVICES WE OFFER................................................................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........................................................16
DIRECTORS AND EXECUTIVE OFFICERS.................................................................................36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................37
MANAGEMENT COMPENSATION..........................................................................................38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................40
SUPERVISION AND REGULATION.......................................................................................40
DESCRIPTION OF OUR COMMON STOCK..................................................................................45
MATERIALS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND REPORTS TO SHAREHOLDERS..........................47
LEGAL MATTERS....................................................................................................48
ACCOUNTING MATTERS...............................................................................................48
FINANCIAL STATEMENTS............................................................................................F-1

APPENDIX A -- Subscription Agreement

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

You should rely only on the information contained in this prospectus.
We have not authorized any other person to provide you with information
different from the information contained in this prospectus. We are not making
an offer to sell our common stock in any jurisdiction where the offer or sale is
not permitted. You should assume that the information contained in this
prospectus is correct only as of the date on the front cover page of this
prospectus, regardless of the time of the delivery of this prospectus or any
sale of our common stock.

SUMMARY

This is a brief summary of some of the information in this prospectus.
It is not a complete statement of all material facts about the matters in this
prospectus. Please read the entire prospectus carefully before you make a
decision whether to invest. Unless the context indicates otherwise, as used
throughout this prospectus, the terms "we", "us", "our" and the "Company" mean
Cornerstone Bancorp and its subsidiaries, and references to "you", "your", "I",
"me" and "my" refer to prospective purchasers of our common stock in this
offering. The term our "bank" refers to our subsidiary bank, Cornerstone
National Bank. Words in the masculine include the feminine genders, and words in
the plural include the singular and words in the singular include the plural.

Cornerstone Bancorp

Cornerstone Bancorp is the holding company for Cornerstone National
Bank. Our principal executive office is located at 1670 East Main Street,
Easley, South Carolina 29640. Our telephone number is (864) 306-1444.

Cornerstone National Bank

Cornerstone National Bank is a national bank organized in 1999 that
engages in a commercial and retail banking business from its main office at 1670
East Main Street in Easley, South Carolina, and from branches located at 45
Farrs Bridge Road in the Berea area of Greenville, South Carolina, and 11000
Anderson Road in the Powdersville area of Anderson County, South Carolina.

Our Directors and Executive Officers

Our directors, who are also the directors of Cornerstone National Bank,
are:

J. Rodger Anthony S. Ervin Hendricks, Jr.
Walter L. Brooks Joe E. Hooper
T. Edward Childress, III Robert R. Spearman
Ben L. Garvin John M. Warren, Jr.
J. Bruce Gaston George I. Wike, Jr.

Our executive officers are J. Rodger Anthony, our President, and
Jennifer M. Champagne, our Executive Vice President and Chief Financial Officer.
Ben L. Garvin is our Secretary and Treasurer and President of our bank.

Our directors and executive officers have preliminarily indicated that
they plan to purchase an aggregate of 112,500 shares in the offering, though
they have no obligation to do so, and may purchase more or fewer shares or no
shares.

Management Philosophy and Policy

We believe that, with the increased demand for banking services arising
from steady growth in population and personal income, the banking market will
continue to grow in our market areas. The wave of bank mergers and
consolidations has resulted in most banks in our market areas being controlled
by large out-of-state institutions. One of the primary objectives of our
business philosophy is to provide citizens of our communities with more
opportunity to have their banking needs met locally. Our officers and directors
are involved extensively in business in our market areas and strive to make
meeting the credit needs of our areas a first priority. We believe that a large
number of bank customers prefer a local bank, and we are dedicated to providing
personalized banking to the citizens of our market areas. Based on our knowledge
of our market areas as long-time residents and business people, we believe that,
as a bank owned and managed by people living and working in the local area, we
can better serve the community than large institutions headquartered outside
South Carolina for the following reasons:

o Decisions regarding credit and services of a bank can best be made at
a local level.

o Funds made available from local deposits should be re-invested in the
depositors' community.

o Stability and continuity of management within a banking institution
without frequent changes are important to its customers.

officers and customers by minimizing transfers of account officers to different
customers, departments or locations. We also seek to limit the number of
accounts served by each of our officers to a level that will permit personal
attention to each customer and full development of each customer's business
relationship with us. Furthermore, because we make all credit and related
decisions locally, we are able to provide prompt responses to our customers.

Use of Proceeds

We plan to use the proceeds of this offering to provide additional
capital to fund growth for our bank and for our general corporate purposes. No
minimum amount is required to be sold in this offering and we will not escrow
the proceeds.

The Offering

Shares of common stock offered............. 445,000

Offering price per share................... $13.50

Minimum individual purchase................ 100 shares

Dividends.................................. We have in the past, and expect to
continue for the foreseeable
future, to retain our earnings to
fund the development and growth of
our business. Therefore, we do not
anticipate declaring cash dividends
on our common stock in the
foreseeable future. See "DIVIDENDS"
on page 10.

Use of proceeds............................ Assuming all of the shares are sold, we estimate the following
amounts will be received and used:

Proceeds received $6,007,500
o Used to pay offering expenses $ (60,000)
----------
o Used to increase our bank's capital and for
general corporate purposes $5,947,500
==========
See "USE OF PROCEEDS" on page 9.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following table sets forth summary consolidated financial data for
Cornerstone Bancorp. The financial data for the five years ended December 31,
2004 are derived from our audited consolidated financial statements. The
financial data for the six-month periods ended June 30, 2005 and 2004 are
derived from our unaudited consolidated financial statements. Operating results
for the six months ended June 30, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. You should
read the following summary consolidated financial information in conjunction
with our financial statements and the notes thereto appearing elsewhere in this
prospectus and the information contained in "Management's Discussion and
Analysis or Plan of Operation" beginning on page 16.

Six Months ended Years ended
June 30, December 31,
-------- ------------
(Dollars in thousands, except per share) 2005 2004 2004 2003 2002 2001 2000
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Income Statement Data:

Interest income ............................. $ 2,788 $ 2,087 $ 4,532 $ 3,801 $ 3,293 $ 2,927 $ 2,055
Interest expense ............................ 922 591 1,291 1,196 1,213 1,423 834
-------- -------- -------- -------- -------- -------- --------
Net interest income ......................... 1,866 1,496 3,241 2,605 2,080 1,504 1,221
Provision for loan losses ................... 36 88 197 174 183 180 102
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses ........................... 1,830 1,408 3,044 2,431 1,897 1,324 1,119
Noninterest income .......................... 437 352 719 617 472 191 73
Noninterest expense ......................... 1,509 1,371 2,710 2,509 2,062 1,659 1,074
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes ........... 758 389 1,053 539 307 (144) 118
Income tax expense (benefit) ................ 276 148 389 183 60 (7) 34
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................ $ 482 $ 241 $ 664 $ 356 $ 247 $ (137) $ 84
======== ======== ======== ======== ======== ======== ========
Balance Sheet Data:
Average Earning Assets ...................... $ 89,817 $ 77,166 $ 81,269 $ 68,660 $ 56,718 $ 40,973 $ 25,692
Assets ...................................... 101,272 86,182 100,632 84,540 66,673 50,950 35,382
Securities (1) .............................. 11,570 12,347 12,689 14,592 18,625 12,807 9,841
Loans (2) ................................... 76,271 64,926 75,158 59,409 41,700 31,473 18,438
Allowance for loan losses ................... 955 813 919 728 553 384 207
Deposits .................................... 82,030 69,703 82,519 65,286 53,708 39,910 24,791
Shareholders' equity ........................ 9,216 8,313 8,777 8,167 7,860 7,614 7,692
Per Share Data: (3)
Earnings (losses) (4) ...................... .40 .20 .56 .30 .21 (.12) .07
Book value ................................. 7.87 7.10 7.50 6.97 6.71 6.50 6.57
Selected Ratios:
Return on average assets(5) ............... .97% .57% .75% .48% .40% (.31%) .30%
Return on average equity(5) ............... 10.73% 5.84% 7.89% 4.45% 3.20% (1.80%) 1.11%
Net interest margin (5) (6) ............... 4.19% 3.91% 3.99% 3.79% 3.67% 3.67% 4.75%
Efficiency (7) ............................ 65.52% 74.40% 68.53% 77.87% 80.78% 97.87% 82.99%
Equity to assets(8) ....................... 9.10% 9.65% 8.72% 9.66% 11.79% 14.94% 21.74%
Capital and Liquidity Ratios: (9)
Average equity to average assets .......... 9.03% 9.78% 9.57% 10.85% 12.57% 17.10% 27.07%
Leverage (4.00% required minimum) ......... 8.6% 8.9% 8.4% 9.0% 9.8% 11.1% 16.9%
Tier 1 risk-based capital ratio ........... 9.7% 10.7% 9.9% 11.1% 13.9% 16.1% 26.2%
Total risk-based capital ratio ............ 10.8% 11.9% 11.1% 12.2% 15.0% 17.2% 27.1%
Average loans to average deposits ......... 92.5% 91.5% 91.9% 81.8% 89.1% 71.1% 75.7%

- --------
(1) Includes available-for-sale securities stated at fair value and
held-to-maturity securities at amortized book value. Nonmarketable equity
securities are excluded.
(2) Loans are stated at gross amounts before allowance for loan losses.
(3) Per share data for the six months ended June 30, 2004 and the years ended
December 31, 2004, 2003, 2002, 2001 and 2000 has been restated for the 10%
stock dividends in 2005, 2004, 2003 and 2002.
(4) Diluted.
(5) Ratios for less than one year have been annualized. (6) Net interest income
divided by average earning assets.
(7) Noninterest expense divided by the sum of net interest income and
noninterest income, net of gains and losses on sales of assets.
(8) Ending equity divided by ending assets.
(9) Capital and liquidity ratios are presented for the bank only. The capital
adequacy of the Company is measured by the capital ratios of the bank
because the Company has assets less than $150 million.

RISK FACTORS

Investment in our stock involves a significant degree of risk. Before
subscribing to purchase any of our shares, you should consider certain risks and
speculative features that are inherent in and affect our business. You should
only make an investment after careful consideration of the risk factors below.
You should not invest in our stock unless you can afford an investment involving
such risks. You should consider the following risks as well as others:

Risks Related to an Investment in Our Common Stock

You may lose your total investment.

Significant risks are associated with an investment in the common
stock of a relatively new company and with investment in a banking business.
Therefore, you should make sure before investing that you are financially able
to sustain a total loss of any funds used to purchase our common stock. Our
common stock is not a savings account or deposit, and will not be insured by the
Federal Deposit Insurance Corporation or any other government agency.

Our common stock is not listed on any exchange and has no trading
market, so you may have to hold our common stock indefinitely.

Our common stock is not traded or listed on any national securities
exchange or market, and currently there is no trading market for our stock. It
is not likely that an active and liquid trading market will develop or be
maintained in the foreseeable future. The development of an active public
trading market depends upon the existence of willing buyers and sellers and is
not within our control. For these reasons, our common stock may not be
appropriate as a short-term investment, and you should be prepared to hold our
common stock indefinitely. We also cannot assure you that you will be able to
resell your shares of common stock for a price that is equal to or greater than
the offering price.

We will not pay cash dividends in the foreseeable future.

We have never paid cash dividends and do not plan to pay cash dividends
in the foreseeable future. We plan to use the funds that might otherwise be
available to pay dividends to expand our business.

Declaration and payment of dividends are within the discretion of our
board of directors. Cornerstone National Bank will be our most likely source of
funds with which to pay cash dividends. Our bank's declaration and payment of
future dividends to us are within the discretion of the bank's board of
directors and are dependent upon the bank's earnings, financial condition, need
to retain earnings for use in its business and any other pertinent factors.
Payment of dividends by our bank is also subject to various regulatory
requirements.
See "DIVIDENDS."

Provisions in our articles of incorporation and South Carolina law may
discourage or prevent takeover attempts, and these provisions may have the
effect of reducing the market price for our stock.

Our articles of incorporation include several provisions that may have
the effect of discouraging or preventing hostile takeover attempts, and
therefore of making the removal of incumbent management difficult. The
provisions include staggered terms for our board of directors and requirements
of supermajority votes to approve certain business transactions. In addition,
South Carolina law contains several provisions that may make it more difficult
for a third party to acquire control of us without the approval of our board of
directors, and may make it more difficult or expensive for a third party to
acquire a majority of our outstanding common stock. To the extent that these
provisions are effective in discouraging or preventing takeover attempts, they
may tend to reduce the market price for our stock. See "DESCRIPTION OF CAPITAL
STOCK."

Our existing management will maintain significant control over us
following the offering.

Our directors and executive officers currently beneficially own 39.10%
of our common stock as of August 31, 2005. If our directors and executive
officers purchase the number of shares they have preliminarily indicated they
plan to purchase in this offering, they will beneficially own 35.43% of our
outstanding common stock immediately following this offering assuming that we
sell all of the offered shares. This percentage may increase to the extent that
the executive officers and directors elect to purchase additional shares in
connection with this offering or we sell less than all of the offered shares.

Accordingly, our current executive officers and directors will be able to
influence, to a significant extent, the outcome of all matters required to be
submitted to our shareholders for approval (including decisions relating to the
election of directors).

We arbitrarily determined the offering price.

The price at which we are selling our stock in this offering has not
been set as a result of arm's length negotiations or with reference to prices
established in an active trading market. In setting the offering price we made
reference to our knowledge of a few recent trades in our stock as well as data
regarding prices of other community bank holding companies. We cannot assure you
that you will be able to sell your shares at or above $13.50 per share.

We may need additional capital and we may dilute your common stock
ownership.

We have no present intention to issue additional stock after this
offering, but we may attempt to do so in the future if we decide additional
capital is required or useful. We have not attempted to determine whether
additional capital would be available or the terms on which such capital might
be available. Our common stock is not subject to any preemptive rights.
Therefore, your percentage ownership of our common stock will be diluted if we
sell additional shares of our common stock, if options we have granted are
exercised, and as we grant stock awards, options or other awards to hire or
retain employees. See "SUPERVISION AND REGULATION -- Capital Adequacy Guidelines
for Bank Holding Companies and National Banks" and "DESCRIPTION OF CAPITAL STOCK
- - No Preemptive Rights."

Risks Related to Our Business

We have a limited operating history, and as a result our financial
performance to date may not be a reliable indicator of whether our business
strategy will be successful.

We did not commence operations until September, 1999, and therefore you
have a limited historical basis upon which to rely for gauging our business
performance and making an investment decision. Our prospects are subject to the
risks and uncertainties frequently encountered by companies in their early
stages of development, including the risk that we will not be able to
sucessfully implement our long-term business plans. Accordingly, our financial
performance to date may not be representative of our long-term future
performance or indicative of whether our business strategy will be successful.

We depend on the services of a number of key personnel, and a loss of
any of those personnel could disrupt our operations and result in reduced
revenues.

We are a relationship-driven organization. Our growth and development
to date have depended in large part on the efforts of our senior management
team. These senior officers have primary contact with our customers and are
extremely important in maintaining personalized relationships with our customer
base, a key aspect of our business strategy, and in increasing our market
presence. The unexpected loss of services of one or more of these key employees
could have a material adverse effect on our operations and possibly result in
reduced revenues if we were unable to find suitable replacements promptly.

If our loan customers do not pay us as they have contracted to, we may
experience losses.

Our principal revenue producing business is making loans. If the loans
are not repaid, we will suffer losses. Even though we maintain an allowance for
loan losses, the amount of the allowance may not be adequate to cover the losses
we experience. We attempt to mitigate this risk by a thorough review of the
creditworthiness of loan customers. Nevertheless, there is risk that our credit
evaluations will prove to be inaccurate due to changed circumstances or
otherwise.

Our business is concentrated in relatively small market areas, and a
downturn in the economy of those areas, a decline in area real estate values or
other events in our market area may adversely affect our business.

Substantially all of our business is located in the Easley, Berea and
Powdersville areas of South Carolina. As a result, our financial condition and
results of operations may be affected by changes in the economies of these small
market areas. A prolonged period of economic recession, a general decline in our
market area real estate values or other adverse economic conditions in those
areas may result in decreases in demand for our services, increases in
nonpayment of loans and decreases in the value of collateral securing loans. The
existence of adverse economic conditions, declines in real estate values or the
occurrence of other adverse economic conditions in our market areas and South
Carolina could have a material adverse effect on our business, future prospects,
financial condition or results of operations.

We face strong competition from larger, more established competitors
which may adversely affect our ability to operate profitably.

We encounter strong competition from financial institutions operating
in our market areas. In the conduct of our business, we also compete with credit
unions, insurance companies, money market mutual funds and other financial
institutions, some of which are not subject to the same degree of regulation as
we are. Many of these competitors have substantially greater resources and
lending abilities than we have and offer services, such as investment banking,
trust and international banking services that we do not provide. We believe that
we have and will continue to be able to compete effectively with these
institutions because of our experienced bankers and personalized service, as
well as through loan participations and other strategies and techniques.
However, we cannot promise that we are correct in our belief. If we are wrong,
our ability to operate profitably may be negatively affected.

Risks Related to Our Industry

We are subject to governmental regulation which could change and
increase our cost of doing business or have an adverse affect on our business.

We operate in a highly regulated industry and are subject to
examination, supervision and comprehensive regulation by various federal and
state agencies. Our compliance with the requirements of these agencies is costly
and may limit our growth and earnings and restrict certain of our activities,
including payment of dividends, mergers and acquisitions, investments, loans and
interest rates charged, and locations of offices. We are also subject to
capitalization guidelines established by federal authorities and our failure to
meet those guidelines could result, in an extreme case, in our bank being placed
in receivership. We have also recently been subjected to the extensive and
expensive requirements imposed on public companies by the Sarbanes-Oxley Act of
2002 and related regulations.

The laws and regulations applicable to us could change at any time, and
we cannot predict the impact of these changes on our business or profitability.
Because government regulation greatly affects the business and financial results
of all commercial banks and bank holding companies, our cost of compliance could
adversely affect our ability to operate profitably.

We are susceptible to changes in monetary policy and other economic
factors which may adversely affect our ability to operate profitably.

Changes in governmental, economic and monetary policies may affect the
ability of our bank to attract deposits and make loans. The rates of interest
payable on deposits and chargeable on loans are affected by governmental
regulation and fiscal policy as well as by national, state and local economic
conditions. All of these matters are outside of our control and affect our
ability to operate profitably.

Our continued pace of growth or regulatory requirements may require us
to raise additional capital in the future, but that capital may not be available
when it is needed or be available on favorable terms.

We anticipate that our capital resources following this offering will
satisfy our capital requirements for the foreseeable future. Nevertheless, we
may need to raise additional capital to support additional growth or to meet
regulatory requirements. Our ability to raise additional capital, if needed,

will depend, among other things, on conditions in the capital markets at that
time, which are outside our control, and on our financial condition and
performance. If we cannot raise additional capital on acceptable terms when
needed, our ability to further expand our operations through internal growth and
acquisitions could be limited.

Technological changes affect our business, and we may have fewer
resources than many of our competitors to invest in technological improvements.

The financial services industry continues to undergo rapid
technological changes with frequent introductions of new technology-driven
products and services. In addition to enabling financial institutions to serve
clients better, the effective use of technology may increase efficiency and may
enable financial institutions to reduce costs. Our future success may depend, in
part, upon our ability to use technology to provide products and services that
provide convenience to customers and to create additional efficiencies in our
operations. We may need to make significant additional capital investments in
technology in the future, and we may not be able to effectively implement new
technology-driven products and services. Many of our competitors have
substantially greater resources to invest in technological improvements.

Our profitability and liquidity may be affected by changes in interest
rates and economic conditions.

Our profitability depends upon our net interest income, which is the
difference between interest earned on our interest-bearing assets, such as loans
and investment securities, and interest expense on interest-bearing liabilities,
such as deposits and borrowings. Our net interest income will be adversely
affected if market interest rates change such that the interest we pay on
deposits and borrowings increases faster than the interest earned on loans and
investments. Interest rates, and consequently our results of operations, are
affected by general economic conditions (domestic and foreign) and fiscal and
monetary policies. Monetary and fiscal policies may materially affect the level
and direction of interest rates. Beginning in June 2004, the Federal Reserve has
increased its target for short-term interest rates by 250 basis points from 1.0%
to 3.5%. Increases in interest rates generally decrease the market values of
interest-bearing investments and loans held and therefore may adversely affect
our liquidity and earnings. Increased interest rates also generally affect the
volume of mortgage loan originations, and the ability of borrowers to perform
under existing variable rate loans of all types.

FORWARD LOOKING STATEMENTS

This prospectus 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," 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 new company with a 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;

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

o the factors discussed in "Risk Factors" beginning on page 4 of this
prospectus.

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 prospectus might not occur.

OFFERING AND METHOD OF SUBSCRIPTION

The Offering

We are offering 445,000 shares of our common stock (no par value) at a
price of $13.50 per share. The price of the common stock has not been set as the
result of arm's length negotiations or with reference to prices established in
an active trading market.

The minimum individual purchase pursuant to this offering is 100
shares. We reserve the right to alter the individual minimum purchase amount and
specifically reserve the right to approve all purchases.

Plan of Distribution

We presently plan to make this offering to the public only through our
executive officers and directors. We will not pay any commission or other sales
compensation to any of our officers or directors in connection with this
offering.

Method of Subscription

You may subscribe for shares by delivering the enclosed subscription
form, completed and executed, together with full payment of the subscription
price, to us, at 1670 East Main Street, Easley, South Carolina 29640. All
subscription payments must be made in United States dollars by check, bank
draft, or money order drawn to the order of "Cornerstone Bancorp." Subscriptions
and full payment must be received on or prior to the Termination Date (as
defined below).

We reserve the right to reject any subscription in whole or in part or
to cancel acceptance of any subscription in whole or in part until the date the
shares subscribed hereunder are issued for any reason whatsoever. If we do not
accept, or if we cancel, all or part of a subscription, all funds relating to
the unaccepted or cancelled portion shall be promptly returned to the subscriber
without interest. Only the President of Cornerstone Bancorp has the authority to
accept or reject a subscription, or portion thereof, on our behalf.

No Escrow of Subscription Funds

We will not escrow subscription funds. Subscribers will become our
shareholders upon our final acceptance of their subscriptions. As stated under
"Method of Subscription," funds related to any subscription or portion thereof
that is not accepted or cancelled will be promptly returned to the subscriber
without interest.

Termination Date or Extension of the Offering

We will offer shares of our common stock in this offering until the
earlier of: (1) the sale of 445,000 shares; (2) our decision to terminate the
offering; or (3) ____________, 2005 (the "Termination Date"). While we intend to
use our reasonable efforts to sell 445,000 shares, we may terminate the offering
without notice to anyone before all such shares are sold. No minimum amount of
shares is required to be sold in this offering.

We may extend the Termination Date until ____________, 2005, in our
sole discretion.

Issuance of Stock Certificates

We will issue certificates for shares of our common stock,
subscriptions for which we have accepted and which have been paid for by the
subscriber promptly after confirmation of payment.

No Trading Market for the Common Stock

Our stock is not traded or listed on any national securities exchange
or market, and there currently is no market for our stock. We have no present
plans to have our stock listed on an exchange. See "RISK FACTORS -- Our common
stock is not listed on any exchange and has no trading market, so you may have
to hold our common stock indefinitely."

USE OF PROCEEDS

We plan to use the proceeds from this offering first to pay offering
expenses which we estimate will be approximately $60,000. If we sell all of the
offered shares, we expect the net proceeds to be $5,947,500.

We plan to use the net proceeds of this offering to increase the
capital of Cornerstone National Bank or for other activities in which we, as a
bank holding company, are permitted to engage.

PRO FORMA CAPITALIZATION

The following table sets forth our capitalization at June 30, 2005, and
our pro forma capitalization after completion of this offering. Pro forma
information is provided for the assumed sale in this offering of 445,000 shares.
The table assumes that estimated offering expenses of $60,000 have been deducted
from the proceeds of the sale of the shares, and that all of the shares were
sold on June 30, 2005.

Shareholders' Equity
(Dollars in thousands) Pro Forma if
445,000
Actual shares sold in
June 30, 2005 this offering(1)
------------- -------------

Preferred stock, (10,000,000 shares authorized) none issued ........................ $ - $ -
Common stock, no par value (20,000,000 shares authorized)
1,170,938 shares issued ..................................................... 9,018,750 -
1,615,938 shares issued .................................................. - 14,966,250
Retained earnings .................................................................. 258,068 258,068
Accumulated other comprehensive income (loss) ...................................... (61,161) (61,161)
----------- -----------
Total Shareholders' Equity ............................................... $ 9,215,657 $15,163,157
=========== ===========

- -----------
(1) Proceeds of the offering are assumed to be $5,947,500 after payment of
$60,000 of expenses of the offering.

DIVIDENDS

We do not plan to pay any cash dividends in the foreseeable future and
may never pay cash dividends. We plan to use the funds that might otherwise be
available to us to pay cash dividends to expand our business. We have, however,
issued 10% stock dividends in each of the past four years, and may do so in the
future if our Board determines it is appropriate to do so.

If we ever pay cash dividends, the most likely source will be dividends
paid to us by our bank. Accordingly, our payment of dividends is indirectly
subject to the same laws and regulations that govern the payment of dividends by
national banks.

Our bank's ability to pay dividends is restricted under the national
banking laws and by regulations of the Comptroller of the Currency. Pursuant to
12 U.S.C. Section 56, a national bank may not pay dividends from its capital.
All dividends must be paid out of net profits then on hand, after deducting
losses and bad debts. Payment of dividends out of net profits is further limited
by 12 U. S. C. Section 60(a), which prohibits a bank from declaring a dividend
on its shares of common stock until its surplus equals the amount of its
capital, unless there has been transferred to surplus not less than 1/10 of the
bank's net profits of the preceding two consecutive half year periods (in the
case of an annual dividend). Pursuant to 12 U. S. C. Section 60 (b), the
approval of the Comptroller of the Currency is required if the total of all
dividends declared by our bank in any calendar year will exceed the total of its
net income for that year combined with its retained net profits for the
preceding two years, less any required transfers to surplus. The Comptroller of
the Currency has issued policy statements that indicate that insured banks
should generally only pay cash dividends out of current operating earnings.

The payment of cash dividends by our bank may also be affected or
limited by other factors, such as the requirements to maintain adequate capital
above regulatory guidelines. In addition, if, in the opinion of the applicable
regulatory authority, a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of cash dividends), such
authority may require, after notice and hearing, that such bank cease and desist
from such practice. Paying dividends that deplete a bank's capital base to an
inadequate level may constitute an unsafe and unsound banking practice.

We cannot give you any assurance when, or whether, we will be in a
position to pay cash dividends on our common stock. Once our bank becomes
sufficiently profitable in the judgment of its directors, its directors expect
that our bank will pay us some dividends in cash. However, as stated above, we

anticipate that all or substantially all of our bank's earnings in the
foreseeable future will be required for use in the development of our business.
Furthermore, even if our bank pays cash dividends to us, we are not required, in
turn, to pay dividends to our shareholders. See "DESCRIPTION OF CAPITAL STOCK -
Dividends."

MARKET FOR COMMON STOCK AND RELATED
STOCKHOLDER MATTERS

As discussed above under "RISK FACTORS" and "OFFERING AND METHOD OF
SUBSCRIPTION," no established market has developed for our common stock, and our
common stock is not listed on any exchange nor is it traded in the Nasdaq Stock
Market, Inc. Furthermore, we do not plan to list our stock on any exchange at
any time in the near future, and we do not expect a market for our stock to
develop in the near future. Management is aware of a few transactions in 2005 in
which our common stock traded between $12.50 and $14.00 per share. However,
management has not ascertained that these transactions were the result of arm's
length negotiations between the parties, and because of the limited number of
shares involved, these prices may not be indicative of the market value of the
common stock.

As of June 30, 2005, we had 1,170,938 shares of our common stock
outstanding held by approximately 508 shareholders of record. As of June 30,
2005, we had outstanding options to purchase 94,288 shares of our common stock.

BUSINESS OF CORNERSTONE BANCORP
AND CORNERSTONE NATIONAL BANK

General

We are a South Carolina bank holding company incorporated in 1999. We
have no operations other than those carried on by Cornerstone National Bank, our
wholly owned subsidiary. Our bank was also organized in 1999, and conducts a
general banking business under a national bank charter granted by the Office of
the Comptroller of the Currency of the United States (the "OCC") pursuant to the
National Bank Act. Our bank conducts its activities from its main office in
Easley, South Carolina, which opened in September, 1999, from a branch office in
the Berea area of Greenville, South Carolina, which opened in August, 2002, and
from a branch office in the Powdersville area of Anderson County, South
Carolina, which opened in July, 2005. In 2004, our bank established a wholly
owned subsidiary, Crescent Financial Services, Inc. ("Crescent"), which is an
insurance agency. Crescent has not yet engaged in any business activities.

Our business primarily consists of accepting deposits and making loans.
We seek deposit accounts from households and businesses in our primary market
areas by offering a full range of savings accounts, retirement accounts,
checking accounts, money market accounts, and time certificates of deposit. We
also make commercial, real estate and installment loans, primarily on a secured
basis, to borrowers in the Upstate area of South Carolina and make other
authorized investments. We offer both in-house and brokered conventional
residential mortgage loans. Brokered loans are funded by a third party investor.
We do not hold any loans for sale.

As of June 30, 2005, our bank employed 36 people. Our full service
branch located at 45 Farrs Bridge Road in the Berea area of Greenville, South
Carolina, maintains a staff of approximately five experienced banking personnel.
Our other full service branch located at 11000 Anderson Road in the Powdersville
area of Anderson County, South Carolina maintains a staff of approximately five
experienced banking personnel and an experienced on-site mortgage lender.

Management Philosophy and Policy

are involved extensively in business in our market areas and strive to make
meeting the credit needs of our areas a first priority. We believe that a large
number of bank customers prefer a local bank, and we are dedicated to providing
personalized banking to the citizens of our market areas. Based on our knowledge
of our market areas as long-time residents and business people, we believe that,
as a bank owned and managed by people living and working in the local area, we
can better serve the community than large institutions headquartered outside
South Carolina for the following reasons:

o Decisions regarding credit and services of a bank can best be made at
a local level;

o Funds made available from local deposits should be re-invested in the
depositors' community; and

o Stability and continuity of management within a banking institution
without frequent changes are important to its customers.

We provide personalized banking services, with emphasis on knowledge of
the individual financial needs and objectives of our customers and an
appropriate array of services to meet those needs and objectives, coupled with
timely response. We seek to promote continuous long-term relationships between
officers and customers by minimizing transfers of account officers to different
customers, departments or locations. We also seek to limit the number of
accounts served by each of our officers to a level that will permit personal
attention to each customer and full development of each customer's business
relationship with us. Furthermore, because we make all credit and related
decisions locally, we are able to provide prompt responses to our customers.

Market Area

Our primary market areas are the city of Easley, South Carolina and the
immediately surrounding areas of Pickens County, the Berea area of Greenville
County, and contiguous areas, and the Powdersville area of Anderson County,
South Carolina, and contiguous areas. Pickens, Anderson, Greenville, Spartanburg
and Cherokee Counties comprise the Greenville Metropolitan Statistical Area (the
"Greenville MSA"), which is South Carolina's largest metro area. On January 1,
1993, the federal government's Office of Management and Budget added Anderson
and Cherokee Counties to the Greenville MSA which theretofore consisted of only
Pickens, Greenville and Spartanburg Counties. The Greenville MSA experienced a
15.9% increase in population from 830,563 in 1990 to 962,441 in 2000, and the
population is expected to reach over one million people by the year 2010. In
1999, the median household income for the Greenville MSA was $39,295.

The economies of each of Pickens County, Anderson County and Greenville
County are dominated by the manufacturing, wholesale and retail trade, service
and construction sectors. Pickens County's population grew by 18% from 93,894 in
1990 to 110,757 in 2000, ranking it 13th among the 46 counties in South Carolina
in terms of population growth over the past decade, and 13th in population size.
In 2004, the population of Pickens County was estimated at 112,475. In 2000,
approximately 66% of the population was between 18 to 64 years old with another
11% being 65 or older. In 1999, median household income was $36,214, the 15th
highest ranking among counties in the state, and an increase of 37.5% over the
1989 amount. Anderson County's population grew by 14.1% from 145,196 in 1990 to
165,740 in 2000, ranking it 21st among South Carolina counties in terms of
population growth over the past decade, and seventh in population size. In 2004,
the population of Anderson County was estimated at 173,550. In 2000,
approximately 62% of the population was between 18 to 64 years old with another
14% being 65 or older. In 1999, median household income was $36,807, the 12th
highest ranking among counties in the state, and an increase of 43% over the
1989 amount. Greenville County's population grew by 18.6% from 320,167 in 1990
to 379,616 in 2000, ranking it 11th among South Carolina counties in terms of
population growth over the past decade, and first in population size. In 2004,
the population of Greenville County was estimated at 401,174. In 2000,
approximately 64% of the population was between 18 to 64 years old with another
12% being 65 or older. In 1999, median household income was $41,149, the fifth
highest ranking among counties in the state, and an increase of 41.5% over the
1989 amount. The population of Easley in 2000 was 17,754, and the median
household income in 1999 was $38,204. The population of Berea in 2000 was
14,158, and the median household income in 1999 was $32,670. The population of
Powdersville in 2000 was 5,362, and the median household income in 1999 was
$50,255.

The foregoing statistical information is derived from the South
Carolina Statistical Abstract 2005 and South Carolina Community Profiles, both
publications of the South Carolina Budget and Control Board, Office of Research
and Statistics. We believe these to be reliable sources, but we have not
independently confirmed all of such information and make no representations as
to its accuracy.

The banking industry plays an important role in the economy of an area.
There is a close correlation between personal income and deposits, loans, and
other banking services. The anticipated increase in personal income because of
anticipated increasing income levels and population growth in the market areas
over the next decade, points to a greater demand for banking services in the
future.

Competition

South Carolina law permits statewide branching by banks and savings and
loan associations. Consequently, many financial institutions have branches
located in several communities. Currently, in addition to our bank, 11
commercial banks and one savings institution operate branches in Pickens County,
22 commercial banks and three savings institutions operate branches in
Greenville County, and 15 commercial banks operate branches in Anderson County.
The principal areas and methods of competition in the banking industry are the
services offered, pricing of those services, the convenience and availability of
the services, and the degree of expertise and personal manner with which those
services are offered.

We encounter strong competition from most of the financial institutions
in our extended market area. In the conduct of certain areas of our business, we
also compete with credit unions, insurance companies, money market mutual funds
and other financial institutions, some of which are not subject to the same
degree of regulation and restrictions as we are. Most of these competitors have
substantially greater resources and lending abilities than we have and offer
certain services, such as international banking, investment banking, and trust
services, which we do not presently provide. However, we believe that we have
been able to compete effectively with these larger institutions because of our
experienced bankers and personalized service, as well as through loan
participations and other strategies and techniques.

SERVICES WE OFFER

Deposits

We offer the full range of deposit services typically available in most
banks and savings and loan associations, including checking accounts, NOW
accounts, retirement accounts (including Individual Retirement Accounts), and
savings and other time deposits of various types, ranging from daily money
market accounts to longer-term certificates of deposit. The transaction accounts
and time certificates are tailored to the principal market area at rates
competitive with those offered in the area. All deposit accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to the maximum amount
permitted by law. We solicit these accounts from individuals, businesses,
associations and organizations, and government authorities. Although we intend
to be competitive in our efforts to attract deposit accounts, we do not
aggressively seek jumbo certificates of deposit (certificates in amounts greater
than $100,000).

Lending Activities

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

Real Estate Loans

One of the primary components of our loan portfolio is loans secured by
first or second mortgages on residential and commercial real estate. These loans
generally consist of short to mid-term commercial real estate loans,
construction and development loans and residential real estate loans (including
home equity and second mortgage loans). Interest rates may be fixed or
adjustable and we frequently charge an origination fee. We seek to manage credit
risk in the commercial real estate portfolio by emphasizing loans secured by
owner-occupied office and retail buildings where the loan-to-value ratio,
established by independent appraisals, does not exceed 80%. In addition, we
generally require personal guarantees of the principal owners of the property.
The loan-to-value ratio for first and second mortgage loans and for construction
loans generally does not exceed 80%. In an effort to control our interest rate
risk, long term residential mortgage loans are funded and owned by third party
investors.

The principal economic risk associated with all loans, including real
estate loans, is the creditworthiness of our borrowers. The ability of a
borrower to repay a real estate loan depends upon a number of economic factors,
including employment levels and fluctuations in the value of real estate. In the
case of a real estate construction loan, there is generally no income from the
underlying property during the construction period, and the developer's personal
obligations under the loan are typically limited. In the case of a real estate
purchase loan, the borrower may be unable to repay the loan at the end of the
loan term and thus may be forced to refinance the loan at a higher interest
rate, or, in certain cases, the borrower may default as a result of its
inability to refinance the loan. Each of these factors increases the risk of
nonpayment by the borrower.

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

Commercial Loans

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

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

Consumer Loans

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

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

Other Services

We participate in a regional network of automated teller machines that
may be used by bank customers in major cities throughout the Southeast. We offer
both VISA and MasterCard brands of bankcards together with related lines of
credit. The lines of credit may be used for overdraft protection as well as
pre-authorized credit for personal purchases and expenses. We also provide
travelers checks, direct deposit of payroll and social security checks, and
automatic drafts for various accounts, but do not currently provide
international or trust banking services. We offer an Internet banking product
accessible via our custom website. The interactive banking product includes an
electronic bill payment service that allows customers to make scheduled and/or
recurring bill payments electronically. We also offer merchant and other
business related services to our commercial customers. We have a residential
mortgage loan department with a highly experienced staff qualified to make
virtually any type of residential mortgage loan.

Asset and Liability Management

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

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

Deposit accounts represent the majority of our liabilities. These
include transaction accounts, savings and money market accounts and certificates
of deposit. The maturities or repricing horizons of the majority of
interest-sensitive accounts are 12 months or less.

Additional Information

For additional information about our business, see "Management's
Discussion and Analysis or Plan of Operation."

Offices

Our main office and Cornerstone National Bank's main office are located
at 1670 East Main Street, Easley, South Carolina 29640. The bank also has
branches located at 45 Farrs Bridge Road in the Berea area of Greenville, South
Carolina, and at 11000 Anderson Road in the Powdersville area of Anderson
County, South Carolina. We own all of these properties, and we believe our
offices are well-suited to our banking business.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION

As discussed above, Cornerstone Bancorp is a bank holding company and
has no operations other than those carried on by its wholly owned subsidiary,
Cornerstone National Bank. In 2004, our bank established a wholly owned
subsidiary, Crescent Financial Services, Inc., but Crescent did not engage in
any transactions in 2004.

The following information describes various financial aspects of our
business. This information should be read in conjunction with our consolidated
financial statements, which appear elsewhere in this prospectus, and our Form
10-KSB for the year ended December 31, 2004, and our Form 10-QSB for the quarter
ended June 30, 2005, which have been filed with the Securities and Exchange
Commission.

Per share data in this discussion has been adjusted to reflect 10%
stock dividends distributed in each of 2005, 2004 and 2003.

Critical Accounting Policies

We have adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of our financial statements. Our significant
accounting policies are described in the notes to the consolidated financial
statements.

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

We believe the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
preparation of our consolidated financial statements. For a detailed description
of our estimation process and methodology related to the allowance for loan
losses refer to the sections "--Financial Condition and Results of Operations
for the Years ended December 31, 2004 and 2003 -- Allowance for Loan Losses",
"--Potential Problem Loans", --Impaired Loans" and Note 1 to our consolidated
financial statements for the years ended December 31, 2004 and 2003.

Financial Condition and Results of Operations
for the Years ended December 31, 2004 and 2003

Overview of Earnings Performance

We earned $664,000 in 2004, $356,000 in 2003 and $274,000 in 2002.
After accounting for the effects of 10% stock dividends in each of 2005, 2004
and 2003, this equates to income per basic common share of $.57 in 2004, $.30 in
2003 and $.21 in 2002, and to income per diluted common share of $.56 in 2004,
$.30 in 2003 and $.21 in 2002. Our earnings have consistently improved as we
have grown. We had net interest income (the difference between interest earned
on interest earning assets and interest paid on interest bearing liabilities) of
$3.2 million, $2.6 million, and $2.1 million for 2004, 2003, and 2002,
respectively. We also had other operating income (principally mortgage loan
origination fees and service fees on deposits) of $719,000, $617,000, and
$472,000 in 2004, 2003, and 2002, respectively. We provided $197,000, $174,000,
and $183,000 to our allowance for loan losses in 2004, 2003, and 2002,
respectively, and had other operating expenses (principally salaries and
benefits, occupancy and data processing expenses) of $2.7 million in 2004, $2.5
million in 2003, and $2.1 million in 2002. Over the past several years the
consistent rise in our earnings has been a result of the growth in our interest
earning assets without corresponding growth in our operating expenses. Our net
interest income after the provision for loan losses plus other income increased
23.5% in 2004 over 2003, while our noninterest expense increased only 8.0% for
the year. 2003 results compared to 2002 results show a similar relationship
between net interest income after the provision for loan losses and noninterest
expenses.

Net Interest Income

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

For the years ended December 31, 2004, 2003, and 2002 our net interest
income was $3.2 million, $2.6 million, and $2.1 million, respectively. The
consistent increases were primarily attributable to increases in the volume of
loans (see "Rate/Volume Analysis of Net Interest Income" below). Our average
interest earning assets increased to $81.3 million in 2004 from $68.7 million in
2003. Our relatively young age makes interest earning asset growth a primary
driver of net interest income. Our average yield on interest earning assets
increased slightly in 2004 to 5.58% from 5.54% in 2003 and decreased from 5.81%
in 2002 to 5.54% in 2003. Our average cost of interest bearing liabilities
continued its decline to 1.83% in 2004 from 2.08% in 2003. The average cost
decreased from 2.59% in 2002 to 2.08% in 2003. Our net yield on average interest
earning assets increased in 2004 to 3.99% from 3.79% in 2003.

The table, "Average Balances, Yields and Rates", provides a detailed
analysis of the effective yields and rates on the categories of our interest
earning assets and interest bearing liabilities for the years ended December 31,
2004 and 2003.
Average Balances, Yields and Rates
(Dollars in thousands)

Year Ended December 31, 2004 Year Ended December 31, 2003
---------------------------- ----------------------------
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances(1) Expense Rates(2) Balances(1) Expense Rates(2)
----------- ------- -------- ----------- ------- --------
Assets

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

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

(1) Average balances calculated based on a daily basis.
(2) Calculated based on the number of days in the year that each type of asset
or liability was in existence.
(3) Nonaccruing loans are included in the average loan balances and income on
such loans is recognized on a cash basis. Interest income on loans includes
loan fee income as well as interest income. The amount of loan fees
included is not considered material.
(4) Total interest bearing assets yield less the total interest bearing
liabilities rate.
(5) Net interest income divided by total interest earning assets.
(6) Total interest earning assets less total interest bearing liabilities.

Rate/Volume Analysis of Net Interest Income

As indicated under "Net Interest Income", our net income is largely
dependent on net interest income. The table below calculates the relative impact
on net interest income caused by changes in the average balances (volume) of
interest-sensitive assets and liabilities and the impact caused by changes in
interest rates earned or paid. Each table compares two years as indicated below.
The effect of a change in average balance has been determined by applying the
average rate in the earlier year to the change in average balance in the later
year, as compared with the earlier year. The effect of a change in the average
rate has been determined by applying the average balance in the earlier year to
the change in the average rate in the later year, as compared with the earlier
year. Because we are in a high-growth stage (typical of young institutions),
average balance increases (volume) have had the greatest magnitude of impact
through each of the two comparison periods.

Year Ended December 31, 2004 compared to 2003

Increase (Decrease) Due to
--------------------------
Volume/
Volume Rate Rate (1) Change
------ ---- -------- ------
(Dollars in Thousands)
Interest earned on:

Securities .................................................... $ (87) $ (6) $ 1 $ (92)

Federal Funds sold ............................................ (11) 12 (3) (2)
Loans ......................................................... 1,017 (145) (47) 825
------- ------- ------- -------
Total interest income .................................... 919 (139) (49) 731
------- ------- ------- -------
Interest paid on:
Deposits ...................................................... 180 (117) (17) 46
Federal Funds purchased & customer repurchase
agreements ................................................ 10 (5) (1) 4
FHLB advances ...................................................... 37 - 8 45
------- ------- ------- -------
Total interest expense ................................... 227 (122) (10) 95
------- ------- ------- -------
Change in Net Interest Income ...................................... $ 692 $ (17) $ (39) $ 636
======= ======= ======= =======

Year Ended December 31, 2003 compared to 2002

Increase (Decrease) Due to
--------------------------
Volume/
Volume Rate Rate (1) Change
------ ---- -------- ------
(Dollars in Thousands)
Interest earned on:

Securities .................................................... $ 41 $ (41) $ (3) $ (3)

Federal Funds sold ............................................ (22) (28) 7 (43)
Loans ......................................................... 871 (238) (79) 554
----- ----- ----- -----
Total interest income .................................... 890 (307) (75) 508
----- ----- ----- -----
Interest paid on:
Deposits ...................................................... 293 (219) (58) 16
Federal Funds purchased & customer repurchase
Agreements ................................................ (5) (31) 2 (34)
FHLB advances ...................................................... - - 2 2
----- ----- ----- -----
Total interest expense ................................... 288 (250) (54) (16)
----- ----- ----- -----
Change in Net Interest Income ...................................... $ 602 $ (57) $ (21) $ 524
===== ===== ===== =====

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

Interest Rate Sensitivity

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

We measure interest sensitivity using various methods. One such method
is a static GAP measurement, which compares the amount of interest sensitive
assets repricing within a one year time period as compared to the amount of
interest sensitive liabilities repricing within the same time frame. Although
this method does not take into account loan prepayments and other
non-contractual changes in balances and the applicable interest rates, it does
give some information as to possible changes in net interest income that could
be expected simply as a result of changes in interest rates. On a cumulative
basis, rate sensitive assets exceeded rate sensitive liabilities, resulting in
an asset sensitive position at the end of 2004 of $14.4 million, for a
cumulative gap ratio of 1.26 calculated at the one-year time horizon. When
interest sensitive liabilities exceed interest sensitive assets for a specific
repricing "horizon", a negative interest sensitivity gap results. The gap is
positive when interest sensitive assets exceed interest sensitive liabilities,
as was the case at the end of 2004 with respect to the one-year time horizon.
For a bank with a positive gap, rising interest rates would be expected to have
a positive effect on net interest income and falling rates would be expected to
have the opposite effect.

The table below reflects the balances of interest earning assets and
interest bearing liabilities at the earlier of their repricing or maturity
dates. Amounts of fixed rate loans are reflected at the loans' final maturity
dates. Variable rate loans are reflected at the earlier of their contractual
maturity date or the date at which the loan may be repriced contractually.
Deposits in other banks and debt securities are reflected at the earlier of each
instrument's repricing date for variable rate instruments or the ultimate
maturity date for fixed rate instruments. Overnight federal funds sold are
reflected in the earliest repricing interval due to the immediately available
nature of these funds. Interest bearing liabilities with no contractual
maturity, such as interest bearing transaction accounts and savings deposits are
reflected in the earliest repricing interval due to contractual arrangements
which give management the opportunity to vary the rates paid on these deposits
within a thirty-day or shorter period. However, we are under no obligation to
vary the rates paid on those deposits within any given period. Fixed rate time
deposits, principally certificates of deposit, are reflected at their
contractual maturity dates. Federal funds purchased is presented in the
immediate repricing interval because the interest rate paid adjusts at the
beginning of each month.

Interest Sensitivity Analysis

December 31, 2004
-----------------
1-3 3-12 1-3 3-5 5-15 > 15
Immediate Months Months Years Years Years Years Total
--------- ------ ------ ----- ----- ----- ----- -----
(Dollars in Thousands)
Interest earning assets

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

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

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

(1) Securities with call features have been included in the period in which the
security becomes callable.
(2) There were no nonaccruing loans or unamortized deferred loan fees, both of
which would normally be subtracted from loans for purposes of this table.

December 31, 2003
-----------------
1-3 3-12 1-3 3-5 5-15 >15
Immediate Months Months Years Years Years Years Total
--------- ------ ------ ----- ----- ----- ----- -----
(Dollars in Thousands)
Interest earning assets

Securities (1) ........................ $ - $ 4,431 $ 4,759 $ 2,944 $ 1,006 $ 1,452 $ 460 $ 15,052
Federal funds sold .................... 3,159 - - - - - - 3,159
Loans (2) ............................. 34,037 4,049 4,896 6,615 8,831 981 - 59,409
-------- -------- -------- -------- -------- -------- -------- --------
Total interest earning assets ..... 37,196 8,480 9,655 9,559 9,837 2,433 460 77,620
-------- -------- -------- -------- -------- -------- -------- --------

Interest bearing deposits
Interest bearing transaction accounts . 9,999 - - - - - - 9,999
MMDA's & Savings ...................... 15,189 - - - - - - 15,189
Time deposits $100M and over .......... - 1,606 5,641 1,233 3,322 - - 11,802
Other time deposits ................... 144 3,924 6,662 2,240 6,124 - - 19,094
Customer repurchase agreements ........ 4,772 - - 1,000 - - - 5,772
FHLB advances ......................... 5,000 - - - - - - 5,000
-------- -------- -------- -------- -------- -------- -------- --------
Total interest bearing liabilities $ 35,104 $ 5,530 $ 12,303 $ 4,473 $ 9,446 $ - $ - $ 66,856
-------- -------- -------- -------- -------- -------- -------- --------

Interest sensitivity gap .................. $ 2,092 $ 2,950 $ (2,648) $ 5,086 $ 391 $ 2,433 $ 460 $ 10,764
Cumulative interest sensitivity gap ....... $ 2,092 $ 5,042 $ 2,394 $ 7,480 $ 7,871 $ 10,304 $ 10,764
Gap ratio ................................. 1.06 1.53 .78 2.14 1.04 1.00 1.00 1.16
Cumulative gap ratio ...................... 1.06 1.12 1.05 1.13 1.12 1.15 1.16

Provision for Loan Losses

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

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

Allowance for possible loan losses, beginning of year ................... $ 727,971 $ 553,372 $ 384,320
Provision for loan losses ............................................... 197,010 173,574 182,842
Charge-offs ............................................................. (5,597) - (13,790)
Recoveries .............................................................. - 1,025 -
--------- --------- ---------
Allowance for possible loan losses, end of year ......................... $ 919,384 $ 727,971 $ 553,372
========= ========= =========

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

Other Income

Our other income, which consists primarily of mortgage loan origination
fees, service charges on deposit accounts, and other fee income, increased by
$102,000 to approximately $719,000 in 2004 from $617,000 in 2003 and $472,000 in
2002. The increase in 2004 is primarily the result of increases in the number of
deposit accounts and fees from our overdraft protection product. Growth in the
mortgage loan origination department was responsible for the increase in fees
from 2002 to 2003. However, mortgage origination volume in 2004 decreased after
the unusually high level of refinancing activity in previous years slowed as a
result of the stabilization of interest rates.

Other Expenses

Our other expenses, which consist primarily of salaries and employee
benefits, occupancy, and data processing totaled $2.7 million for 2004, $2.5
million for 2003, and $2.1 million for the year ended December 31, 2002.
Salaries and employee benefits rose to $1.5 million in 2004 from $1.4 million in
2003 and $1.2 million in 2002. The increases in each year were due to the hiring
of additional staff to support our growth and annual salary increases. Net
occupancy increased by 2.8% in 2004 to $439,000. This increase is due to price
increases. These expenses increased $111,000 or 35.2% for the year ended
December 31, 2003 as compared to 2002. This increase was largely a result of a
full year of costs associated with our Berea branch opened in August 2002. Data
processing expense decreased by 10.6% in 2004 as compared to 2003 as a result of
renegotiation of certain contractual arrangements. The increase of $27,000 or
20.2% to $159,000 for 2003 from $133,000 for 2002 was due to growth in the
number of accounts processed under certain terms of our previous data processing
contract. Our efficiency ratio which is measured as noninterest expense as a
percentage of the sum of net interest income plus other income improved to 69%
in 2004 compared to 78% in 2003 and 81% in 2002 as our noninterest expenses were
spread over a larger customer base.

Income Taxes

For 2004 we recorded income tax expense of $389,000 compared to
$183,000 in 2003 and $60,000 for 2002. The increases are due to our increased
profitability. We account for income taxes under Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Certain items of income and
expense (principally provision for loan losses, depreciation, and pre-opening
expenses) are included in one reporting period for financial accounting purposes
and another for income tax purposes. Refer to the notes to our consolidated
financial statements contained elsewhere herein for more information.

Investment Securities

Management assigns securities upon purchase into one of the categories
(trading, available-for-sale and held-to-maturity) designated by Statement of
SFAS No. 115 based on intent, taking into consideration other factors including
expectations for changes in market rates of interest, liquidity needs,
asset/liability management strategies, and capital requirements. We have not
historically held securities for trading purposes. As of December 31, 2004, 2003
and 2002, our investment portfolio comprised approximately 13.1%, 17.8%, and
28.2%, respectively, of total assets.

The following table summarizes the carrying amounts of securities we
held at December 31, 2004 and 2003. Available-for-sale securities are stated at
estimated fair value. Held-to-maturity securities are stated at amortized cost.
Federal Reserve Bank and Federal Home Loan Bank of Atlanta stocks have no quoted
market value, but have historically been redeemed at par value, and are
therefore carried at cost.

Investment Securities Portfolio Composition

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

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

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

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

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

Investment Securities Portfolio Maturities and Yields

December 31, 2004 December 31, 2003
----------------- -----------------
Amount Yield Amount Yield
------ ----- ------ -----
(Dollars in thousands) (Dollars in thousands)
Available for sale securities:

U.S. Government Agencies
Within one year ........................................... $ 496 2.68% $ 1,185 4.25%
After one through five years .............................. 6,979 3.27% 5,000 3.07%
After five through ten years .............................. - -% 1,506 4.10%
After ten years ........................................... - -% 772 1.71%
FNMA Mortgage-backed securities (1) ............................ 880 3.66% 680 4.08%
Corporate bonds
Within one year ........................................... 217 7.05% - -%
After one through five years .............................. - -% 227 7.01%
Municipal bonds maturing in five to ten years .................. 403 4.54% - -%

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

Other securities
No stated maturity ........................................ 532 4.64% 460 4.78%
------- -------
Total ..................................................... $13,221 3.82% $15,052 3.90%
======= =======

(1) The FNMA Mortgage-backed security matures within 10 years on an amortizing
basis.

Securities classified as available-for-sale are recorded at fair market
value. While several individual securities are in an unrealized loss position as
of December 31, 2004, none of these securities has been in a continuous loss
position for twelve months or more. We have the ability and intent to hold these
securities until such time as the value recovers or the securities mature. We
believe, based on industry analyst reports and credit ratings, that the
deterioration in value is attributable to changes in market interest rates and
not in the credit quality of the issuer and therefore, these losses are not
considered other-than-temporary.

Loan Portfolio

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

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

Loan Portfolio Composition

December 31,
------------
2004 2003
---- ----
(Dollars in thousands)
% of % of
Amount Loans Amount Loans
------ ----- ------ -----

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

Maturity Distribution on Loans

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

Maturity Distribution of Loans

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

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

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

Variable rate, maturity greater than one year ...................... $ - $22,446 $ 481 $59,024

(1) Includes loans that mature in one year or less and loans that reprice in
one year or less.

Impaired Loans

A loan will be considered to be impaired when, in management's judgment
based on current information and events, it is probable that the loan's
principal or interest will not be collectible in accordance with the terms of
the original loan agreement. Impaired loans, when not material, will be carried
in the balance sheet at a value not to exceed their observable market price or
the fair value of the collateral if the repayment of the loan is expected to be
provided solely by the underlying collateral. The carrying values of any
material impaired loans will be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, which is the
contractual interest rate adjusted for any deferred loan fees or costs, premium
or discount existing at the inception or acquisition of the loan.

Loans which management identifies as impaired generally will be
nonperforming loans. Nonperforming loans include nonaccrual loans or loans which
are 90 days or more delinquent as to principal or interest payments. At December
31, 2004 and 2003, we had no nonaccrual loans or loans 90 days or more past due
and no restructured loans.

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

Potential Problem Loans

Management identifies and maintains a list of potential problem loans.
These are loans that are not included in nonaccrual status, or loans that are
past due 90 days or more and still accruing interest. A loan is added to the
potential problem list when management becomes aware of information about
possible credit problems of borrowers that causes serious doubts as to the
ability of such borrowers to comply with the current loan repayment terms. These
loans are designated as such in order to be monitored more closely than other
credits in our portfolio. There were no loans determined by management to be
potential problem loans at December 31, 2004.

Allowance for Loan Losses

The allowance for loan losses is increased by direct charges to
operating expense. Losses on loans will be charged against the allowance in the
period in which management determines that it is likely that such loans have
become uncollectible. Recoveries of previously charged off loans will be
credited to the allowance. In reviewing the adequacy of the allowance for loan
losses at each year end, our management will take into consideration our
historical loan losses, current economic conditions affecting the borrowers'
ability to repay, the volume of loans, and the trends in delinquent,
nonaccruing, and any potential problem loans, and the quality of collateral
securing nonperforming and problem loans. Management considers the allowance for
loan losses to be adequate to cover its estimate of loan losses inherent in the
loan portfolio as of December 31, 2004.

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

Summary of Loan Loss Experience

Year Ended December 31,
-----------------------
2004 2003
---- ----
(Dollars in thousands)

Total loans outstanding at end of period,
net of deferred net loan fees ..................................................... $ 75,158 $ 59,409
Average amount of loans outstanding ..................................................... $ 65,128 $ 49,296
Balance of allowance for loan losses-beginning .......................................... $ 728 $ 553
Loans charged-off
Real estate mortgage .............................................................. 4 -
Consumer installment .............................................................. 2 -
-------- --------
Total charge-offs ................................................................. 6 -
-------- --------
Recoveries of loans previously charged-off
Consumer installment .............................................................. - 1
-------- --------
Total recoveries .................................................................. - 1
-------- --------
Net (charge-offs) recoveries ............................................................ (6) 1
-------- --------
Additions to allowance charged to expense ............................................... 197 174
-------- --------
Additions to allowance charged to expense
Balance of allowance for loan losses-ending ............................................. $ 919 $ 728
======== ========
Ratios
Net (charge-offs) recoveries to average loans outstanding ......................... <(.01%) <.01%
Net (charge-offs) recoveries to loans at end of period ............................ <(.01%) <.01%
Allowance for loan losses to average loans ........................................ 1.41% 1.48%
Allowance for loan losses to loans at end of period ............................... 1.22% 1.23%
Net (charge-offs) recoveries to allowance for loan losses ......................... (.60%) .14%
Net (charge-offs) recoveries to provision for loan losses ......................... (2.84%) .57%

The following table presents the allocation of the allowance for loan
losses at the end of the years ended December 31, 2004 and 2003, compared with
the percent of loans in the applicable categories to total loans. The allowance
for loan losses is not restricted to specific categories of loans and is
available to absorb losses in all categories.

Allocation of Allowance for Loan Losses

December 31,
-----------------------
2004 2003
----- ----
% of % of
Amount Loans Amount Loans
------ ----- ------ -----
(Dollars in thousands)

Commercial and industrial .............................. $163 17.8% $138 18.9%
Real Estate - construction ............................. 196 21.3% 147 20.2%
Real Estate - mortgage ................................. 525 57.1% 410 56.3%
Consumer installment ................................... 35 3.8% 33 4.6%
---- ----- ---- -----
Total ............................................ $919 100.0% $728 100.0%
==== ===== ==== =====

Real Estate Owned

We had no real estate owned pursuant to foreclosure or in-substance
foreclosure at December 31, 2004. Real estate owned is initially recorded at the
lower of net loan principal balance or its estimated fair market value less
estimated selling costs. The estimated fair value is determined by appraisal at
the time of acquisition.

Deposits

The amounts and percentage composition of deposits we held as of
December 31, 2004 and 2003 are summarized below:

Deposit Composition

December 31,
------------
2004 2003
---- ----
% of % of
Amount Deposits Amount Deposits
------ -------- ------ --------
(Dollars in thousands)

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

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

Average Deposits

Year ended December 31,
-----------------------
2004 2003
---- ----
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)

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

As of December 31, 2004, we held $17.0 million of time deposits of
$100,000 or more with $643,000 maturing within three months, $968,000 maturing
over three through six months, $3.9 million maturing over six through twelve
months, and $11.5 million maturing over twelve months. The vast majority of time
deposits $100,000 and over are acquired from customers within our service area
in the ordinary course of business. While most of the large time deposits are
acquired from customers with standing relationships with us, it is a common
industry practice not to consider these types of deposits as core deposits
because their retention can be expected to be heavily influenced by rates
offered, and therefore such deposits may have the characteristics of
shorter-term purchased funds. Time deposits $100,000 and over involve the
maintenance of an appropriate matching of maturity distribution and a
diversification of sources to achieve an appropriate level of liquidity.

Return on Equity and Assets

The following table shows our return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for the years ended December 31, 2004 and 2003.

2004 2003
---- ----

Return on assets ............................. .75% .48%
Return on equity ............................. 7.89% 4.45%
Dividend payout ratio ........................ - -
Equity to assets ratio ....................... 9.57% 10.85%

The return on assets and equity improved in 2004 due largely to growth
in our customer base.

Customer Repurchase Agreements

Customer repurchase agreements consist of sweep accounts and retail
repurchase agreements, and totaled $5.5 million and $5.8 million at December 31,
2004 and 2003, respectively. U. S. Government securities with an amortized cost
of $6.5 million and $7.3 million (fair value of $6.5 million and $7.4 million)
were used as collateral for the sweep accounts and retail repurchase agreements
at December 31, 2004 and 2003, respectively. The majority of these accounts pay
interest on a floating rate basis.

Plan of Operation

During 2005, our plan of operation is to attract new deposit and loan
customers, to increase the ratio of services per customer and the account
profitability of our current customers, and to expand our geographic footprint.
We plan to seek deposit accounts from individuals and businesses in the Easley,
Berea, Powdersville and surrounding markets. We intend to offer competitive
rates for such accounts and may seek new accounts by offering rates slightly
above those prevailing in the market. We have added a number of new deposit
account products and services for 2005. We expect these products to broaden the
customer base and increase the profitability of existing accounts. We plan to
seek loan business by offering competitive rates and terms to creditworthy
customers. Our management will emphasize personal service, accessibility, and
flexibility as reasons for customers to do business with us. Personal contacts
by management, advertising, and competitive prices and services will be our
principal marketing tools.

Financial Condition and Results of Operations
for the Periods Ended June 30, 2005 and 2004

A number of the terms and concepts we use in this discussion of our
financial condition and results of operations for the quarterly and six months
periods ended June 30, 2005 and 2004 are explained more completely in the
foregoing discussion of our financial condition and results of operations for
the years ended December 31, 2004 and 2003. Accordingly, you should read the
following information for the periods ended June 30, 2005 and 2004 in
conjunction with the foregoing discussion for the years ended December 31, 2004
and 2003 and our consolidated financial statements for the three and six months
ended June 30, 2005 and 2004 included elsewhere in this prospectus.

Results of Operations for the Three Months Ended June 30, 2005 and 2004

Overview

Our net income for the three months ended June 30, 2005 was $260,638 or
$.22 per basic and diluted share compared to $120,856 or $.10 per basic and
diluted share for the three months ended June 30, 2004. On April 12, 2005 our
Board of Directors declared a 10% stock dividend payable on May 27, 2005 to all
shareholders of record on May 10, 2005. Our 2004 earnings per share calculations
have been adjusted to reflect the stock dividend. Our earnings per share for
2005 also reflect the stock dividend as if it had occurred on January 1, 2005.
The 115.7% percent increase in earnings is due to growth in our earning assets
over the past 12 months. Our average interest earning assets totaled $90.8
million for the quarter ended June 30, 2005 and $77.6 million for the quarter
ended June 30, 2004. Our total assets were $86.2 million as of June 30, 2004 and
increased to $101.3 million as of June 30, 2005.

Our net interest income was $966,073 for the three months ended June
30, 2005, compared to $756,916 for the three months ended June 30, 2004. The
increase was primarily the result of the growth of our earning assets from 2004
to 2005. Our net interest margin increased over the same period from 3.92% for
the quarter ended June 30, 2004 to 4.28% for the quarter ended June 30, 2005 and
contributed to the increase in net income.

The amount of our provision for loan losses for the three months ended
June 30, 2005 was $20,794 compared to $48,501 for the three months ended June
30, 2004. In each case, management has sought to provide the amount estimated to
be necessary to maintain an allowance for loan losses that was adequate to cover
the level of loss that management believed to be inherent in the portfolio as a
whole, taking into account our experience, economic conditions and information
about borrowers available at the time of the analysis. During 2005 we have had
no charge-offs or recoveries. See "--Balance Sheet Review for the Six Months
Ended June 30, 2005 -- Loans" for additional information on our loan portfolio
and allowance for loan losses as of June 30, 2005 compared to December 31, 2004.

Our noninterest income for the three months ended June 30, 2005 was
$265,361 compared to $164,593 for the three months ended June 30, 2004. The
increase was primarily the result of an increase in mortgage loan origination
fees.

Our total noninterest expense for the three months ended June 30, 2005
was $789,002 versus $678,074 for the first three months of 2004. Expenses
increased primarily as a result of increases in salaries and benefits and other
expense, offset by a decrease in data processing expense. Salaries and benefits
increased 24.9% as a result of annual salary increases, the increasing costs of
benefits, and additional personnel, including personnel for the new Powdersville
branch opened in July, 2005. As of June 30, 2005, we employed 36 full-time
personnel. Our premises and equipment costs have risen due to the cost of
upgrading certain hardware and software. Other expenses include advertising and
courier costs, which have both increased in 2005 over 2004.

Net Interest Income

Our net interest income was $966,073 for the three months ended June
30, 2005 and $756,916 for the three months ended June 30, 2004.

Changes that affect net interest income are changes in the average rate
earned on interest earning assets, changes in the average rate paid on interest
bearing liabilities, and changes in the volume of interest earning assets and
interest bearing liabilities. Our average earning assets for the three months
ended June 30, 2005 were $90.8 million and for the quarter ended June 30, 2004
were $77.6 million. The increase was mainly attributable to a $12.3 million
increase in average loans primarily supported by an $11.9 million increase in
average interest bearing deposits. Our philosophy is to grow the customer base
deliberately, with core business and strong relationships.

For the three months ended June 30, 2005 the average yield on our
earning assets was 6.43% while the average cost of our interest-bearing
liabilities was 2.47%. For the three months ended June 30, 2004 the average
yield on our earning assets was 5.45% and the average cost of our interest
bearing liabilities was 1.78%. The increase in the yield on earning assets and
the cost of interest bearing liabilities is attributable to a higher short-term
interest rate environment. The Federal Reserve's Open Market Committee has
increased their target federal funds rate 225 basis points to 3.25% since June
2004, and loans and deposits have continued to reprice at higher interest rates
throughout the second half of 2004 and the first half of 2005.

The net interest margin is computed by subtracting interest expense
from interest income and dividing the resulting figure by average interest
earning assets. The net interest margin for the three months ended June 30, 2005
was 4.28% compared to 3.92% for the three months ended June 30, 2004. The
increase in the net interest margin is attributable to asset sensitivity in the
balance sheet as short term interest rates have increased. There has also been a
shift in asset allocation between investments and loans receivable. Investments
are generally lower yielding assets than loans due to a lower level of credit
risk on the investments we normally purchase. As investments have matured or
been called, the proceeds have been invested in loans receivable whenever
possible. During the second quarter of 2005 investments amounted to 13.4% of
total average interest earning assets, while during the second quarter of 2004
they were 14.6% of interest earning assets. During the second quarter of 2005
our loan portfolio earned an average of 341 basis points more than our
investment portfolio.

The table below illustrates the average balances of interest earning
assets and interest bearing liabilities and the resulting annualized yields and
costs for the three-month periods ended June 30, 2005 and 2004.

June 30, 2005 June 30, 2004
------------- -------------
Average Interest Average Average Interest Average
Balance Earned Yield/Cost Balance Earned Yield/Cost
------- ------ ---------- ------- ------ ----------

Investments .................................. $12,172,407 $ 111,663 3.68% $11,335,311 $ 112,762 3.99%
Fed Funds Sold ............................... 4,216,785 29,187 2.78% 4,144,692 10,899 1.05%
Loans ........................................ 74,450,690 1,315,317 7.09% 62,119,944 930,966 6.01%
----------- ----------- ----------- -----------
Total interest earning assets ............. 90,839,882 1,456,167 6.43% 77,599,947 1,054,627 5.45%
=========== ----------- =========== -----------

Interest bearing transaction accounts ........ 13,668,444 34,581 1.01% 11,546,995 29,088 1.01%
Savings and money market ..................... 11,203,974 31,776 1.14% 14,269,802 35,333 0.99%
Time deposits greater than $100,000 .......... 19,458,062 172,860 3.56% 13,089,292 82,453 2.53%
Other time deposits .......................... 27,509,368 204,419 2.98% 21,027,263 129,719 2.47%
----------- ----------- ----------- -----------
Total interest bearing deposits ........... 71,839,848 443,636 2.48% 59,933,352 276,593 1.85%
Customer repurchase agreements ............... 4,068,860 14,449 1.42% 5,794,239 16,468 1.14%
Borrowings from FHLB Atlanta ................. 3,716,891 32,009 3.45% 1,500,000 4,650 1.24%
----------- ----------- ----------- -----------
Total interest bearing liabilities ........ $79,625,599 490,094 2.47% $67,227,591 297,711 1.78%
=========== ----------- =========== -----------

Net interest income .......................... $ 966,073 $ 756,916
=========== ===========
Interest rate spread ......................... 3.96% 3.67%
Interest margin .............................. 4.28% 3.92%

As of June 30, 2005, our cumulative GAP ratio was 1.20 through 12
months. This indicates an asset-sensitive position as of June 30, 2005. In a
period of rising interest rates, asset-sensitive balance sheets would be
expected to experience a widening of the net interest margin, while
liability-sensitive balance sheets can experience pressure on the net interest
margin. In a period of decreasing interest rates, liability-sensitive balance
sheets typically experience a widening of the net interest margin and
asset-sensitive balance sheets experience the opposite effect.

Results of Operations for the Six Months Ended June 30, 2005 and 2004

Overview

Our net income for the six months ended June 30, 2005 was $481,769 or
$.41 per basic and $.40 per diluted share compared to $241,106 or $.21 per basic
and $.20 per diluted share for the six months ended June 30, 2004. On April 12,
2005 our Board of Directors declared a 10% stock dividend payable on May 27,
2005 to all shareholders of record on May 10, 2005. Our 2004 earnings per share
calculations have been adjusted to reflect the stock dividend. Our earnings per
share for 2005 also reflect the stock dividend as if it has occurred on January
1, 2005. The increase in net income is due to our growth.

Our net interest income was $1.9 million for the six months ended June
30, 2005 compared to $1.5 million for the six months ended June 30, 2004. The
increase was primarily the result of our growth from 2004 to 2005.

Our provision for loan losses for the six months ended June 30, 2005
was $35,794 compared to $88,071 for the six months ended June 30, 2004. In each
case, management has sought to provide the amount estimated to be necessary to
maintain an allowance for loan losses that was adequate to cover the level of
loss that management believed to be inherent in the portfolio as a whole, taking
into account our experience, economic conditions and information about borrowers
available at the time of the analysis. There have been no charge-offs or
recoveries in 2005. See "--Balance Sheet Review for the Six Months Ended June
30, 2005 --Loans" for additional information on our loan portfolio and allowance
for loan losses as of June 30, 2005 compared with December 31, 2004.

Our non interest income for the six months ended June 30, 2005 was
$437,689 compared to $351,655 for the six months ended June 30, 2004. The
increase was primarily the result of growth in mortgage loan origination fees
from 2004 to 2005 and an increase in the cash surrender value of life insurance
policies. Our mortgage loan origination fees increased due to an increase in the
number of loans originated for other lenders in 2005 compared to 2004.

Our total non interest expense for the six months ended June 30, 2005
was $1.5 million versus $1.4 million for the six months ended June 30, 2004.
Salaries and other expenses increased 14.5% and 9.2%, respectively. Salary and
benefit costs increased primarily as a result of additional personnel, including
personnel for our new Powdersville branch, and annual performance increases.
Other expense includes advertising costs and directors fees which both increased
in 2005 over 2004. Advertising costs increased as we began to increase the
frequency of print advertising of its products and services. Directors' fees
increased as the frequency of meetings increased.

Net Interest Income

Our net interest income was $1.9 million for the six months ended June
30, 2005 compared to $1.5 million for the six months ended June 30, 2004. The
increase was mainly attributable to an increase in average loans and an increase
in the weighted average interest rate on loans. Our average earning assets for
the six months ended June 30, 2005 increased to $89.8 million or 16.4% from the
$77.2 million reported for the six months ended June 30, 2004. Our average
interest bearing liabilities increased $11.4 million to $78.7 million for the
six months ended June 30, 2005. The increase was spread among various deposit
account types and other borrowed money.

For the six months ended June 30, 2005 the average yield on earning
assets was 6.26% while the average cost of interest-bearing liabilities was
2.36%. For the six months ended June 30, 2004 the average yield on earning
assets was 5.46% and the average cost of interest-bearing liabilities was 1.77%.
The increase in the yield on earning assets and the cost of interest bearing
liabilities is attributable to the higher overall interest rate environment. The
net interest margin for the six months ended June 30, 2005 was 4.19% compared to
3.91% for the six months ended June 30, 2004. The increase in the net-interest
margin is attributable to a change in the mix of the types of interest earning
assets and the corresponding interest bearing liabilities in our balance sheet.
We have increased loans receivable as a percentage of total earning assets in
2005 in comparison to 2004. Average loans comprised 82.7% of total average
interest earning assets in 2005 compared to 79.0% in 2004, and comprised the
largest component of the increase in interest income across the two periods
compared. The average yield on interest earning assets increased 80 basis points
from the 2004 period to the 2005 period. During the same period, we were able to
hold the increases in our cost of funds to only 59 basis points. The cost of
time deposits greater than $100,000 increased to 3.45% and other time deposits
increased to an average cost of 2.87% as competition for time deposits increased
in our market areas. Our advances from the FHLB also increased in cost from
1.23% in 2004 to 3.43% in 2005 as a result of lengthened maturities and
increases in interest rates. Early in 2004 our advances were variable rate
advances. At June 30, 2005 we had several fixed rate amortizing and
non-amortizing advances at various maturities.

The table below illustrates the average balances of interest earning
assets and interest bearing liabilities and the resulting annualized yields and
costs for the six month periods ended June 30, 2005 and 2004.

Investments .................................. $12,330,388 $ 228,468 3.74% $12,470,810 $ 247,816 4.01%
Fed Funds Sold ............................... 3,249,108 42,500 2.64% 3,745,754 20,031 1.08%
Loans ........................................ 74,237,524 2,516,807 6.84% 60,949,263 1,819,923 6.02%
----------- ---------- ----------- ----------
Total interest earning assets ............. 89,817,020 2,787,775 6.26% 77,165,827 2,087,770 5.46%
=========== ---------- =========== ----------
Interest bearing transaction accounts ........ 13,421,958 67,567 1.02% 10,934,806 54,882 1.01%
Savings and money market ..................... 12,841,722 71,781 1.13% 15,023,923 74,905 1.01%
Time deposits greater than $100,000 .......... 18,804,829 322,065 3.45% 12,691,640 162,352 2.58%
Other time deposits .......................... 26,232,500 373,173 2.87% 20,040,188 248,893 2.50%
----------- ---------- ----------- ----------
Total interest bearing deposits ........... 71,301,009 834,586 2.36% 58,690,557 541,032 1.86%
Customer repurchase agreements ............... 3,854,730 27,361 1.43% 5,759,760 32,817 1.15%
Advances from FHLB ........................... 3,556,026 60,434 3.43% 2,846,154 17,407 1.23%
----------- ---------- ----------- ----------
Total interest bearing liabilities ........ $78,711,765 922,381 2.36% $67,296,471 591,256 1.77%
=========== ---------- =========== ----------
Net interest income .......................... $1,865,394 $1,496,514
========== ==========
Interest rate spread ......................... 3.90% 3.68%
Interest margin .............................. 4.19% 3.91%

Balance Sheet Review for the Six Months Ended June 30, 2005

Our total consolidated assets increased $700,000 from $100.6 million at
December 31, 2004 to $101.3 million at June 30, 2005. This increase resulted
primarily from an increase in loans and property and equipment, partially offset
by a decrease in cash and available for sale securities. Our loans increased
approximately $1.1 million during the first 6 months and property and equipment
increased $1.7 million, primarily due to costs associated with our new branch
office.

As of June 30, 2005 we held securities available for sale of
approximately $7.9 million. These securities are held primarily for liquidity
purposes and for pledging against public deposits and accounts exceeding the
FDIC insurance limits. As such, these securities are generally, but may not
ultimately be, held to maturity. As of June 30, 2005 these securities, many of
which were purchased during the recent low interest rate environment, yield
below market interest rates. As a result, many of these securities show
unrealized losses when marked to market value at June 30, 2005. All of the
securities in question have been issued by agencies of the U.S. Government or
municipal governments and have good bond ratings from various rating agencies.
We currently have the ability and intent to hold these securities until their
maturity at which time their full face value is expected to be realized. The
average life of the portfolio of securities available for sale is 2.02 years.
Based on our intent and ability to hold these securities until maturity and
based on their relatively short average lives and good credit ratings,
management believes that the unrealized losses in the available for sale
portfolio are temporary.

At December 31, 2004, deposits were $82.5 million, customer repurchase
agreements were $5.5 million and borrowings from the FHLB were $3.4 million. As
of June 30, 2005 total deposits were $82.0 million, customer repurchase
agreements were $3.0 million, and borrowings from the FHLB were $6.7 million. At
December 31, 2004 we had one customer with an unusually high short-term balance
in his deposit and customer repurchase agreement accounts. Due to the short-term
nature of these accounts, these balances were expected to change following year
end. During 2005 movements in interest rates and other market conditions also
changed the composition and amounts of our interest-bearing liabilities.

Management seeks to maintain sufficient cash and other forms of
liquidity to meet both anticipated and unanticipated cash outflows and a balance
sheet mix that effectively utilizes our earning assets. Cash and cash
equivalents amounted to $7.0 million at June 30, 2005 and $7.1 million at
December 31, 2004.

Loans

Commercial and industrial loans made up 18.1% of the total loan
portfolio as of June 30, 2005, totaling $13.7 million, compared to $13.3 million
or 17.8% at December 31, 2004. Loans secured by real estate for construction and
land development totaled $17.5 million or 22.9% of the total loan portfolio as
of June 30, 2005 compared to $16.0 million or 21.3% of the portfolio at December
31, 2004. Nonresidential, nonfarm real estate loans totaled $23.6 million or
30.9% of the portfolio, while all other loans secured by real estate totaled
$18.7 million or 24.5% of the total loan portfolio as of June 30, 2005. As of
December 31, 2004, nonfarm, nonresidential loans were $23.2 million or 30.9% of
the portfolio and all other loans secured by real estate were $19.7 million or
26.2% of the portfolio. Installment loans and other consumer loans to
individuals comprised $2.6 million or 3.6% of the total loan portfolio as of
June 30, 2005, compared to $2.7 million or 3.5% of the portfolio as of December
31, 2004. The allowance for loan losses was 1.25% of gross loans as of June 30,
2005 compared to 1.22% as of December 31, 2004. Based on information available
as of June 30, 2005, in Management's opinion, the allowance for loan losses is
adequate as of June 30, 2005. At June 30, 2005, we had no loans that were 90
days or more past due or non-accruing. As of June 30, 2005, we had $48.0 million
of loans or 63.0% of the loan portfolio at variable rates of interest. Of the
remaining loans in the portfolio, $10.6 million mature within 1 year.

Liquidity

Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in the most timely and economical

manner. Some liquidity is ensured by maintaining assets that may be immediately
converted into cash at minimal cost (amounts due from banks and federal funds
sold). However, the most manageable sources of liquidity are composed of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within our service area. Core deposits (total deposits less
time deposits greater than $100,000) provide a relatively stable funding base,
and were equal to 65.1% of total assets at December 31, 2004 and 60.6% of total
assets at June 30, 2005.

Asset liquidity is provided from several sources, including amounts due
from banks and federal funds sold, and funds from maturing loans. We had over
$7.1 million in cash and liquid assets at December 31, 2004, and $7.0 million in
cash and liquid assets at June 30, 2005. We have $4.4 million available through
lines of credit with other banks and a line with the Federal Home Loan Bank of
Atlanta ("FHLB") as additional sources of liquidity funding. The line with the
FHLB is equal to 10% of assets provided that adequate collateral is available
for pledging. The line may be used for short or long term funding needs and may
be used on a fixed or variable-rate basis. The lines with the other banks are
for short-term use only and are unsecured. As of December 31, 2004 and June
30,2005, respectively, we had $3.4 million and $6.7 million at various fixed and
variable rates of interest, maturing at various dates through 2013 borrowed from
the FHLB. The highest balance at any month end during 2004 was $5.0 million. The
average balance for 2004 was $2.5 million. The average rate paid on the
borrowings for 2004 was 1.87%. The weighted average interest rate as of December
31, 2004 was 3.40%. At December 31, 2004 and June 30, 2005, respectively,
approximately $6.6 million and $3.3 million of additional funds were available
under the FHLB line. Management believes that our overall liquidity sources are
adequate to meet our operating needs in the ordinary course of our business.

Off Balance Sheet Risk

We make contractual commitments to extend credit in the ordinary course
of our business activities. These commitments are legally binding agreements to
lend money to our customers at predetermined interest rates for a specified
period of time. Commitments are subject to various conditions that are expected
to reduce our credit risk. We also issue standby letters of credit which are
assurances to a third party that they will not suffer a loss if our customer
fails to meet its contractual obligation to the third party.

Our management evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
management upon extension of credit, is based on a credit evaluation of the
borrower. Collateral varies but may include accounts receivable, inventory,
property, plant and equipment, and commercial or residential real estate.
Management manages the credit risk on these commitments by subjecting them to
normal underwriting and risk management processes.

At June 30, 2005, we had issued commitments to extend credit of $17.9
million through various types of lending arrangements. Of that amount,
approximately $12.0 million was undisbursed amounts of closed-end loans,
$887,000 related to unused overdraft protection, and approximately $5.0 million
was related to lines of credit. We also had standby letters of credit
outstanding of approximately $757,000 at June 30, 2005. An immaterial amount of
fees were collected related to these commitments and letters of credit during
the quarter ended June 30, 2005. Historically many of these commitments and
letters of credit expire unused, and the total amount committed as of June 30,
2005 is not necessarily expected to be funded. However, through our various
sources of liquidity discussed above, we believe that we will have the necessary
resources to meet these obligations should the need arise.

We are not involved in other off-balance sheet contractual
relationships, unconsolidated related entities that have off-balance sheet
arrangements or transactions that could result in liquidity needs or other
commitments or significantly impact earnings. We did not maintain any
obligations under non-cancelable operating lease agreements at June 30, 2005. We
have completed the first year of a five-year contract with a data processing
service. The annual costs are approximately $109,000. Refer to notes 10 and 14
to our consolidated financial statements for discussions on commitments and
contingencies and financial instruments with off balance sheet risk.

Capital Resources

At December 31, 2004, shareholders' equity increased from the balance
at December 31, 2003 by approximately $610,000. Total shareholders' equity at
December 31, 2004 was $8.8 million compared to $8.2 million as of December 31,
2003. The increase is a result of net income of $664,000 partially offset by an
unrealized loss on investment securities and cash paid in lieu of fractional
shares as a result of stock dividends paid in 2004 and 2005.

Our capital base increased by $438,197 for the first six months of
2005, due to net income, partially off-set by an unrealized loss on investment
securities and cash paid in lieu of fractional shares for our stock dividend.
Our equity to asset ratio was 9.1% as of June 30, 2005 compared to 8.7% as of
December 31, 2004. We expect to continue to leverage our capital as we grow.

We made capital expenditures totaling approximately $524,000 in 2004
for bank premises and furniture and equipment. We made capital expenditures
totaling approximately $696,000 in 2005 for construction of our new Powdersville
branch location. Such expenditures were made from cash on hand.

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

As of June 30, 2005, we are considered well capitalized based on the
capital requirement levels that are to be maintained according to FDIC
guidelines.

As of April 12, 2005, our Board of Directors declared a 10% stock
dividend to shareholders of record on May 10, 2005 payable on May 27, 2005. We
issued 106,282 shares as a result of the dividend. All per share amounts have
been restated to reflect the dividend. The dividend has also been reflected in
the accompanying Consolidated Statement of Shareholders' Equity for the six
months ended June 30, 2005.

Capital Ratios

Adequately
Well Capitalized Capitalized
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----

Total capital to risk weighted assets .................. $ 9,383 10.78% $ 8,701 10.0% $ 6,961 8.0%
Tier 1 capital to risk weighted assets ................. $ 8,428 9.69% $ 5,221 6.0% $ 3,480 4.0%
Tier 1 capital to average assets ....................... $ 8,428 8.58% $ 4,911 5.0% $ 3,929 4.0%

Inflation

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

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

DIRECTORS AND EXECUTIVE OFFICERS

Our directors are also the directors of Cornerstone National Bank. Set
forth below is information about their recent business experience and community
activities.

Directors

The table below shows as to each of our directors, his name, age,
positions held with us, principal occupation for the past five years, and the
period during which he has served as our director. Our directors serve until the
annual meeting of shareholders for the year indicated or until their successors
are elected and qualify to serve.

Term
Director Continues
Name Age Principal Occupation During the Past Five Years Since Until
- ---- --- ----------------------------------------------- ----- -----

J. Rodger Anthony 60 President and Chief Executive Officer of Cornerstone 1999 2007
Bancorp since 1999; Chairman and Chief Executive
Officer of Cornerstone National Bank since 1999;
Chief Executive Officer, First National Bank of
Pickens County, Easley, SC, 1996 to 1998

Walter L. Brooks 78 President, G&B Enterprises, Liberty, SC (egg 1999 2007
production)

T. Edward Childress, III 60 Registered pharmacist and long-term care facility 1999 2007
owner; Shareholder of Health Management Resources,
Inc.; Chairman Cornerstone Bancorp since 1999

Ben L. Garvin 60 President of Cornerstone National Bank since 2001; 2001 2008
Secretary and Treasurer of Cornerstone Bancorp since
2003; Senior Vice President of Central Carolina
Bank, 1983 to 2001

J. Bruce Gaston 49 Certified public accountant. Partner in Gaston and 1999 2008
Gaston, C.P.A.'s, P.A.

S. Ervin Hendricks, Jr. 62 President and Co-owner, Nu-Life Environmental, Inc., 1999 2008
Easley, SC; President and Owner of Advance Machine
Works since 1995.

Joe E. Hooper 67 President, Pride Mechanical and Fabrication Company, 1999 2006
Inc.

Robert R. Spearman 65 Surveyor/Retired 1999 2006

John M. Warren, Jr., M.D. 55 Physician, Easley OB-GYN Associates, P.A. 1999 2006

George I. Wike, Jr. 61 Investor; retired optometrist 1999 2006

Executive Officers

Our executive officers are:

J. Rodger Anthony President and Chief Executive Officer
Jennifer M.Champagne Chief Financial Officer

Mr. Anthony's age and business experience are set forth above under
"-Directors." Mrs. Champagne (age 37) is a certified public accountant, and
joined us in October 2002 as our Chief Financial Officer. Prior to joining us,
Mrs. Champagne worked as a Senior Manager with Elliott Davis, LLC from August
2000 to October 2002. None of our principal executive officers or any of our
directors are related by blood, marriage or adoption in the degree of first
cousin or closer.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below shows the number of shares of our common stock owned
and the percentage of outstanding common stock such number represents for all of
our directors and executive officers at June 30, 2005, and the pro forma number
and percentage of our shares expected to be owned by them after the offering if
they purchase the number of shares they have preliminarily indicated they intend
to purchase in the offering Our directors and executive officers are not
obligated to purchase such shares, however, and they may decide to purchase more
or fewer shares or no shares. No persons other than those shown below are
currently known by us to be beneficial owners of 5% or more of our common stock.
Except as otherwise indicated, to the knowledge of our management, all shares
are owned directly with sole voting power.

Actual
June 30, 2005 Pro Forma
------------- ---------
Number of Number of % of Common Stock
Shares % of Shares Ownership if
Beneficially Outstanding Beneficially 445,000
Name (and Address of 5% Owners) Owned (1) Common Stock Owned Shares Sold
- ------------------------------- --------- ------------ ----- -----------

J. Rodger Anthony (2) .................... 50,747 4.13% 60,747 3.63%
Walter L. Brooks (3) ..................... 16,296 1.32% 19,796 1.18%
Jennifer M. Champagne (4) ................ 849 0.07% 2,349 .14%
T. Edward Childress, III ................. 116,147 9.44% 153,147 9.14%
101 McAlister Lake Drive
Easley, South Carolina 29642
Ben L. Garvin (5) ........................ 15,081 1.23% 29,881 1.78%
J. Bruce Gaston .......................... 28,301 2.30% 33,301 1.99%
S. Ervin Hendricks, Jr. .................. 48,067 3.91% 48,067 2.87%
Joe E. Hooper ............................ 57,583 4.68% 57,583 3.44%
Robert R. Spearman ....................... 10,732 0.87% 10,732 .64%
John M. Warren, Jr., M.D. ................ 20,981 1.71% 24,681 1.48%
George I. Wike, Jr. ...................... 116,147 9.44% 153,147 9.14%
------- ----- ------- -----
PO Box 98
Tigerville, SC 29688
All directors and executive .............. 480,931 39.10% 593,431 35.43%
officers as a group (11 persons) ......... ======= ====== ======= ======

- --------------------
(1) Includes for each individual, except Mr. Garvin and Ms. Champagne, 5,856
shares subject to currently exercisable stock options. Options that are
neither currently exercisable nor exercisable within 60 days are omitted.
(2) Includes 968 shares subject to currently exercisable stock options in
addition to the options shown in note (1).
(3) Includes 7,320 shares owned by a partnership in which Mr. Brooks is a
partner.
(4) Includes 484 shares subject to currently exercisable stock options.
(5) Includes 968 shares subject to currently exercisable stock options.

MANAGEMENT COMPENSATION

The following table sets forth the remuneration paid during the years
ended December 31, 2004, 2003 and 2002 to our Chief Executive Officer and the
President of our bank. None of our, or our bank's, other principal officers was
paid remuneration in excess of $100,000.

Summary Compensation Table

Annual Compensation (1) Long Term Compensation Awards
----------------------- -----------------------------
Number of
Securities
Underlying
Options All Other
Name and Principal Position Year Salary Bonus Awarded(2) Compensation (3)
- --------------------------- ---- ------ ----- ---------- ----------------

J. Rodger Anthony, President and 2004 $135,200 $ - 2,904 $3,887
Chief Executive Officer 2003 $130,000 $5,592 - $4,027
2002 $125,000 $4,228 - $3,750

Ben L. Garvin, President, 2004 $113,500 $ - 2,904 $3,265
Cornerstone National Bank 2003 $109,200 $4,697 - $3,383
2002 $105,000 $3,552 - $3,150

- ---------------------
(1) Perquisites and personal benefits did not exceed the lesser of $50,000 or
10% of salary plus bonus payments.
(2) Adjusted to reflect 10% stock dividend issued in 2005.
(3) Contributions by us to our Simple IRA Plan on behalf of Mr. Anthony and Mr.
Garvin.

Organizers' Stock Options

In December, 1999, in consideration of the time and efforts of our
directors in organizing our company and our bank and each director's personally
guaranteeing a portion of the organizational expenses, our Board of Directors
granted options to each director to purchase up to 4,000 shares of our common
stock for a purchase price of $10.00 per share, which was the price at which our
common stock was sold to the public in 1999. The options became exercisable for
each director one-third each year beginning on December 14, 2000 and expire on
December 14, 2009, unless they terminate sooner as the result of the director's
ceasing to be one of our directors, in which case the options expire six months
after the holder ceases to be a director. Our Board of Directors declared ten
percent stock dividends to shareholders of record on May 10, 2005, May 11, 2004,
March 17, 2003 and April 30, 2002. Our stock option agreements provide for
appropriate adjustments of the number of outstanding stock options in the event
of stock dividends and other similar stock transactions. The agreements also
provide for the aggregate consideration to be paid upon exercise of the options
to be proportionately adjusted following a stock dividend. Therefore, at June
30, 2005, each of the organizing directors held options to purchase 5,856 shares
with an exercise price of $6.83 per share, all of which are currently
exercisable.

2003 Stock Option Plan

In 2003, our shareholders approved a stock option plan for the benefit
of our employees and directors (the "2003 Plan"). The 2003 Plan reserved 125,000
shares of common stock for issuance upon exercise of options. During each of the
years 2004 and 2005, options to purchase 18,000 shares of common stock were
granted under the 2003 Plan. These options vest over a three year period and are
exercisable for a period of ten years at the estimated fair market value on the
date of grant. Following the stock dividends declared in 2004 and 2005 the total
number of options outstanding under the 2003 Plan was 41,580 at a weighted
average exercise price of $11.03 per share. As of June 30, 2005, one-third of
the options granted in 2004 were vested, all in accordance with the provisions
of the 2003 Plan.

Option Grants in Last Fiscal Year

The following table presents information about options granted in 2004
to the persons named in the Summary Compensation Table at December 31, 2004. The
number of securities underlying options granted and the exercise price have been
adjusted to reflect the 10% stock dividend issued in 2005.

Number of Securities % of Total Options
Underlying Options Granted to Employees
Name Granted in 2004 Exercise Price Expiration Date
---- ------- ------- -------------- ---------------

J. Rodger Anthony 2,904 28.6% $10.33 2014
Ben L. Garvin 2,904 28.6% $10.33 2014

These options vest over a three year period beginning in 2005 and
terminate ten years from the date of grant.

Option Exercises and Year End Options Outstanding and Values

The following table presents information about options held by the
persons named in the Summary Compensation Table at December 31, 2004. No options
were exercised by Mr. Anthony or Mr. Garvin in 2004.

Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options 12/31/04(1) Options 12/31/04(2)
------------------- -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------

J. Rodger Anthony 5,856 2,904 $ 36,128 $ 7,754
Ben L. Garvin - 2,904 $ - $ 7,754

- --------------
(1) Adjusted to reflect the 10% stock dividend issued in April 2005.
(2) Based on exercise prices of $6.83 per share for the 1999 Organizers Plan
and $10.33 for the 2003 Plan (after adjustments for the 2005, 2004, 2003
and 2002 10% stock dividends) and assuming that the fair market value of
our common stock on December 31, 2004 was $13.00 per share.

Options Granted in 2005

In 2005, we granted each of Messrs. Anthony and Garvin options to
purchase an additional 2,400 shares at an exercise price of $13.00 per share.
Following the 2005 10% stock dividend, the number of shares underlying these
options was 2,640 each at an exercise price of $11.82 per share. These options
vest over a three-year period beginning in 2006 and terminate ten years from the
date of grant.

Change of Control Agreements

We have entered into Change of Control Agreements with J. Rodger
Anthony, our President and Chief Executive Officer, and Ben L. Garvin, President
of our bank and our Corporate Secretary and Treasurer (each referred to as an
"Executive"). The agreements provide that, if we are subject to a "change of
control" within five years of the date of the agreements, and the Executive
terminates his employment with us or we terminate his employment with us within
six months of such change of control, the Executive will be entitled to a lump
sum payment equal to a multiple of his annual salary in effect at the date of
termination. The agreements automatically renew each year unless, 30 days prior
to an annual anniversary date, we give notice that the agreements will not
renew. A "change of control" is deemed to occur under the agreements if either
(i) any person or group acting in concert, directly or indirectly, acquires
voting control of us, (ii) we are merged with or into any other entity and we
are not the surviving entity of the merger, (iii) voting control of any of our
subsidiaries by which subsidiary the Executive is principally employed is
acquired, directly or indirectly, by any person or group acting in concert, or
(iv) any of our subsidiaries by which the Executive is principally employed is
merged with or into another entity which is not also one of our subsidiaries and
such subsidiary is not the surviving entity of the merger.

The foregoing is merely a summary of the Change of Control Agreements
and is not intended to create any rights in any person, and is qualified in its
entirety by reference to such agreements.

Compensation of Directors

Our directors are not paid for service as directors of our holding
company. However, our directors also serve as directors of our bank and receive
fees for meetings of our bank's Board of Directors and committee meetings of our
bank's Board of Directors. Our bank paid directors $400.00 per board meeting in
2004, except Mr. Childress, who was paid $500.00 per board meeting due to his
additional duties as Chairman of the Board. Directors were paid $50.00 for each
committee meeting attended. Total director fees were $58,100 in 2004. For 2005,
the Board of Directors of our bank has increased monthly directors' fees to
$500.00 per meeting, and increased the fee for the Chairman of the Board to
$600.00. Committee fees have been increased to $100.00 per meeting attended in
person, and decreased to $25.00 per meeting attended by telephone. See also
"Organizers Stock Options" above for information about stock options granted to
our original directors.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Extensions of Credit. Our bank, in the ordinary course of its business,
makes loans to and has other banking transactions with our directors, officers,
principal shareholders, and their associates. Loans are made on substantially
the same terms, including rates and collateral, as those prevailing at the time
for comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features. Our bank
expects to continue to enter into transactions in the ordinary course of
business on similar terms with directors, officers, principal stockholders, and
their associates. The aggregate dollar amount of such loans outstanding at
December 31, 2004 was $4.5 million. During 2004, $3.6 million of new loans were
made and repayments totaled $2.9 million.

Organizers Options. See the discussion above under the caption
"MANAGEMENT COMPENSATION -- Organizers' Stock Options" for information about
options granted to our organizers.

SUPERVISION AND REGULATION

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

General

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

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

Obligations of Cornerstone Bancorp to its Subsidiary Bank

A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.

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

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

Capital Adequacy Guidelines for Bank Holding Companies and National Banks

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

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

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

Our bank exceeded all applicable capital requirements at December 31,
2004. Cornerstone Bancorp is not currently subject to separate capital
requirements because the Federal Reserve applies its guidelines on a bank-only
basis for bank holding companies with less than $150 million in consolidated
assets.

Payment of Dividends

Cornerstone Bancorp is a legal entity separate and distinct from its
bank subsidiary. Most of the revenues of Cornerstone Bancorp are expected to

result from dividends paid to Cornerstone Bancorp by our bank. There are
statutory and regulatory requirements applicable to the payment of dividends by
our bank to Cornerstone Bancorp as well as by Cornerstone Bancorp to its
shareholders. Cornerstone Bancorp does not anticipate that it will pay cash
dividends in the near future. See "DIVIDENDS."

Certain Transactions by Cornerstone Bancorp with its Affiliates

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

FDIC Insurance Assessments

Because its deposits are insured by the BIF, our bank is subject to
insurance assessments imposed by the FDIC. Currently, the assessments imposed on
all FDIC deposits for deposit insurance have an effective rate ranging from 0 to
27 basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. In addition, our bank is subject
to an assessment to pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"). The FICO assessment is
adjusted quarterly to reflect changes in the assessment bases of the respective
funds based on quarterly Call Report and Thrift Financial Report submissions.

Regulation of Cornerstone National Bank

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

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

Other Safety and Soundness Regulations

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

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

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

Interstate Banking

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

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act, which makes it easier for affiliations
between banks, securities firms and insurance companies to take place, removes
Depression-era barriers that had separated banks and securities firms, and seeks
to protect the privacy of consumers' financial information.

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

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

The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.

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

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

The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions. The privacy provisions of the Act have been
implemented by adoption of regulations by various Federal agencies.

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

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 mandated extensive reforms and
requirements for public companies. The SEC has adopted extensive new regulations
pursuant to the requirements of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act
and the SEC's new regulations have increased our cost of doing business,
particularly our fees for internal and external audit services and legal
services, and the law and regulations are expected to continue to do so.
However, we do not believe that we will be affected by Sarbanes-Oxley and the
new SEC regulations in ways that are materially different or more onerous than
those of other public companies of similar size and in similar businesses.

Legislative Proposals

Proposed legislation, which could significantly affect the business of
banking, is introduced in Congress from time to time. Our management cannot
predict the future course of such legislative proposals or their impact on us
should they be adopted.

Fiscal and Monetary Policy

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

DESCRIPTION OF OUR COMMON STOCK

This section contains important information about shareholder rights
and prospective subscribers should review it carefully before making a decision
to invest. The following summarizes certain provisions of the Articles of
Incorporation of Cornerstone Bancorp and state law, but is not complete and is
qualified in its entirety by reference to the Articles of Incorporation and by
the applicable statutory provisions.

Cornerstone Bancorp is a South Carolina corporation. As such, South
Carolina law controls the rights of shareholders and other matters relating to
the stock of Cornerstone Bancorp.

Capitalization. We are authorized to issue 20,000,000 shares of common
stock (no par value). We may also issue options or warrants to purchase some of
these authorized shares of common stock, including the options to be issued to
our directors and organizers. See "MANAGEMENT COMPENSATION - Organizers' Stock
Options." Our common stock has unlimited voting rights and is entitled to
receive our net assets upon dissolution. We are also authorized to issue up to
10,000,000 shares of preferred stock in one or more series having the
preferences, limitations and relative rights determined by the Board of
Directors.

Quorum. A majority of our shares entitled to vote constitutes a quorum
at any meeting of shareholders.

Voting Rights; No Cumulative Voting. In general, each holder of our
common stock is entitled to one vote per share and to the same and identical
voting rights as other holders of our common stock. In the election of
directors, each shareholder has the right to vote the number of shares owned by
him on the record date for as many persons as there are directors to be elected.
Cumulative voting is not permitted. Absence of cumulative voting makes it more
difficult to effect a change in our board of directors.

Mergers, Consolidations, Exchanges, Sales of Assets or Dissolution. Our
Articles of Incorporation provide that, with respect to any plan of merger,
consolidation or exchange or any plan for the sale of all, or substantially all,
of our property and assets, with or without the good will, or any resolution to
dissolve us, which plan or resolution shall not have been adopted by the
affirmative vote of at least two-thirds of our full board of directors, such
plan or resolution must be approved by the affirmative vote of holders of 80% of
our outstanding shares. If at least two-thirds of the full board of directors
approves any such plan or resolution, the plan or resolution need only be
approved by the affirmative vote of holders of two-thirds of our outstanding
shares. Consequently, unless two-thirds of our directors favor such a plan or
resolution, it may be very difficult to effect any such transaction.

Classified Board of Directors. Our Articles of Incorporation provide
that our board of directors shall have the power to set the number of directors
from time to time at six or more directors. Our Articles provide further that
the board of directors shall be divided into three classes, each class to be as
nearly equal in number as possible. (This type of board is sometimes referred to
as a "classified board.") At each annual shareholders' meeting, directors are
chosen for a term of three years to succeed those directors whose terms expire.
Existence of a classified board makes it more difficult to effect a change in
control because it would normally require at least two elections to gain a
majority representation on the board, and three elections to change the entire
board.

Nomination of Directors. Our Articles of Incorporation provide that no
person shall be eligible to be elected as one of our directors at a meeting of
shareholders unless that person has been nominated by a shareholder entitled to
vote at such meeting by giving written notice of such nomination to our
corporate secretary at least 90 days prior to the date of the meeting. The
notice is required to include any information required by our Bylaws.

Removal of Directors. Our Articles of Incorporation provide that an
affirmative vote of 80% of our outstanding shares shall be required to remove
any or all of the directors without cause.

Duty of Directors. Our Articles of Incorporation provide that, when
evaluating any proposed plan of merger, consolidation, exchange or sale of all,
or substantially all, of our assets, our board of directors shall consider the
interests of our employees and the community or communities in which we and our
subsidiaries, if any, do business in addition to the interests of our
shareholders. Absent this provision, under existing common law, directors would
be required to give paramount consideration with respect to such matters to the
best interests of shareholders.

Limitation of Director Liability. Our Articles of Incorporation provide
that, to the extent permitted by the South Carolina Business Corporation Act,
our directors will not be personally liable to us or our shareholders for
monetary damages for breaches of their fiduciary duties. This provision does
not, however, eliminate or limit the liability of any director (i) for any
breach of the director's duty of loyalty to us or our shareholders, (ii) for
acts or omissions not in good faith or which involve gross negligence,
intentional misconduct or a knowing violation of law, (iii) imposed for unlawful
distributions as set forth in the South Carolina Business Corporation Act, or
(iv) for any transaction from which the director derived an improper personal
benefit.

No Preemptive Rights. Our shareholders do not have preemptive rights
with respect to the issuance of additional shares, options or rights of any
class of our stock. As a result, our directors may sell additional authorized
shares of our common stock without first offering them to existing shareholders
and giving them the opportunity to purchase sufficient additional shares to
prevent dilution of their ownership interests.

Amendment to Articles of Incorporation. Unless such amendment shall
have been approved by the affirmative vote of at least two-thirds of our full
board of directors, no amendment to our Articles of Incorporation which amends,
alters, repeals or is inconsistent with any of provisions of the Articles
described in this paragraph or in the nine paragraphs above, or in the
provisions relating to business combinations set forth under "Statutory Matters"
below, shall be effective unless it is approved by the affirmative vote of 80%
of our outstanding shares. If two-thirds of the full board of directors approves
such an amendment, the amendment need only be approved by holders of two-thirds
of our outstanding shares. Amendments to change the number and classes of shares
we are authorized to issue and to change our name only require the approval of a
majority of the outstanding shares. Other amendments requiring shareholder
approval must be approved by two-thirds of the outstanding shares.

Dividends. Our common stock is entitled, pro rata, to dividends paid by
us when, if and as declared by our board of directors from funds legally
available, whether in cash or in stock, but common stockholders have no specific
right to dividends. The determination and declaration of dividends is within the
discretion of our board of directors and will take into account our financial
condition, results of operations and other relevant factors. No assurances can
be given that any future dividends will be declared or, if declared, what the
amount of such dividends will be or whether such dividends will continue for
future periods. We may not declare or pay a cash dividend on any of our stock if
we are insolvent or if the payment of the dividend would render us insolvent. If
we issue preferred stock, the terms of the preferred stock may require us to pay
dividends to holders of preferred stock under some circumstances. The payment of
dividends to holders of preferred stock will not entitle our common stockholders
to the payment of dividends.

Conversion; Redemption; Sinking Fund. None of our common stock is
convertible, has any redemption rights or is entitled to any sinking fund.

Statutory Matters.

Business Combination Statute. The South Carolina business combinations
statute provides that a 10% or greater shareholder of a resident domestic
corporation cannot engage in a "business combination" (as defined in the
statute) with such corporation for a period of two years following the date on
which the 10% shareholder became such, unless the business combination or the
acquisition of shares is approved by a majority of the disinterested members of
such corporation's board of directors before the 10% shareholder's share
acquisition date. This statute further provides that at no time (even after the
two-year period subsequent to such share acquisition date) may the 10%
shareholder engage in a business combination with the relevant corporation
unless certain approvals of the board of directors or disinterested shareholders
are obtained or unless the consideration given in the combination meets certain
minimum standards set forth in the statute. The law is very broad in its scope
and is designed to inhibit unfriendly acquisitions but it does not apply to
corporations whose articles of incorporation contain a provision electing not to
be covered by the law. Our Articles of Incorporation do not contain such a
provision. An amendment of our Articles of Incorporation to that effect would,
however, permit a business combination with an interested shareholder although
that status was obtained prior to the amendment. Unless we have a class of
securities registered under Section 12 of the Securities Exchange Act of 1934,
this statute would not ordinarily apply to us. However, we have specifically
elected in our Articles of Incorporation to make the provisions of the statute
applicable to us.

Control Share Acquisitions. The South Carolina corporations law also
contains provisions that, under certain circumstances, would preclude an

acquiror of the shares of a South Carolina corporation who crosses one of three
voting thresholds (20%, 33-1/3% or 50%) from obtaining voting control with
respect to such shares unless a majority in interest of the disinterested
shareholders of the corporation votes to accord voting power to such shares.

The legislation provides that, if authorized by the articles of
incorporation or bylaws prior to the occurrence of a control share acquisition,
the corporation may redeem the control shares if the acquiring person has not
complied with certain procedural requirements (including the filing of an
"acquiring person statement" with the corporation within 60 days after the
control share acquisition) or if the control shares are not accorded full voting
rights by the shareholders. We are not authorized by our Articles of
Incorporation or bylaws to redeem control shares.

The provisions of the Control Share Acquisitions Act will only apply to
us if we have a class of securities registered under Section 12 of the
Securities Exchange Act of 1934. Although we do not currently have a class of
securities registered under Section 12, we expect that we will be required to
register our common stock under this section in 2006.

Indemnification of Directors and Officers. Under South Carolina law, a
corporation has the power to indemnify directors and officers who meet the
standards of good faith and reasonable belief that their conduct was lawful and
in the corporate interest (or not opposed thereto) set forth by statute. A
corporation may also provide insurance for directors and officers against
liability arising out of their positions although the insurance coverage is
broader than the power of the corporation to indemnify. Unless limited by its
articles of incorporation, a corporation must indemnify a director or officer
who is wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he was a party because he is or was a director against
reasonable expenses incurred by him in connection with the proceeding. Our
Articles of Incorporation do not limit such indemnification.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.

General

Taken together, the foregoing provisions of our Articles of
Incorporation and South Carolina law favor maintenance of the status quo and may
make it more difficult to change current management, and may impede a change of
control of Cornerstone Bancorp even if desired by a majority of our
shareholders.

MATERIALS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION AND REPORTS TO SHAREHOLDERS

We are required to file annual, quarterly and periodic reports with the
Securities and Exchange Commission (the "SEC"). You may read or obtain copies of
our filed reports at the SEC's Public Reference Room at 100 F Street, N.E., Room
1580, Washington, D.C. 20549. You may obtain information about the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings with
the SEC are made electronically. The SEC maintains an internet site that
contains the reports and other information we file with the SEC. The address of
the SEC's internet site is http://www.sec.gov.

We have filed a registration statement on Form SB-2 with the SEC that
relates to this offering of common stock. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits. For
further information about us and our common stock, you should read the entire
registration statement and its exhibits. You may obtain copies of the
registration statement from the SEC's Public Reference Room or internet site at
the addresses provided in the preceding paragraph.

We will furnish shareholders with annual reports containing audited
financial information.

LEGAL MATTERS

The validity of the common stock we are offering by this prospectus
will be passed upon for us by Haynsworth Sinkler Boyd, P.A., Columbia, South
Carolina.

ACCOUNTING MATTERS

Our financial statements at December 31, 2004, and for the years ended
December 31, 2004, 2003 and 2002, have been audited by Elliott Davis, LLC, an
Independent Registered Public Accounting Firm, as stated in their report
appearing elsewhere herein, and have been included in this prospectus and the
registration statement in reliance on the report of such firm given upon their
authority as certified public accountants.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm...........................................................F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003......................................................F-2
Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002............................F-3
Consolidated Statements of Shareholders' Equity and Comprehensive Income (loss) for the years ended
December 31, 2004, 2003 and 2002............................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002........................F-5
Notes to Consolidated Financial Statements........................................................................F-6
Consolidated Balance Sheets (Unaudited) as of June 30, 2005 and December 31, 2004................................F-22
Consolidated Statements of Income (Unaudited) for the six months and three months ended June 30, 2005 and
June 30, 2004..............................................................................................F-23
Consolidated Statements of Shareholders' Equity and Comprehensive Income (loss) (Unaudited) for the six
months ended June 30, 2005 and June 30, 2004...............................................................F-24
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2005 and June 30, 2004.......F-25
Notes to Unaudited Consolidated Financial Statements.............................................................F-26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors
Cornerstone Bancorp and Subsidiary
Easley, South Carolina

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

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

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

/s/ Elliott Davis, LLC
Greenville, South Carolina
February 11, 2005, except for Note 21, as to which the date is September 1, 2005

F-1

CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

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

Cash and due from banks ............................................................. $ 3,008,847 $ 2,575,157

Federal funds sold .................................................................. 4,130,595 3,158,508
------------- -------------
Cash and cash equivalents ....................................................... 7,139,442 5,733,665

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

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

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

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

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

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
Deposits
Noninterest bearing ........................................................ $ 9,405,079 $ 9,202,362
Interest bearing ........................................................... 73,113,865 56,083,857
------------- -------------
Total deposits ............................................................. 82,518,944 65,286,219

Customer repurchase agreements ................................................. 5,483,993 5,772,192
Borrowings from Federal Home Loan Bank of Atlanta .............................. 3,400,000 5,000,000
Other liabilities .............................................................. 451,722 314,551
------------- -------------

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

Commitments and contingencies -Notes 10 and 14

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

Total shareholders' equity ................................................. 8,777,460 8,166,652
------------- -------------
Total liabilities and shareholders' equity ................................. $ 100,632,119 $ 84,539,614
============= =============

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

F-2

CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME

Year ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
INTEREST INCOME

Loans and fees on loans .............................................. $3,990,474 $3,166,185 $2,612,517
Investment securities ................................................ 493,578 585,729 588,495
Federal funds sold and other interest income ......................... 47,618 49,158 92,278
---------- ---------- ----------

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

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

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

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

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

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

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

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

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

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

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

Income tax provision ................................................. 388,898 183,418 60,500
---------- ---------- ----------
Net income ....................................................... $ 664,057 $ 356,048 $ 247,285
========== ========== ==========
EARNINGS PER COMMON SHARE
Basic ................................................................. $ .57 $ .30 $ .21
Diluted ............................................................... $ .56 $ .30 $ .21

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic ............................................................... 1,170,938 1,170,938 1,170,938
Diluted ............................................................. 1,194,879 1,189,289 1,182,806

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

F-3

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

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

Balance, December 31, 2001 ..................... 800,000 $ 7,985,000 $ (453,019) $ 82,982 $ 7,614,963
-----------

Net income .................................. - - 247,285 - 247,285
Other comprehensive income, net of
income taxes:
Unrealized loss on investment
securities ............................... - - - (2,036) (2,036)
-----------
Comprehensive income ........................ 245,249
Stock dividend (10%), net of cash
in lieu of fractional shares .............. 79,994 (75) - - (75)
----------- ----------- ----------- ----------- -----------

Balance, December 31, 2002 ..................... 879,994 7,984,925 (205,734) 80,946 7,860,137
-----------
Net income ..................................... - - 356,048 - 356,048
Other comprehensive income, net
of income taxes:
Unrealized loss on investment
securities ............................... - - - (49,216) (49,216)
-----------
Comprehensive income ........................ 306,832
Stock dividend (10%), net of cash
in lieu of fractional shares .............. 87,974 (317 - - (317)
----------- ----------- ----------- ----------- -----------

Balance, December 31, 2003 .................... 967,968 7,984,608 150,314 31,730 8,166,652
-----------
Net income ..................................... - - 664,057 - 664,057
Other comprehensive income, net of
income taxes:
Unrealized loss on investment
securities ............................... - - - (51,889) (51,889)
-----------
Comprehensive income ........................ 612,168
Stock dividend (10%), net of cash
in lieu of fractional shares .............. 96,688 269,204 (270,564) - (1,360)
----------- ----------- ----------- ----------- -----------

Balance, December 31, 2004 ..................... 1,064,656 $ 8,253,812 $ 543,807 $ (20,159) $ 8,777,460
=========== =========== =========== =========== ===========

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

F-4

CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Operating Activities

Net income ........................................................... $ 664,057 $ 356,048 $ 247,285
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and net amortization ................................. 233,714 281,036 244,632
Deferred income tax provision (benefit) ........................... (72,500) (39,200) 20,571
Provision for possible loan losses ................................ 197,010 173,574 182,842
(Gain) loss on sale of property and equipment ..................... (1,255) 2,191 -
Gain on sale of securities ........................................ (5,230) - -
(Increase) decrease in other assets ............................... (34,709) 72,422 (43,742)
Increase (decrease) in other liabilities .......................... 36,302 191,565 (9,469)
------------ ------------ ------------

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

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

Net cash used for investing activities ......................... (14,954,778) (15,281,030) (17,140,385)
------------ ------------ ------------

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

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

Net increase (decrease) in cash and cash equivalents ........... 1,405,777 3,124,457 (1,010,742)

Cash and cash equivalents, beginning of year .............................. 5,733,665 2,609,208 3,619,950
------------ ------------ ------------

Cash and cash equivalents, end of year .................................... $ 7,139,442 $ 5,733,665 $ 2,609,208
============ ============ ============

Cash paid for:
Interest ............................................................. $ 1,246,900 $ 1,193,619 $ 1,251,165
============ ============ ============
Income taxes ......................................................... $ 388,991 $ 42,679 $ 2,740
============ ============ ============

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

F-5

CORNERSTONE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

Cornerstone Bancorp, (the "Company") was incorporated under the laws of
the State of South Carolina for the purpose of operating as a bank holding
company for Cornerstone National Bank (the "Bank"). The Company obtained
regulatory approval to acquire the Bank and opened the Bank for business on
September 15, 1999, with a total capitalization of $6 million. The Bank opened a
branch location in Greenville, South Carolina in 2002. The Bank provides full
commercial banking services to customers and is subject to regulation by the
Office of the Controller of the Currency ("OCC") and the Federal Deposit
Insurance Corporation. The Company is subject to regulation by the Board of
Governors of the Federal Reserve ("FRB") and to limited regulation by the South
Carolina State Board of Financial Institutions.

Basis of presentation

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

Estimates

Concentrations of credit risk

The Company makes loans to individuals and businesses in and around
Upstate South Carolina for various personal and commercial purposes. The Bank
has a diversified loan portfolio and the borrowers' ability to repay their loans
is not dependent upon any specific economic sector. As of December 31, 2004, the
Bank has concentrations of credit in real estate rental and leasing,
construction, retail trade, professional, scientific and technical services,
manufacturing, health care and social assistance, and other services, which by
category comprise over 25 percent of Tier 1 Capital adjusted for the allowance
for loan losses.

Investment securities

The Company accounts for investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The statement requires
investments in equity and debt securities to be classified into three
categories:

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

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

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

(Continued)

F-6

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

Other investments include the Bank's stock investments in the FRB and
the Federal Home Loan Bank of Atlanta ("FHLB"). The Bank, as a member
institution, is required to own certain stock investments in the FRB and FHLB.
The stock is generally pledged against any borrowings from the FRB and FHLB. No
ready market exists for the stock and it has no quoted market value. However,
redemption of these stock investments has historically been at par value.

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

Loans, interest and fee income on loans

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

Loans are generally placed on non-accrual status when principal or
interest becomes ninety days past due, or when payment in full is not
anticipated. When a loan is placed on non-accrual status, interest accrued but
not received is generally reversed against interest income. If collectibility is
in doubt, cash receipts on non-accrual loans are not recorded as interest
income, but are used to reduce principal. Non-performing assets include real
estate acquired through foreclosure or deed taken in lieu of foreclosure, and
loans on non-accrual status.

Allowance for possible loan losses

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

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

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

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

(Continued)

F-7

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

Property and equipment

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

Income taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the expected future tax consequences of events
that have been recognized in the consolidated financial statements or tax
return. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be realized or settled.

Advertising and public relations expense

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

Cash surrender value of life insurance policies

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

Earnings per common share

Basic earnings per common share is computed on the basis of the
weighted average number of common shares outstanding in accordance with SFAS No.
128, "Earnings per Share". The treasury stock method is used to compute the
effect of stock options on the weighted average number of common shares
outstanding for diluted earnings per common share. As of December 31, 2004 there
were 21,598 common stock equivalents, all of which were related to options
issued by the Company. The Company declared 10 percent stock dividends to
shareholders of record as of May 10, 2005, May 11, 2004, March 17, 2003 and
April 30, 2002. All per share amounts have been restated to reflect these
transactions. See also Note 21 for additional information.

Statement of cash flows

For purposes of reporting cash flows, cash and cash equivalents are
defined as those amounts included in the balance sheet captions "Cash and Due
From Banks" and "Federal Funds Sold". Cash and due from banks and federal funds
sold have an original maturity of three months or less.

Fair values of financial instruments

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
as amended by SFAS No. 119, requires disclosure of fair value information for
financial instruments, whether or not recognized in the balance sheet, when it
is practicable to estimate the fair value. SFAS No. 107 defines a financial
instrument as cash, evidence of an ownership interest in an entity or
contractual obligations that require the exchange of cash or other financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including the Company's common stock. In addition, other
nonfinancial instruments such as premises and equipment and other assets and
liabilities are not subject to the disclosure requirements.

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

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

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

F-8

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

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

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

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

Deposits - The fair values disclosed for demand deposits are, by
definition, equal to their carrying amounts. The carrying amounts of variable
rate, fixed-term money market accounts and short-term certificates of deposit
approximate their fair values at the reporting date. Fair values for long-term
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities.

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

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

Stock Based Compensation

The Company has issued stock options to certain directors who were
organizers of and the Company and the Bank, and also has a stock-based director
and employee compensation plan (the "2003 Plan") as further described in Note
16. The Company accounts for stock options under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related Interpretations. No stock-based
compensation cost is reflected in net income, as all stock options granted had
an exercise price equal to the market value of the underlying common stock on
the date of grant. Under the 2003 Plan, 18,000 options were granted during 2004.
During 2004, a 10% stock dividend was declared, which converted the number of
options granted to 19,800 and decreased the exercise price by 10% as well. See
Notes 16 and 21 for additional information.

(Continued)

F-9

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

The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based
compensation.

Year ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Net income:

As reported .................................................................. $ 664,057 $ 356,048 $ 247,285
Deduct: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax effects ...... 5,844 - -
----------- ----------- -----------
Pro forma ................................................................... $ 658,213 $ 356,048 $ 247,285
=========== =========== ===========

Basic earnings per common share
As reported .................................................................. $ .57 $ .30 $ .21
Pro forma .................................................................... $ .56 $ .30 $ .21

Diluted earnings per common share
As reported .................................................................. $ .56 $ .30 $ .21
Pro forma .................................................................... $ .55 $ .30 $ .21

The fair value of the option grant is estimated on the date of grant
using the Black-Scholes option pricing model. The risk free interest rate used
was 4.15 percent, which was the 10 Year Constant Maturity Rate on US Treasury
Securities during the month in which the options were granted. The assumed
dividend rate was zero and the expected option life was 10 years. Volatility is
difficult to measure accurately due to the low volume of trading of the
Company's stock. The above estimates were calculated assuming 6% volatility.

Recently issued accounting standards

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

In November 2003, the Emerging Issues Task Force ("EITF") reached a
consensus that certain quantitative and qualitative disclosures should be
required for debt and marketable equity securities classified as available for
sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired
at the balance sheet date but for which an other-than-temporary impairment has
not been recognized. Accordingly, the EITF issued EITF No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
This issue addresses the meaning of other-than-temporary impairment and its
application to investments classified as either available for sale or held to
maturity under SFAS No. 115 and provides guidance on quantitative and
qualitative disclosures The disclosure requirements of EITF No. 03-1 are
effective for annual financial statements for fiscal years ending after June 15,
2004. The effective date for the measurement and recognition guidance of EITF
No. 03-1 has been delayed. The FASB staff has issued a proposed Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a, "Implementation Guidance for the
Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under the measurement and recognition
requirements of EITF No. 03-1. The delay of the effective date for the
measurement and recognition requirements of EITF No. 03-1 will be superseded
concurrent with the final issuance of FSP EITF 03-1-a. Adopting the disclosure
provisions of EITF No. 03-1 did not have any impact on the Company's financial
position or results of operations.

(Continued)

F-10

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

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

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

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

Risks and Uncertainties

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

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

NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS

The Bank is required to maintain average reserve balances, computed by
applying prescribed percentages to its various types of deposits, either at the
Bank or on deposit with the FRB. At December 31, 2004 and 2003 these required
reserves were met by vault cash.

NOTE 3 - FEDERAL FUNDS SOLD

When the Bank's cash reserves (Note 2) are in excess of the required
amount, it may lend any excess to other banks on a daily basis. As of December
31, 2004 and 2003 federal funds sold amounted to $4,130,595 and $3,158,508
respectively.

F-11

NOTE 4 - INVESTMENT SECURITIES

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

December 31, 2004
-------------------------------------------------------------
Gross unrealized
Amortized ---------------------------- Fair
cost Gains Losses value
---------- ---------- ---------- ----------

Federal agencies ............................................... $7,500,000 $ 5,156 $ 29,687 $7,475,469
Mortgage-backed securities ..................................... 886,633 4,313 11,342 879,604
Corporate bonds ................................................ 215,198 2,126 - 217,324
Municipal bonds ................................................ 404,241 980 2,090 403,131
---------- ---------- ---------- ----------
Total investment securities available-for-sale ......... $9,006,072 $ 12,575 $ 43,119 $8,975,528
========== ========== ========== ==========

December 31, 2003
-------------------------------------------------------------
Gross unrealized
Amortized -------------------------- Fair
cost Gains Losses value
---------- ---------- ---------- ----------

Federal agencies ............................................... $8,435,682 $ 37,763 $ 10,776 $8,462,669
Mortgage-backed securities ..................................... 669,956 9,981 - 679,937
Corporate bonds ................................................ 216,160 11,107 - 227,267
---------- ---------- ---------- ----------
Total investment securities available-for-sale ......... $9,321,798 $ 58,851 $ 10,776 $9,369,873
========== ========== ========== ==========

While eight individual U.S. Government agency bonds, one municipal bond
and one U.S. government agency mortgage-backed security are in an unrealized
loss position as of December 31, 2004, none of these securities has been in a
continuous loss position for twelve months or more. The Company has the ability
and intent to hold these securities until such time as the value recovers or the
securities mature. The Company believes, based on industry analyst reports and
credit ratings, that the deterioration in value is attributable to changes in
market interest rates and not in the credit quality of the issuer and therefore,
these losses are not considered other-than-temporary.

The amortized cost and fair value of investment securities
held-to-maturity as of December 31, 2004 and 2003 are summarized in the table
below.

December 31, 2004
-------------------------------------------------------------
Gross unrealized
Amortized ------------------------- Fair
cost Gains Losses value
---------- ---------- --------- -----------

Federal agencies held-to-maturity ............................ $3,713,645 $ 98,792 $ - $3,812,437

December 31, 2003
-------------------------------------------------------------
Gross unrealized
Amortized ------------------------- Fair
cost Gains Losses value
---------- ---------- -------- ----------

Federal agencies held-to-maturity ............................ $5,222,430 $ 232,650 $ - $5,455,080

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

F-12

NOTE 4 - INVESTMENT SECURITIES, Continued

The amortized cost and fair value of securities at December 31, 2004,
by contractual maturity, are shown in the following chart. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

December 31, 2004
----------------------------------
Amortized Fair
Cost Value
----------- -----------

Within one year ...................................................................... $ 715,198 $ 713,261
Due after one through five years ..................................................... 10,713,645 10,791,969
Due after five through ten years ..................................................... 1,290,874 1,282,735
Federal Reserve and Federal Home Loan Bank stock (no maturity) ....................... 532,100 532,100
----------- -----------
Total investment securities ...................................................... $13,251,817 $13,320,065
=========== ===========

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

NOTE 5 - LOANS

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

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

Commercial ..................................... $13,355,098 $11,242,095
Real estate - construction ..................... 16,011,109 12,018,222
Real estate - mortgage ......................... 42,932,263 33,427,094
Consumer ....................................... 2,859,683 2,721,694
----------- -----------

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

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

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

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

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

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

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

F-13

NOTE 6 - PROPERTY AND EQUIPMENT

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

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

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

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

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

Depreciation expense for the years ended December 31, 2004, 2003, and
2002 amounted to $212,605, $203,841, and $170,829, respectively. Depreciation is
charged to operations over the estimated useful lives of the assets. The
estimated useful lives and methods of depreciation for the principal items
follow:

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

NOTE 7 - DEPOSITS

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

December 31,
-----------------------------
2004 2003
----------- -----------
Noninterest bearing ........................ $ 9,405,078 $ 9,202,362
Interest bearing:
NOW accounts .......................... 13,416,502 9,999,335
Money market accounts ................. 15,372,975 11,424,959
Savings ............................... 4,005,567 3,763,669
Time, less than $100,000 .............. 23,306,873 19,093,476
Time, $100,000 and over ............... 17,011,949 11,802,418
----------- -----------

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

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

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

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

F-14

NOTE 8 - CUSTOMER REPURCHASE AGREEMENTS

Customer repurchase agreements consist of the following:

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

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

NOTE 9 -BORROWINGS FROM FEDERAL HOME LOAN BANK OF ATLANTA

At December 31, 2004, the Bank had a line of credit to borrow funds
from the FHLB in the amount of 10% of the Bank's assets. Funds borrowed from the
FHLB are collateralized by a blanket lien on loans. At December 31, 2004 the
Bank had advances outstanding as follows:

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

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

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES

The Bank may become party to litigation and claims arising in the
normal course of business. As of December 31, 2004, there was no litigation
pending.

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

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

From time to time the Bank may guarantee merchant credit card accounts
on behalf of certain customers. At December 31, 2004 the total amount guaranteed
by the Bank related to merchant credit card accounts was immaterial.

Refer to Note 14 concerning financial instruments with off balance
sheet risk.

F-15

NOTE 11 - UNUSED LINES OF CREDIT

At December 31, 2004, the Bank had unused lines of credit to purchase
federal funds totaling $4,350,000 from unrelated banks. These lines of credit
are available on a one to fourteen-day basis for general corporate purposes of
the Bank. The lenders have reserved the right to withdraw the lines at their
option.

NOTE 12 - INCOME TAXES

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

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

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

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

2004 2003
---- ----
Deferred tax asset:

Allowance for loan losses .................................................... $ 311,000 $ 243,000
Unrealized net gains on securities available for sale ........................ 10,400 (16,300)
Depreciation ................................................................. (107,000) (111,500)
--------- ---------
Net deferred tax assets ............................................... $ 214,400 $ 115,200
========= =========

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

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

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

Income taxes currently payable .................................... $ 461,398 $ 222,618 $ 39,929

Deferred income tax provision (benefit) ........................... (72,500) (39,200) 20,571
--------- --------- ---------

Income tax provision ...................................... $ 388,898 $ 183,418 $ 60,500
========= ========= =========

F-16

NOTE 13 - RELATED PARTY TRANSACTIONS

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

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

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

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

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

NOTE 14 - FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK

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

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

Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any material condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. At December 31, 2004 and 2003,
unfunded commitments to extend credit were $14,897,187 and $14,054,616,
respectively, and outstanding letters of credit were $464,308 and $158,709,
respectively. At December 31, 2004, the unfunded commitments consisted of $11.3
million at variable rates and approximately $3.6 million at fixed rates with
$9.8 million expiring within one year. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate. Fair values of off balance sheet lending commitments are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing and
were immaterial in 2004 and 2003.

NOTE 15 - EMPLOYEE BENEFIT PLAN

The Company sponsors a Simple IRA Plan for the benefit of all eligible
employees. The Bank contributes up to three percent of the employee's
compensation. Employer contributions made to the Plan in 2004, 2003, and 2002
amounted to $31,822, $29,831, and $25,142, respectively.

F-17

NOTE 16 - STOCK OPTION PLANS

In 1999, the Board of Directors awarded options (the "Organizers'
Options") to purchase 4,000 shares of the Company's common stock to each of the
organizing directors of the Company and the Bank (an aggregate of 40,000
shares). These options had an exercise price of $10.00 per share and became
exercisable in one-third increments each year beginning on December 14, 2000.
The Organizers' Options expire ten years from the date of grant, unless they
terminate sooner as a result of the holder ceasing to be a director. Pursuant to
the option agreements, the total number of such options outstanding as of
December 31, 2004 has been adjusted to 53,240, and the exercise price has been
adjusted to $7.51 per share as a result of the stock dividends discussed in Note
17 below. See Note 21 for an explanation of the effect of the 2005 10% stock
dividend on these options.

In 2003, the Company's shareholders approved the Cornerstone Bancorp
2003 Stock Option Plan (the "2003 Plan"), which reserved 125,000 shares of the
Company's common stock for issuance upon exercise of options. Pursuant to the
2003 Plan, the number of shares reserved for issuance has been increased to
137,500 shares as a result of the 10% stock dividends declared in 2004 and 2005,
which are discussed in Notes 17 and 21 below. Employees and Directors are
eligible to participate in the 2003 Plan, which has a term of 10 years. Awards
under the 2003 Plan must be made by the Board of Directors or by a Committee of
Directors designated by the Board at an exercise price equal to the fair market
value of the Company's common stock on the date of grant. A summary of the
activity in the plans is presented below:

Year ended December 31,
----------------------------------------------------------------------------
2004 2003 2002
---------------------- ------------------------ -----------------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
price price price
------ ----- ------ ----- ------ -----

Outstanding at beginning of year ................ 47,916 $ 7.51 51,465 $ 7.51 53,240 $ 7.51
Granted (1) ..................................... 19,800 11.36 - - - -
Exercised ....................................... - - - - - -
Forfeited or expired ............................ - - (3,549) 7.51 (1,775) 7.51
------- ------- ------

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

Options exercisable at end of year .............. 47,916 $ 7.51 47,916 $ 7.51 51,465 $ 7.51
Shares available for grant ...................... 117,700 137,500 -

(1) Options granted during 2004 vest over a three year period, with one third
vesting on each anniversary of the grant date.

As described in Notes 17 and 21 below, the Company's Board of Directors
declared 10 percent stock dividends to shareholders of record on May 10, 2005,
May 11, 2004, March 17, 2003, and on April 30, 2002. The agreements relating to
the Organizers' Options provide for proportionate adjustments in the number of
shares subject to options and the exercise price of options in the event of
stock dividends, stock splits and other similar stock transactions. Similarly,
the 2003 Plan provides for proportionate adjustments in the number of shares
reserved for issuance under the 2003 Plan, the number of shares subject to
outstanding options and the exercise prices of outstanding options in the event
of such transactions.

NOTE 17 - DIVIDENDS

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

F-18

NOTE 18 - REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes, as of December 31, 2004,
that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2004, the most recent notification of the banking
regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the institution's
category. The Bank's actual capital amounts and ratios and minimum regulatory
amounts and ratios are presented as follows:

To be well capitalized
For capital under prompt corrective
adequacy purposes action provisions
--------------------- --------------------
Actual Minimum Minimum
------------------- --------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
As of December 31, 2004

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

As of December 31, 2003
Total Capital (to risk weighted assets) ......... $7,959 12.2% $5,236 8.0% $6,545 10.0%
Tier 1 Capital (to risk weighted assets) ........ 7,231 11.1 2,618 4.0 3,927 6.0
Tier 1 Capital (to average assets) ............. 7,231 9.0 3,201 4.0 4,001 5.0

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

F-19

NOTE 19 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

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

December 31,
--------------------------------------------------------------
2004 2003
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ----------- -----------
FINANCIAL ASSETS

Cash and due from banks .................................. $ 3,008,847 $ 3,008,847 $ 2,575,157 $ 2,575,157
Federal funds sold ....................................... 4,130,595 4,130,595 3,158,508 3,158,508
Investment securities .................................... 13,221,273 13,320,065 15,052,303 15,284,953
Loans, gross ............................................. 75,158,153 75,178,968 59,409,105 60,235,361
Cash surrender value of life insurance policies .......... 1,515,172 1,515,172 1,088,338 1,088,338
FINANCIAL LIABILITIES
Deposits ................................................. 82,518,944 80,057,167 65,286,219 65,932,064
Customer repurchase agreements ........................... 5,483,993 5,483,993 5,772,192 5,772,192
Borrowings from Federal Home Loan Bank of Atlanta ........ 3,400,000 3,366,174 5,000,000 5,000,000

NOTE 20 - PARENT COMPANY INFORMATION

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

CONDENSED BALANCE SHEETS

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

Cash and interest bearing deposits .............................................. $ 836,037 $ 870,019
Investment in subsidiary ........................................................ 7,909,750 7,262,623
Other assets .................................................................... 40,000 40,000
---------- ----------

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

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

Total Liabilities and Shareholders' Equity ......................... $8,785,787 $8,172,642
========== ==========

(Continued)

F-20

NOTE 20 - PARENT COMPANY INFORMATION, Continued

CONDENSED STATEMENTS OF INCOME

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

Interest ............................................................. $ 9,469 $ 11,839 $ 35,877

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

Equity in undistributed net income of subsidiary ..................... 699,016 399,003 241,972
--------- --------- ---------

Net income ........................................................ $ 664,057 $ 356,048 $ 247,285
========= ========= =========

CONDENSED STATEMENTS OF CASH FLOWS

Year ended December 31,
------------------------------------------------------
2004 2003 2002
----------- ----------- ------------
OPERATING ACTIVITIES

Net income ...................................................... $ 664,057 $ 356,048 $ 247,285
Adjustments to reconcile net income to net
cash provided by (used for) operating activities

Equity in undistributed net income of subsidiary ............. (699,016) (399,003) (241,972)
Increase (decrease) in accrued expenses ...................... 2,337 5,732 (578)
----------- ----------- -----------

Net cash provided by (used for) operating activities ...... (32,622) (37,223) 4,735
----------- ----------- -----------

INVESTING ACTIVITIES
Investment in bank subsidiary ................................... - - (1,000,000)
----------- ----------- -----------

FINANCING ACTIVITIES
Cash paid in lieu of fractional shares .................... (1,360) (317) (75)
----------- ----------- -----------

Net decrease in cash ...................................... (33,982) (37,540) (995,340)

Cash, beginning of year ............................................. 870,019 907,559 1,902,899
----------- ----------- -----------

Cash, end of year ................................................... $ 836,037 $ 870,019 $ 907,559
=========== =========== ===========

NOTE 21 - SUBSEQUENT EVENT

On April 12, 2005, the Company declared a ten percent (10%) common
stock dividend payable on May 27, 2005, to shareholders of record as of May 10,
2005. Per share amounts have been retroactively restated throughout the
consolidated financial statements and notes to consolidated financial statements
to reflect this stock dividend. After declaration of the 2005 stock dividend,
the number of options granted to the Company's organizers in December, 1999
increased to 52,707 options and the exercise price decreased to $6.83 per share.
Total options outstanding under the 2003 Plan increased to 41,580 options and
the weighted average exercise price decreased to $11.03 per share.

F-21

CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

June 30, December 31,
2005 2004
---- ----
ASSETS (Unaudited)

Cash and due from banks ............................................................ $ 5,447,818 $ 3,008,847
Federal funds sold ................................................................. 1,528,000 4,130,595
------------- -------------
Cash and cash equivalents ..................................................... 6,975,818 7,139,442

Investment securities
Available-for-sale ............................................................ 7,860,552 8,975,528
Held-to-maturity (Fair value $3,747,375 at June 30, 2005 and
$3,812,437 at December 31, 2004) ........................................... 3,709,253 3,713,645
Other investments ............................................................. 713,800 532,100
Loans, net ......................................................................... 75,315,357 74,238,769
Property and equipment, net ........................................................ 4,364,589 3,778,983
Cash surrender value of life insurance policies .................................... 1,544,038 1,515,172
Other assets ....................................................................... 788,996 738,480
------------- -------------
Total assets .............................................................. $ 101,272,403 $ 100,632,119
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing ....................................................... $ 9,430,475 $ 9,405,079
Interest bearing .......................................................... 72,599,761 73,113,865
------------- -------------
Total deposits ............................................................ 82,030,236 82,518,944
Customer repurchase agreements ................................................ 3,040,240 5,483,993
Borrowings from Federal Home Loan Bank of Atlanta ............................. 6,721,296 3,400,000
Other liabilities ............................................................. 264,974 451,722
------------- -------------
Total liabilities ......................................................... 92,056,746 91,854,659
------------- -------------
Commitments and contingencies
Shareholders' equity
Preferred stock, 10,000 shares authorized, no shares issued ................... - -
Common stock, no par value, 20,000,000 shares authorized,
1,170,938 and 1,064,656 shares issued at June 30, 2005
and December 31, 2004, respectively ....................................... 9,018,750 8,253,812
Retained earnings ............................................................. 258,068 543,807
Accumulated other comprehensive loss .......................................... (61,161) (20,159)
------------- -------------

Total shareholders' equity ................................................ 9,215,657 8,777,460
------------- -------------
Total liabilities and shareholders' equity ................................ $ 101,272,403 $ 100,632,119
============= =============

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

F-22

CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

For the three months ended June 30 For the six months ended June 30,
---------------------------------- ---------------------------------
2005 2004 2005 2004
---- ---- ---- ----
Interest and Dividend Income

Interest and fees on loans ............................... $1,315,317 $ 930,966 $2,516,807 $1,819,923
Investment securities .................................... 111,663 112,762 228,468 247,816
Federal funds sold and interest bearing balances ......... 29,187 10,899 42,500 20,031
---------- ---------- ---------- ----------
Total interest income ................................ 1,456,167 1,054,627 2,787,775 2,087,770
---------- ---------- ---------- ----------

Interest Expense
Deposits ................................................. 443,636 276,593 834,586 541,032
Borrowings and customer repurchase
agreements ............................................... 46,458 21,118 87,795 50,224
---------- ---------- ---------- ----------
Total interest expense ................................ 490,094 297,711 922,381 591,256
---------- ---------- ---------- ----------

Net Interest Income ........................................ 966,073 756,916 1,865,394 1,496,514
Provision for Loan Losses .................................. 20,794 48,501 35,794 88,071
---------- ---------- ---------- ----------

Net interest income after provision
for loan losses ....................................... 945,279 708,415 1,829,600 1,408,443
---------- ---------- ---------- ----------

Noninterest Income
Service charges on deposit accounts ...................... 102,237 92,507 185,479 185,522
Mortgage loan origination fees ........................... 143,596 64,636 204,702 139,643
Gain on sale of securities ............................... - - - 5,230
Other .................................................... 19,528 7,450 47,508 21,260
---------- ---------- ---------- ----------
Total noninterest income .............................. 265,361 164,593 437,689 351,655
---------- ---------- ---------- ----------

Noninterest Expense
Salaries and employee benefits ........................... 480,612 384,829 906,722 791,855
Premises and equipment ................................... 115,578 109,336 234,877 219,145
Data processing .......................................... 31,223 40,541 60,716 84,078
Professional fees ........................................ 27,869 22,860 53,092 45,970
Supplies ................................................. 21,686 16,468 40,300 34,778
Other .................................................... 112,034 104,040 213,349 195,391
---------- ---------- ---------- ----------
Total noninterest expense ............................. 789,002 678,074 1,509,056 1,371,217
---------- ---------- ---------- ----------
Net income before taxes ............................... 421,638 194,934 758,233 388,881
Provision for income taxes ................................. 161,000 74,078 276,464 147,775
---------- ---------- ---------- ----------
Net income ............................................ $ 260,638 $ 120,856 $ 481,769 $ 241,106
========== ========== ========== ==========

Earnings Per Share
Basic .................................................... $ .22 $ .10 $ .41 $ .21
Diluted .................................................. $ .22 $ .10 $ .40 $ .20
Weighted Average Shares Outstanding
Basic .................................................... 1,170,938 1,170,938 1,170,938 1,170,938
Diluted .................................................. 1,206,724 1,194,129 1,205,641 1,194,129

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

F-23

CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the six months ended June 30, 2005 and 2004
(Unaudited)

Accumulated
Common stock other Total
------------ Retained comprehensive shareholders'
Shares Amount earnings income (loss) equity
------ ------ -------- ------------- ------

BALANCE, DECEMBER 31, 2003 ...................... 967,968 $ 7,984,608 $ 150,314 $ 31,730 $ 8,166,652
-----------
Net income ................................. 241,106 241,106
Other comprehensive income, net of
income taxes
Unrealized loss on investment
securities ............................ - - - (93,890) (93,890)
-----------
Comprehensive income ..................... 147,216
Stock dividend (10%), net of cash in
lieu of fractional shares ................ 96,688 269,204 (270,564) - (1,360)
--------- ----------- ----------- ----------- -----------

BALANCE, JUNE 30, 2004 .......................... 1,064,656 $ 8,253,812 $ 120,856 $ (62,160) $ 8,312,508
========= =========== =========== =========== ===========

BALANCE, DECEMBER 31, 2004 ...................... 1,064,656 $ 8,253,812 $ 543,807 $ (20,159) $ 8,777,460
-----------
Net income ................................. - - 481,769 - 481,769
Other comprehensive income, net of
income taxes
Unrealized loss on investment
securities ............................ - - - (41,002) (41,002)
-----------
Comprehensive income ....................... 440,767
Stock dividend (10%), net of cash in
lieu of fractional shares ................ 106,282 764,938 (767,508) - (2,570)
--------- ----------- ----------- ----------- -----------

BALANCE, JUNE 30, 2005 .......................... 1,170,938 $ 9,018,750 $ 258,068 $ (61,161) $ 9,215,657
========= =========== =========== =========== ===========

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

F-24

CORNERSTONE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

For the six months ended June 30,
---------------------------------
2005 2004
---- ----
Operating Activities

Net income .......................................................................... $ 481,769 $ 241,106
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization .................................................... 118,500 117,596
Provision for loan losses ........................................................ 35,794 88,071
Gain on sale of investment securities available for sale ......................... - (5,230)
Changes in operating assets and liabilities
Change in interest receivable .................................................... (39,481) 23,229
Change in other assets ........................................................... (39,901) 33,820
Change in other liabilities ...................................................... (165,625) (144,246)
----------- -----------

Net cash provided by operating activities ..................................... 391,056 354,346
----------- -----------

Investing Activities
Proceeds from maturities and principal repayments of available for
sale securities ................................................................... 1,049,207 4,854,199
Proceeds from sale of investment securities available for sale ...................... - 708,422
Proceeds from redemption of FHLB stock ............................................. - 75,500
Purchase of FHLB stock .............................................................. (181,700) -
Purchase of property and equipment .................................................. (696,070) (52,034)
Purchase of life insurance policies ................................................. - (421,183)
Purchase of investment securities available for sale ................................ - (3,467,795)
Net increase in loans to customers .................................................. (1,112,382) (5,520,381)
----------- -----------
Net cash used by investing activities ......................................... (940,945) (3,823,272)
----------- -----------

Financing Activities
Net increase (decrease) in demand, savings and time deposits ........................ (488,708) 4,416,946
Net increase (decrease) in customer repurchase agreements ........................... (2,443,753) 723,475
Proceeds from FHLB advances ......................................................... 3,350,000 -
Repayment of FHLB advances .......................................................... (28,704) (3,500,000)
Cash paid in lieu of fractional shares .............................................. (2,570) (1,360)
----------- -----------

Net cash provided by financing activities ..................................... 386,265 1,639,061
----------- -----------

Net decrease in cash and cash equivalents ..................................... (163,624) (1,829,865)

Cash and Cash Equivalents, Beginning of Period ........................................... 7,139,442 5,733,665
----------- -----------

Cash and Cash Equivalents, End of Period ................................................. $ 6,975,818 $ 3,903,800
=========== ===========

Supplemental Information
Cash paid for interest ............................................................... $ 947,876 $ 577,674
Cash paid for income taxes ........................................................... $ 444,000 $ 285,430

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

F-25

CORNERSTONE BANCORP AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Principles

A summary of significant accounting policies is included in the
Cornerstone Bancorp 2004 Annual Report to Shareholders, which also contains the
Company's audited financial statements for 2004 and is included in the Form
10-KSB for the year ended December 31, 2004.

Principles of Consolidation

The consolidated financial statements include the accounts of
Cornerstone Bancorp, the parent company, and Cornerstone National Bank (the
"Bank"), its wholly owned subsidiary, and Crescent Financial Services, Inc., a
wholly owned subsidiary of the Bank. All significant intercompany items have
been eliminated in the consolidated statements.

Management Opinion

The interim financial statements in this report are unaudited. In the
opinion of management, all the adjustments necessary to present a fair statement
of the results for the interim period have been made. Such adjustments are of a
normal and recurring nature.

The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year. These interim
financial statements should be read in conjunction with the annual financial
statements and notes thereto contained in the 2004 Annual Report on Form 10-KSB.

Earnings per Share

Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" requires that the Company present basic and diluted net income per
common share. The assumed conversion of stock options creates the difference
between basic and diluted net income per share. Income per share is calculated
by dividing net income by the weighted average number of common shares
outstanding for each period presented. The weighted average number of common
shares outstanding for basic net income per common share for the three months
ended June 30, 2005 and 2004 was 1,170,938 shares. The weighted average number
of common shares outstanding for diluted net income per share for the quarters
ended June 30, 2005 and 2004 were 1,206,724 shares and 1,194,129 shares,
respectively.

The Company declared a ten percent common stock dividend on April 12,
2005. Per share data in 2004 has been restated to reflect this transaction, and
2005 per share data has been calculated assuming the effect of the ten percent
stock dividend.

Stock Based Compensation

The Company has stock-based compensation that is further described in
Note 16 to the financial statements in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2004. The Company accounts for
stock-based compensation plans under the recognition and measurement principles
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related Interpretations. No stock-based compensation
cost is reflected in net income, as all stock options granted had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The fair value of each option grant under the Company's plans is
estimated on the date of grant using the Black-Scholes option pricing model.

The Company awarded options to the Organizers in 1999 (the "Organizers'
Options"). Each of the organizing directors was awarded options to purchase
4,000 shares of the Company's common stock at $10.00 per share. The options
expire 10 years from the date of grant. The Company valued the options using the
Black-Scholes model for purposes of disclosing the compensation that would have
been expensed had the Company chosen to adopt SFAS No. 123 for accounting for
these options. The risk free interest rate used in the calculation was 5.89
percent and the assumed dividend rate was zero. The expected option life was 3
years. Since 1999 no options have been exercised and 4,000 have been forfeited.
As of June 30, 2005, after the effect of stock dividends, there are 52,707
Organizers' options outstanding. Each option is exercisable at a price of $6.83.

F-26

The Company also has a stock-based employee and director compensation
plan, which was approved by shareholders in 2003 (the "2003 Plan") and is
further described in Note 16 to the financial statements in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2004. Under the 2003 Plan,
options to purchase 36,000 shares have been granted to date. The options were
granted for a term of 10 years at an exercise price equal to the estimated
market price on the dates of grant. The options vest over a three-year period.
After the effect of the stock dividends declared in 2004 and 2005, 41,580
options are outstanding under the 2003 Plan at a weighted average exercise price
of $11.03 per share.

Under APB Opinion No. 25, no compensation expense was recorded at the
dates of grant. However, the Company has calculated a fair value as of each date
of grant using the Black-Scholes option pricing model. The risk-free interest
rate used was the average 10 year Treasury note during the month in which the
options were granted (ranging from 4.15%-4.22%) and the assumed dividend rate
was zero. The expected option life used was eight years. Had the Company been
accounting for the 2003 Plan under SFAS No. 123, the Company would have expensed
approximately $5,570 for the quarter (approximately $3,451, net of tax) as
compensation expense during the quarter ended June 30, 2005 based on the
difference between the options' exercise prices and the fair value calculated
using the Black-Scholes option pricing model. As illustrated in the table below,
basic and diluted earnings per share for the six months ended June 30, 2005
would have been $.41 and $.39 per share, respectively, had the Company accounted
for the options granted under SFAS No. 123.

For the six months ended June 30,
---------------------------------
2005 2004
---- ----
Net income:

As reported ............................................................................ $ 481,769 $ 241,106
Deduct: Total stock-based compensation expense determined
under fair value based method for all awards, net of related tax effects ............ 6,902 2,922
----------- -----------
Pro forma .............................................................................. $ 474,867 $ 238,184
=========== ===========

Basic earnings per common share
As reported ............................................................................ $ .41 $ .21
Pro forma .............................................................................. $ .41 $ .20

Diluted earnings per common share
As reported ............................................................................ $ .40 $ .20
Pro forma .............................................................................. $ .39 $ .20

Estimates

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
interest and noninterest income and expenses during the reporting period. Actual
results could differ from those estimates. The primary significant estimate in
the accompanying consolidated financial statements is the allowance for loan
losses. A discussion of the significant factors involved in estimating the
allowance for loan losses is included in this Form 10-QSB in "Management's
Discussion and Analysis or Plan of Operation" in the section titled "Results of
Operations" and in the Company's 2004 Form 10-KSB. The provision for income
taxes is also considered a significant estimate.

Concentrations of credit risk

The Bank makes loans to individuals and small businesses located
primarily in upstate South Carolina for various personal and commercial
purposes. The Bank has a diversified loan portfolio and borrowers' ability to
repay loans is not dependent upon any specific economic sector. The Bank
monitors the portfolio for concentrations of credit on a quarterly basis using
North American Industry Codes ("NAIC"). The Bank has loans in two NAIC
categories that each represents more than 10% of the portfolio. These do not
necessarily represent areas of greater risk in the portfolio. The NAIC
concentrations are 12% in Residential Building Construction and 24% in Real
Estate and Rental and Leasing. The portfolio also has loans representing 16
other NAIC categories.

F-27

Recently issued accounting standards

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

In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)").
SFAS No.123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. 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
disclosure related to the income tax and cash flow effects resulting from
share-based payment arrangements. SFAS No. 123(R) is effective for small
business issuers beginning with the first interim or annual reporting period of
the registrant's first fiscal year beginning on or after December 15, 2005. The
Company is currently evaluating the impact that the adoption of SFAS No. 123(R)
will have on its financial position, results of operations and cash flows. The
effect of adoption, if any, will be measured and recognized in the statement of
income on the date of adoption.

In April 2005, the Securities and Exchange Commission's ("SEC") Office
of the Chief Accountant and its Division of Corporation Finance released Staff
Accounting Bulletin ("SAB") No.107. 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).

F-28

(This Page Intentionally Left Blank)

THIS AGREEMENT IS SUBJECT TO ARBITRATION PURSUANT TO THE SOUTH CAROLINA UNIFORM
ARBITRATION ACT, SECTION 15-48-10, ET. SEQ., CODE OF LAWS OF SOUTH CAROLINA,
1976 (AS AMENDED). THIS AGREEMENT IS ALSO SUBJECT TO ARBITRATION PURSUANT
TO THE FEDERAL ARBITRATION ACT TITLE 9, SECTION 1 ET. SEQ.,
UNITED STATES CODE (AS AMENDED).

CORNERSTONE BANCORP APPENDIX A
SUBSCRIPTION AGREEMENT

The undersigned, having received and reviewed the Prospectus (the
"Prospectus") dated _________, 2005, of Cornerstone Bancorp (the "Company"),
subject to the terms and conditions of the Prospectus, hereby subscribes for the
number of shares of Common Stock of Cornerstone Bancorp (the "Common Stock"),
shown below. The undersigned tenders herewith the purchase price of $13.50 per
share to Cornerstone Bancorp. All payments shall be in United States dollars in
cash or by check, draft or money order drawn to the order of "Cornerstone
Bancorp."

Your Properly Completed Subscription Form and Payment Must Be Returned To:

CORNERSTONE BANCORP
1670 East Main Street
Easley, South Carolina 29640

Acknowledgments and Representations

In connection with this subscription, the undersigned hereby acknowledges
and agrees that:

(1) This subscription may not be cancelled, terminated, or revoked by the
undersigned before ____________, 2005. Upon acceptance in writing by Cornerstone
Bancorp, the Subscription Agreement will be binding and legally enforceable
against the undersigned until ____________, 2005. This subscription will only be
deemed accepted upon agreement thereto by the President of Cornerstone Bancorp.
No other person has authority to accept or reject a subscription on behalf of
Cornerstone Bancorp.
(2) Cornerstone Bancorp reserves the right to accept this subscription in
whole or in part. If this subscription is accepted in part, the undersigned
agrees to purchase the accepted number of shares subject to all of the terms of
this offer.
(3) Cornerstone Bancorp reserves the right to cancel this subscription
after acceptance until the date of issue of the Common Stock.
(4) The shares of Common Stock subscribed for hereby are equity securities
and are not savings accounts or deposits, and Investment therein is Not insured
by the Federal Deposit Insurance Corporation.
(5) This subscription is nonassignable and nontransferable, except with
the written consent of Cornerstone Bancorp.
(6) Subscription funds will not be held in escrow.
(7) Subscription funds relating to any portion of a subscription that is
not accepted or is cancelled will be returned to the subscriber without any
interest thereon.
(8) Certificates will be delivered by first class mail to the address set
forth herein.
(9) The undersigned has received a copy of the Prospectus, and represents
that this Subscription Agreement is made solely on the basis of the information
contained in the Prospectus and is not made in reliance on any inducement,
representation or statement not contained in the Prospectus. No person
(including any Director of Cornerstone Bancorp) has given any information or
made any representation not contained in the Prospectus, or, if given or made,
such information or representation has not been relied upon.
(10) Any dispute arising pursuant to this subscription agreement, or
relating to the ownership, purchase or sale of the Common Stock, the Prospectus
or the Registration Statement on Form SB-2 shall be resolved by binding
arbitration in Columbia, South Carolina pursuant to the rules of the American
Arbitration Association.
(11) The undersigned represents that the state shown in the undersigned's
address in this Subscription Agreement is the state of the undersigned's
principal residence.

I wish to subscribe for the following shares of Cornerstone Bancorp Common
Stock:

Number of shares I want to buy is
____________ shares x $13.50 = $______________________*

My payment of that amount is enclosed. Make check out to:
Cornerstone Bancorp.

*If this amount is more or less than the correct amount for the number of shares
shown or as to which the subscription is accepted, I want to buy as many shares
as this amount will buy at $13.50 per share (or as are accepted).

- --------------------------------------------------------------------------------
(Name(s) in which stock certificates should be registered**)

- --------------------------------------------------------------------------------
(Street Address)

- --------------------------------------------------------------------------------
(City/State/Zip Code)

- --------------------------------------------------------------------------------
(Social Security or Employer I.D. No.)

( ) ( )
- ----------------------- ------------------------
(Home Telephone No.) (Business Telephone No.)

**Stock certificates for shares to be issued in the names of two or more persons
will be registered in the names of such persons as joint tenants with right of
survivorship, and not as tenants in common.

SUBSTITUTE W-9

Under the penalties of perjury, I certify that: (1) the Social Security number
or taxpayer identification number given above is correct; and (2) I am not
subject to backup withholding. INSTRUCTION: YOU MUST CROSS OUT #2 ABOVE IF YOU
HAVE BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE THAT YOU ARE SUBJECT TO
BACKUP WITHHOLDING BECAUSE OF UNDERREPORTING INTEREST OR DIVIDENDS ON YOUR TAX
RETURN.

I HAVE READ AND UNDERSTAND THE PROSPECTUS AND THIS SUBSCRIPTION AGREEMENT.

- --------------------------- -------------------------------
(Signature) (Date)

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

If shares are to be held in joint ownership, all joint owners should
sign this Agreement.

PART II - INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

Under the South Carolina Business Corporation Act (the "SCBA"), a
corporation has the power to indemnify directors and officers who meet the
standards of good faith and reasonable belief that their conduct was lawful and
in the corporate interest (or not opposed thereto) set forth by statute. A
corporation may also provide insurance for directors and officers against
liability arising out of their positions although the insurance coverage is
broader than the power of the corporation to indemnify. Unless limited by its
articles of incorporation, a corporation must indemnify a director or officer
who is wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he was a party because he is or was a director against
reasonable expenses incurred by him in connection with the proceeding.
Registrant's Articles of Incorporation do not limit such indemnification.

Registrant's Articles of Incorporation provide that, to the extent
permitted by the SCBA, Registrant's directors will not be personally liable to
Registrant or its shareholders for monetary damages for breaches of their
fiduciary duties. This provision does not, however, eliminate or limit the
liability of any director (i) for any breach of the director's duty of loyalty
to Registrant or its shareholders, (ii) for acts or omissions not in good faith
or which involve gross negligence, intentional misconduct or a knowing violation
of law, (iii) imposed for unlawful distributions as set forth in the SCBA, or
(iv) for any transaction from which the director derived an improper personal
benefit.

Item 25. Other Expenses of Issuance and Distribution.

SEC registration fee............................. $ 707.08
Blue Sky filing fees............................. 1,000.00*
Accounting fees.................................. 15,000.00*
Legal fees and expenses.......................... 35,000.00*
Printing and Mailing Costs....................... 4,000.00*
Transfer agent's fees and expenses............... 4,000.00*
Miscellaneous.................................... 293.00*
-------------
Total...................................... $ 60,000.08
=============
* Estimated

Item 26. Recent Sales of Unregistered Securities.

None.

Item 27. Exhibits.

See Exhibit Index.

Item 28. Undertakings.

(a) The Registrant hereby undertakes:

(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in
the form of a prospectus filed with the Commission pursuant
to 17 C.F.R.Section 230.424(b) if, in the aggregate, the
changes in the volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.

(iii) Include any additional or changed material information on
the plan of distribution.

(2) For determining liability under the Securities Act, to
treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of
the securities at that time to be the initial bona fide
offering.

(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at
the end of the offering.

(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Easley,
State of South Carolina, on August 25, 2005.

By: s/Jennifer M. Champagne By: s/J. Rodger Anthony
---------------------------------- -------------------------------
Jennifer M. Champagne J. Rodger Anthony
Chief Financial Officer (Principal Chief Executive Officer
Financial and Accounting Officer)

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and
appoints J. Rodger Anthony and Jennifer M. Champagne, and each of them, the true
and lawful attorneys-in-fact and agents of the undersigned, with full power of
substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and hereby grants to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.

In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.

Signature Title Date
- --------- ----- ----

s/J. Rodger Anthony President, August 25, 2005
- -------------------------------- Chief Executive Officer, Director
J. Rodger Anthony

s/ Walter L. Brooks Director August 25, 2005
- --------------------------------
Walter L. Brooks

s/T. Edward Childress, III Director August 25, 2005
- --------------------------------
T. Edward Childress, III

s/Ben L. Garvin Director August 25, 2005
- --------------------------------
Ben L. Garvin

s/J. Bruce Gaston Director August 25, 2005
- --------------------------------
J. Bruce Gaston

- -------------------------------- Director
S. Ervin Hendricks, Jr.

s/Joe E. Hooper Director August 25, 2005
- --------------------------------
Joe E. Hooper

s/Robert R. Spearman Director August 25, 2005
- --------------------------------
Robert R. Spearman

s/John M. Warren, Jr., M.D. Director August 25, 2005
- --------------------------------
John M. Warren, Jr., M.D.

s/George I. Wike, Jr. Director August 25, 2005
- --------------------------------
George I. Wike, Jr.

EXHIBIT INDEX

Exhibit No. Description
- ----------- -----------

3.1 Articles of Incorporation of the Registrant (incorporated by reference to exhibits to
Registrant's Registration Statement on SB-2 (No. 333-79543) (the "1999 SB-2")).

3.2 Bylaws of Registrant (incorporated by reference to the 1999 SB-2).

4.1 Specimen Common Stock Certificate (incorporated by reference to the 1999 SB-2).

4.2 Form of Option Agreement Issued to Organizers (incorporated by reference to exhibits
to Registrant's Form 10-KSB for the year ended December 31, 1999).

5 Opinion of Haynsworth Sinkler, Boyd, P.A. relating to validity of securities offered.

10.1 Change of Control Agreements (incorporated by reference to exhibits to Registrant's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004).

10.2 Cornerstone Bancorp 2003 Stock Option Plan (incorporated by reference to Registrant's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2003).

10.3 Information about increases in director fees and executive compensation (incorporated
by reference to Form 8-K filed February 17, 2005).

21 Subsidiaries of the Registrant (incorporated by reference to the Form 10-KSB for the
year ended December 31, 2004).

23.1 Consent of Haynsworth Sinkler Boyd, P.A. (included in Exhibit 5)

23.2 Consent of Elliott Davis LLC

24 Power of Attorney (included on signature page)