Exhibit 10.4

AGREEMENT AND PLAN OF REORGANIZATION AND MERGER

by and between

BANK OF HEATH SPRINGS

and

WACCAMAW BANK

and

WACCAMAW BANKSHARES, INC.

THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (this “Agreement”) is
entered into as of the 19th day of December, 2005 by and between BANK OF HEATH
SPRINGS, a South Carolina chartered bank (“BHS”), WACCAMAW BANK, a North
Carolina banking corporation (the “Bank”) and WACCAMAW BANKSHARES, INC., a North
Carolina corporation and registered bank holding company (“Bankshares”);

W I T N E S S E T H:

WHEREAS, the parties hereto have agreed that it is in their mutual best
interests and in the best interests of their respective shareholders for BHS to
be merged with and into the Bank pursuant to a plan of merger (the “Plan of
Merger”) in the form attached hereto as Schedule A, with the effect that each of
the outstanding shares of BHS’s common stock will be converted into cash in the
manner set forth herein, and the parties desire to provide for certain
undertakings, conditions, representations, warranties and covenants in
connection with the Merger (as hereinafter defined) and transactions
contemplated hereby.

NOW, THEREFORE, in consideration of the premises, the mutual benefits to be
derived from this Agreement, and of the representations, warranties, conditions,
covenants and promises herein contained, and subject to the terms and conditions
hereof, the parties hereto mutually agree as follows:

ARTICLE I. THE MERGER

1.1 Merger. Subject to the provisions of this Agreement and the Plan of Merger,
as of the Effective Time (as defined in Section 1.9 hereof), BHS shall be merged
with and into the Bank pursuant to Section 53-12 of the North Carolina General
Statutes and Title 34 of the South Carolina Code of Laws (the “Merger”), the
separate corporate existence of BHS shall cease and the corporate existence of
the Bank, as the surviving corporation in the Merger, shall continue under the
laws of the State of North Carolina. The Bank, as the surviving corporation in
the Merger, is hereinafter sometimes referred to as the “Surviving Corporation.”

1.2 Effect of the Merger. At the Effective Time and by reason of the Merger, and
in accordance with applicable law, all of the property, assets and rights of
every kind and character of BHS including, without limitation, all real,
personal or mixed property, all debts due on whatever account, all other choses
in action and every other interest of or belonging to or due to BHS, whether
tangible or intangible, shall vest in the Surviving Corporation, and the
Surviving

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Corporation shall succeed to all the rights, privileges, immunities, powers,
purposes and franchises of a public or private nature of BHS, all without any
conveyance, assignment or further act or deed; and the Surviving Corporation
shall become responsible for all of the liabilities, duties and obligations of
every kind, nature and description of BHS as of the Effective Time.

1.3 Articles of Incorporation, Bylaws and Management. The Articles of
Incorporation and bylaws of the Bank in effect at the Effective Time shall be
the Articles of Incorporation and bylaws of the Surviving Corporation until
thereafter amended in accordance with applicable laws. The officers and
directors of the Bank at the Effective Time shall continue to hold such offices
and positions of the Surviving Corporation until removed as provided by law or
until the election or appointment of their respective successors.

1.4 Conversion of Shares and Merger Consideration.

(a) Bankshares and Bank Stock. Each share of common stock of Bankshares, no par
value (“Bankshares Stock”), and of the Bank, par value $5.00 per share, issued
and outstanding immediately prior to the Effective Time shall continue to be
issued and outstanding and shall not be affected by the Merger.

(b) BHS Stock. Except as otherwise provided herein, at the Effective Time, all
rights of BHS’s shareholders with respect to all then outstanding shares of the
common stock of BHS, $10.00 par value per share (“BHS Stock”), shall cease to
exist, and the holders of shares of BHS Stock shall cease to be and shall have
no further rights as shareholders of BHS. At the Effective Time, each such
outstanding share of BHS Stock (except for shares held, other than in a
fiduciary capacity or as a result of debts previously contracted, by BHS, the
Bank or Bankshares, which shall be canceled in the Merger, and for Dissenting
Shares (as defined in Section 1.7)) shall be converted, without any action on
the part of the holder of such shares, into the right to receive the Per Share
Cash Consideration (as defined in Section 1.4(c)) in accordance with this
Article I. Following the Effective Time, certificates representing shares of BHS
Stock outstanding at the Effective Time shall evidence only the right to receive
the Per Share Cash Consideration. No share of BHS Stock, other than Dissenting
Shares (as defined in Section 1.7), shall be deemed to be outstanding or have
any rights other than those set forth in this Section 1.4 after the Effective
Time.

(c) Per Share Cash Consideration. For purposes of this Agreement, the “Per Share
Cash Consideration” shall be the quotient of Eight Million Dollars ($8,000,000)
divided by the number of shares of BHS Stock issued and outstanding as of the
Effective Time.

1.5 Closing Payment. At least one (1) business day prior to the Effective Time,
Bankshares or the Bank shall deposit, or shall cause to be deposited, with
First-Citizens Bank and Trust Company, Raleigh, North Carolina transfer agent of
Bankshares Stock (the “Exchange Agent”), for the benefit of each holder of BHS
Stock for exchange in accordance with this Article I the aggregate amount of
cash to be delivered to holders of BHS Stock as cash consideration to be paid
pursuant to this Article I for outstanding shares of BHS Stock (such cash
referred to as the “Exchange Fund”). Immediately after the Effective Time, the
Exchange Agent

 

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shall, pursuant to irrevocable instructions in accordance with this Article I,
deliver cash contemplated to be paid with respect to BHS Stock out of the
Exchange Fund to each shareholder of BHS Stock who has surrendered in accordance
with the provisions of Section 1.6 below one or more certificates representing
shares of BHS Stock. Such cash shall be delivered (i) via certified check of the
Exchange Agent or (ii) via wire transfer pursuant to the written wire
instructions of the applicable holder of BHS Stock. The Exchange Fund shall not
be used for any other purpose. The Exchange Agent shall invest all cash included
in the Exchange Fund, as directed by Bankshares, on a daily basis. Any interest
and other income resulting from such investments shall be paid to Bankshares.

1.6 Exchange of Shares.

(a) Exchange Procedures. Prior to the Effective Time, Bankshares or the Bank
shall cause the Exchange Agent to mail to the shareholders of BHS of record as
of the date of such mailing, transmittal materials and other appropriate written
instructions (collectively, a “Transmittal Letter”) (which shall specify that
delivery shall be effected, and risk of loss and title to the certificate
representing shares of BHS Stock prior to such Effective Time shall pass, only
upon proper delivery of such certificates to the Exchange Agent and which shall
be in such form and have such other provisions as Bankshares may reasonably
specify). At the Effective Time and upon the proper surrender of certificate(s)
representing shares of BHS Stock to the Exchange Agent, together with a properly
completed and duly executed Transmittal Letter, the holder of such
certificate(s) shall receive, in exchange therefor, the Per Share Cash
Consideration subject to any required withholding of applicable taxes.
Notwithstanding anything else herein contained, neither Bankshares, the Bank nor
the Exchange Agent shall be obligated to deliver any of such payments in cash
unless and until such holder has surrendered the certificate(s) representing
such holder’s BHS Stock. The certificate(s) so surrendered shall be duly
endorsed as the Exchange Agent may require and shall be held in escrow by the
Exchange Agent pending the effective time. If there is a transfer of ownership
of any shares of BHS Stock not registered in the transfer records of BHS, the
appropriate cash consideration shall be paid to the transferee thereof if the
certificates representing such BHS Stock are presented to the Exchange Agent,
accompanied by all documents required, in the reasonable judgment of Bankshares,
the Bank and the Exchange Agent, to evidence and effect such transfer and to
evidence that any applicable stock transfer taxes have been paid. Any portion of
the Exchange Fund which remains undistributed to the holders of certificates
representing BHS Stock for six months after the Effective Time shall be
delivered to Bankshares, upon demand, and any shareholders of BHS who have not
previously complied with the provisions of this Article I shall thereafter look
only to Bankshares for payment of their claim for cash. Any portion of the
Exchange Fund remaining unclaimed by holders of BHS Stock five years after the
Effective Time (or such earlier date immediately prior to such time as such
portion would otherwise escheat to or become property of any government entity)
shall, to the extent permitted by applicable law, become the property of
Bankshares free and clear of any claims or interest of any person previously
entitled therein. Any other provision of this Agreement notwithstanding, neither
Bankshares, the Bank nor the Exchange Agent shall be liable to any holder of
shares of BHS Stock for any amounts paid or properly delivered in good faith to
a public official pursuant to any applicable abandoned property law.

(b) Lost Certificates. Any shareholder of BHS whose certificate representing
shares of BHS Stock has been lost, destroyed, stolen or otherwise is missing
shall be entitled to

 

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receive any cash to which he or she is entitled in accordance with and upon
compliance with conditions reasonably imposed by the Exchange Agent or
Bankshares (including, without limitation, a requirement that the shareholder
provide a lost instruments indemnity bond in form, substance and amount
reasonably satisfactory to the Exchange Agent and Bankshares).

(c) Rights of Former BHS Shareholders. At the Effective Time, the stock transfer
books of BHS shall be closed as to holders of BHS Stock immediately prior to the
Effective Time and no transfer of BHS Stock by any such holder shall thereafter
be made or recognized. Until surrendered for exchange in accordance with the
provisions of Section 1.6(a) of this Agreement, each certificate theretofore
representing shares of BHS Stock (other than shares to be canceled pursuant to
Section 1.4(b) of this Agreement and Dissenting Shares) shall from and after the
Effective Time represent for all purposes only the right to receive the
appropriate cash consideration. If, after the Effective Time, certificates
representing BHS Stock are presented to BHS, Bankshares or the Exchange Agent
for any reason, they shall be canceled and exchanged as provided in this Article
I.

1.7 Dissenting Shares. Notwithstanding any other provision of this Agreement to
the contrary, shares of BHS Stock that are outstanding immediately prior to the
Effective Time and that are held by shareholders who shall have not voted in
favor of the Merger or consented thereto in writing and who properly shall have
demanded appraisal for such shares in accordance with S.C. Code Ann. § 33-13-101
et seq. (collectively, the “Dissenting Shares”) shall not be converted into or
represent the right to receive the appropriate cash consideration. Such
shareholders instead shall be entitled to receive payment of the appraised value
of such shares held by them in accordance with the provisions of S.C. Code Ann.
§ 33-13-101 et seq. except that all Dissenting Shares held by shareholders who
shall have failed to perfect or who effectively shall have withdrawn or
otherwise lost their rights to appraisal of such shares under S.C. Code Ann. §
33-13-101 et seq. shall thereupon be deemed to have been converted into and to
have become exchangeable, as of the Effective Time, for the right to receive,
without any interest thereon, the appropriate cash consideration upon surrender
in the manner provided in Section 1.6 of the certificate or certificates that,
immediately prior to the Effective Time, evidenced such shares. BHS shall give
Bankshares (i) prompt notice of any written demand for appraisal of any shares
of BHS Stock, attempted withdrawals of such demands for appraisal or any other
instruments served pursuant to S.C. Code Ann. § 33-13-101 et seq. and received
by BHS relating to shareholders’ rights of appraisal, and (ii) the opportunity
to participate in all negotiations and proceedings with respect to demands under
S.C. Code Ann. § 33-13-101 et seq. consistent with the obligations of BHS
thereunder. BHS shall not, except with the prior written consent of Bankshares,
(x) make any payment with respect to such demand, (y) offer to settle or settle
any demand for appraisal, or (z) waive any failure to timely deliver a written
demand for appraisal or timely take any other action to perfect appraisal rights
in accordance with S.C. Code Ann. § 33-13-101 et seq.

1.8 Closing. The closing of the transactions contemplated by this Agreement (the
“Closing”) shall take place at the offices of Bankshares in Whiteville, North
Carolina, or at such other place as Bankshares shall designate, on a date
mutually agreeable to BHS and Bankshares (the “Closing Date”) after the
expiration of any and all required waiting periods following the effective date
of all required approvals of the Merger by the Federal Deposit Insurance
Corporation (“FDIC”), the North Carolina Commissioner of Banks (the
“Commissioner”), the

 

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South Carolina Board of Financial Institutions (the “SCBFI”) and any other
governmental or regulatory authorities (as soon as practicable, but in no event
to be more than 60 days following the expiration of all such required waiting
periods). At the Closing, Bankshares and BHS shall take such actions (including,
without limitation, the delivery of certain closing documents and the execution
of Articles of Merger under North Carolina law and South Carolina law) as are
required herein and as otherwise shall be required by law to consummate the
Merger and cause it to become effective.

1.9 Effective Time. Subject to satisfaction or waiver of all conditions
precedent set forth in this Agreement, the Merger shall become effective (the
“Effective Time”) on the date and at the time on which Articles of Merger
containing the Plan of Merger and the other provisions required by, and executed
in accordance with applicable North Carolina, South Carolina and applicable
federal law shall have been accepted for filing by the Secretary of State of the
State of North Carolina and the Secretary of State of the State of South
Carolina (or such later time as may be specified in the Articles of Merger);
provided, however, that unless otherwise mutually agreed upon by the parties
hereto, the Effective Time shall in no event be more than ten days following the
Closing Date.

1.10 Further Assurances. If at any time after the Effective Time Bankshares or
the Bank shall consider or be advised that any further deeds, assignments or
assurances in law or any other actions are necessary, desirable or proper to
vest, perfect or confirm of record or otherwise, in the Surviving Corporation,
the title to any property or rights of BHS acquired or to be acquired by reason
of, or as a result of, the Merger, BHS, and its officers and directors shall
execute and deliver all such proper deeds, assignments and assurances in law and
do all things necessary, desirable or proper to vest, perfect or confirm title
to such property or rights in Bankshares or the Bank, as applicable and
otherwise to carry out the purpose of this Agreement, and that the officers and
directors of Bankshares or the Bank, as applicable are fully authorized and
directed in the name of BHS or otherwise to take any and all such actions.

ARTICLE II. REPRESENTATIONS AND WARRANTIES OF BHS

Except as otherwise specifically provided herein or as “Previously Disclosed” to
Bankshares, BHS hereby makes the following representations and warranties to
Bankshares. (“Previously Disclosed” shall mean, as to BHS, the disclosure of
information in a letter delivered by BHS to Bankshares specifically referring to
this Agreement and arranged in sections corresponding to the sections,
subsections and items of this Agreement applicable thereto, and which letter has
been delivered prior to the execution of this Agreement. Information shall be
deemed Previously Disclosed for the purpose of a given section, subsection or
item of this Agreement only to the extent that a specific reference thereto is
made in connection with disclosure of such information at the time of such
delivery.)

2.1 Corporate Organization, Capacity and Authority.

(a) Organization. BHS is a banking corporation duly organized and incorporated
and validly existing under the laws of the State of South Carolina with its
deposits insured up to applicable limits by the FDIC. BHS has no subsidiaries.

 

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(b) Power and Authority. BHS has all requisite power and authority (corporate
and other) to own, lease and operate its properties and to carry on its business
as it is now being conducted, is duly qualified to do business and is in good
standing in each other jurisdiction in which the character of the properties
owned, leased or operated by it therein or in which the transaction of its
business makes such qualification necessary, except where failure to so qualify
would not have a Material Adverse Effect (as defined herein) on BHS, and, to the
best knowledge and belief of the management of BHS, is not transacting business
or operating any properties owned or leased by it in violation of any provision
of federal, state or local law or any rule or regulation promulgated thereunder,
which violation would have a Material Adverse Effect on BHS. For purposes of
this Article II, “Material Adverse Effect” shall mean any event or change that
(i) is material and adverse to the financial position, results of operations or
business of BHS, or (ii) would materially impair the ability of BHS to perform
its obligations under this Agreement or otherwise materially impede the
consummation of the Merger; provided, however, that “Material Adverse Effect”
shall not be deemed to include the impact of (A) changes in banking and similar
laws of general applicability or interpretations thereof by any applicable
governmental authority, (B) changes in generally accepted accounting principles
(“GAAP”) or regulatory accounting requirements applicable to banks and their
holding companies generally, (C) changes in general economic conditions,
including interest rates, affecting banks and their holding companies generally,
(D) any modifications or changes to valuation policies and practices, or
expenses incurred, in connection with the Merger or restructuring charges taken
in connection with the Merger, in each case in accordance with GAAP, and (E) the
effects of any action or omission taken with the prior consent of Bankshares or
as otherwise contemplated by the Agreement.

(c) Constituent Documents. BHS has previously delivered to Bankshares true,
accurate and complete copies of the currently effective charter and bylaws or
equivalent organizational documents of BHS, including all amendments and
proposed amendments thereto.

2.2 Capital Stock. The authorized capital stock of BHS consists of 5,000 shares
of common stock, $10.00 par value per share, of which 5,000 shares are issued
and outstanding as of the date hereof. Other than the BHS Stock, BHS has no
outstanding class of capital stock. Each outstanding share of BHS Stock has been
duly authorized and validly issued, is fully paid and nonassessable, has been
issued in compliance with applicable federal and state securities laws and has
not been issued in violation of the preemptive rights of any shareholder.

2.3 Principal Shareholders. Except as “Previously Disclosed,” there are no
persons or entities known to BHS that own beneficially, directly or indirectly,
more than 5% of the outstanding shares of BHS Stock.

2.4 Convertible Securities, Options, Etc. BHS does not have any outstanding
(i) securities or other obligations (including debentures or other debt
instruments) which are convertible into shares of BHS Stock or any other
securities of BHS, (ii) options, warrants, rights, calls or other commitments of
any nature which entitle any person to receive or acquire any shares of BHS
Stock or any other securities of BHS, or (iii) plan, agreement or other
arrangement pursuant to which shares of BHS Stock or any other securities of BHS
or options, warrants, rights, calls or other commitments of any nature
pertaining thereto, have been or may be issued.

 

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2.5 Authorization and Validity of Agreement. This Agreement has been duly and
validly approved by BHS’s Board of Directors. Subject only to approval of the
Plan of Merger by the shareholders of BHS, (i) BHS has the corporate power and
authority to execute and deliver this Agreement and to perform its obligations
and agreements and carry out the transactions described herein, (ii) all
corporate proceedings and approvals required to be taken to authorize BHS to
enter into this Agreement and to perform its obligations and agreements and to
carry out the transactions described herein have been duly and properly taken,
and (iii) this Agreement constitutes the valid and binding agreement of BHS
enforceable in accordance with its terms (except to the extent enforceability
may be limited by (A) applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws from time to time in effect which affect creditors’
rights generally, (B) legal and equitable limitations on the availability of
injunctive relief, specific performance and other equitable remedies, and
(C) general principles of equity and applicable laws or court decisions limiting
the enforceability of indemnification provisions).

2.6 Validity of Transactions; Absence of Required Consents or Waivers. Provided
the required approvals of BHS’s shareholders and of governmental or regulatory
authorities are obtained, neither the execution and delivery of this Agreement,
nor the consummation of the transactions described herein, nor compliance by BHS
with any of its obligations or agreements contained herein, will: (i) conflict
with or result in a breach of the terms and conditions of, or constitute a
default or violation under any provision of, the Articles of Incorporation or
bylaws or the equivalent organizational documents of BHS, or any material
contract, agreement, lease, mortgage, note, bond, indenture, license, or
obligation or understanding (oral or written) to which BHS is bound or by which
it or its business, capital stock or any of its properties or assets may be
affected; (ii) result in the creation or imposition of any lien, claim,
interest, charge, restriction or encumbrance upon any of the properties or
assets of BHS; (iii) violate any applicable federal or state statute, law, rule
or regulation, or any judgment, order, writ, injunction or decree of any court,
administrative or regulatory agency or governmental body; (iv) result in the
acceleration of any obligation or indebtedness of BHS; or (v) interfere with or
otherwise adversely affect the ability of BHS to carry on its business as
presently conducted, or interfere with or otherwise adversely affect the ability
of Bankshares and the Bank to carry on such business after the Effective Time.
No consents, approvals or waivers are required to be obtained from any person or
entity in connection with BHS’s execution and delivery of this Agreement, or the
performance of its obligations or agreements or the consummation of the
transactions described herein, except for required approvals of BHS’s
shareholders as described in Section 7.1(a) below and of governmental or
regulatory authorities as described in Section 7.1(b) below and approvals
previously obtained.

2.7 Books and Records. The books of account of BHS have been maintained in
material compliance with all applicable legal and accounting requirements and in
accordance with good business practices, and such books of account are complete
and reflect accurately in all material respects BHS’s items of income and
expense and all of its assets, liabilities and shareholders’ equity. The minute
books of BHS accurately reflect in all material respects the corporate actions
which its shareholders and board of directors, and all committees thereof, have
taken during the time periods covered by such minute books. All such minute
books have been or will be made available to Bankshares and its representatives.

 

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2.8 Regulatory Reports. Since its date of incorporation, BHS has filed all
reports, registrations and statements, together with any amendments required to
be made with respect thereto, that were required to be filed with (i) the FDIC,
(ii) the SCBFI, and (iii) any other governmental or regulatory authorities
having jurisdiction over BHS except to the extent that failure to file such
reports, registrations and statements would not have a Material Adverse Effect
on BHS. All such reports, registrations and statements filed by BHS with the
FDIC, the SCBFI or other such regulatory authority are collectively referred to
herein as the “BHS Reports.” As of their respective dates, the BHS Reports
complied in all material respects with all the statutes, rules and regulations
enforced or promulgated by the regulatory authority with which they were filed
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and BHS has not been notified that any such BHS Reports were
deficient as to form or content. Following the date of this Agreement, BHS shall
deliver to Bankshares, simultaneous with the filing thereof, a copy of each
report, registration, statement or other regulatory filing made thereafter by
BHS, with the FDIC, the SCBFI or any other such regulatory authority.

2.9 Shareholder Communications and FDIC Filings; Financial Statements.

(a) Shareholder Communications and FDIC Filings. BHS has made available to
Bankshares true, accurate and complete copies of all communications by BHS to
its shareholders generally since December 31, 2002 (collectively, the “BHS
Shareholder Reports”). The BHS Shareholder Reports did not as of their
respective dates contain any untrue statement of a material fact or omit to
state a material fact required to be stated in such BHS Shareholder Reports or
necessary in order to make the statements in such BHS Shareholder Reports, in
light of the circumstances under which they were made, not misleading.

(b) Financial Statements. BHS has made available to Bankshares the following
financial statements (collectively, the “BHS Financial Statements”): (i) its
balance sheets as of September 30, 2005 and 2004 and December 31, 2004 and 2003
and its statements of operations for the nine month period ended September 30,
2005 and for the years ended December 31, 2004, 2003 and 2002, together with
notes thereto. Following the date of this Agreement, BHS promptly will deliver
to Bankshares all other annual or interim financial statements prepared by or
for BHS. The BHS Financial Statements (including any related notes and schedules
thereto) are in accordance with BHS’s books and records and present fairly BHS’s
financial condition, assets and liabilities and results of operations as of the
dates indicated and for the periods specified therein subject, in the case of
unaudited interim financial statements, to normal year-end adjustments and any
other adjustments described therein, which adjustments will not be material in
amount or effect.

2.10 Tax Returns and Other Tax Matters. (i) BHS has timely filed or caused to be
filed, or obtained proper extensions of time for filing, all federal, state and
local income tax returns and reports which are required by law to have been
filed, and all such returns and reports were true, correct and complete in all
material respects and contained all material information required to be
contained therein; (ii) all federal, state and local income, profits, franchise,
sales, use, occupation, property, excise, withholding, employment and other
taxes (including interest and penalties), charges and assessments which have
become due from or been assessed or levied

 

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against BHS, or its respective properties have been fully paid or, if not yet
due, a reserve or accrual which is reasonably believed by the management of BHS
to be adequate in all material respects for the payment of all such taxes to be
paid and the obligation for such unpaid taxes is reflected on the BHS Financial
Statements; (iii) tax returns and reports of BHS have not been subject to audit
by the Internal Revenue Service (the “IRS”) or the South Carolina Department of
Revenue since December 31, 2000 and BHS has not received any indication of the
pendency of any audit or examination in connection with any such tax return or
report or has any knowledge that any such return or report is subject to
adjustment; and (iv) BHS has not executed any waiver or extended the statute of
limitations (or been asked to execute a waiver or extend a statute of
limitations) with respect to any tax.

2.11 Absence of Material Adverse Effects or Certain Other Events.

(a) Since December 31, 2004, BHS has conducted business only in the ordinary
course, and there has been no Material Adverse Effect, and there has occurred no
event or development and there currently exists no condition or circumstance
which, with the lapse of time or otherwise, may or could cause, create or result
in a Material Adverse Effect, on BHS.

(b) Since December 31, 2004, and other than in the ordinary course of its
business, BHS has not incurred any material liability or engaged in any material
transaction or entered into any material agreement, suffered any loss,
destruction or damage to any of its respective properties or assets, or made a
material acquisition or disposition of any assets or entered into any material
contract or lease.

(c) BHS has Previously Disclosed to Bankshares any and all “Raises” approved or
actually effected since December 31, 2004. For purposes of this Section 2.11(c),
“Raises” shall be defined to include (i) any bonus; and (ii) any increase in the
salaries, compensation or general benefits payable to employees of BHS.

2.12 Absence of Undisclosed Liabilities. BHS has no liabilities or obligations,
whether known or unknown, matured or unmatured, accrued, absolute, contingent or
otherwise, whether due or to become due (including, without limitation, tax
liabilities or unfunded liabilities under employee benefit plans or
arrangements), other than (i) those reflected in the BHS Financial Statements,
or (ii) obligations or liabilities incurred in the ordinary course of its
business since December 31, 2004 and which are not, individually or in the
aggregate, material to BHS. No facts or circumstances exist that could
reasonably be expected to serve as the basis for any other liabilities of BHS.

2.13 Litigation and Compliance with Law.

(a) There are no actions, suits, arbitrations, controversies or other
proceedings or investigations (or, to the best knowledge and belief of
management of BHS, any facts or circumstances which reasonably could result in
such), including, without limitation, any such action by any governmental or
regulatory authority, which currently exist or are ongoing, pending or, to the
best knowledge and belief of management of BHS, threatened, contemplated or
probable of assertion, against, relating to or otherwise affecting BHS, or any
of their

 

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respective properties, assets or employees which, if determined adversely, could
result in liability on the part of BHS for, or subject BHS to, material monetary
damages, fines or penalties or an injunction, or which could have a Material
Adverse Effect on BHS or on BHS’s ability to consummate the Merger.

(b) Except for such licenses, permits, orders, authorizations or approvals
(“Permits”) the absence of which would not have a Material Adverse Effect on
BHS, BHS has all Permits of any federal, state, local or foreign governmental or
regulatory body that are material to or necessary for the conduct of its
respective business or to own, lease and operate its respective properties.
Except as would not have a Material Adverse Effect on BHS, all such Permits are
in full force and effect and no violations are or have been recorded in respect
of any such Permits. No proceeding is pending or, to the best knowledge and
belief of management of BHS, threatened or probable of assertion to suspend,
cancel, revoke or limit any Permit.

(c) BHS is not subject to any supervisory agreement, enforcement order, writ,
injunction, capital directive, supervisory directive, memorandum of
understanding or other similar agreement, order, directive, memorandum or
consent of, with or issued by any regulatory or other governmental authority
(including, without limitation, the SCBFI or the FDIC) relating to its financial
condition, directors or officers, employees, operations, capital, regulatory
compliance or otherwise; there are no judgments, orders, stipulations,
injunctions, decrees or awards against BHS that in any manner limit, restrict,
regulate, enjoin or prohibit any present or past business or practice of BHS;
and BHS has not been advised or has any reason to believe that any regulatory or
other governmental authority or any court is contemplating, threatening or
requesting the issuance of any such agreement, order, injunction, directive,
memorandum, judgment, stipulation, decree or award.

(d) BHS is not in violation or default under, and has complied with, all laws,
statutes, ordinances, rules, regulations, orders, writs, injunctions or decrees
of any court or federal, state, municipal or other governmental or regulatory
authority having jurisdiction or authority over it or its business operations,
properties or assets (including, without limitation, all provisions of South
Carolina law relating to usury, consumer protection and all other laws and
regulations applicable to extensions of credit) except for any such violation,
default or noncompliance as does not or would not have a Material Adverse Effect
on BHS, and, to the best knowledge and belief of management of BHS, there is no
basis for any claim by any person or authority for compensation, reimbursement
or damages or otherwise for any violation of any of the foregoing.

2.14 Real Properties. BHS has Previously Disclosed to Bankshares a listing of
all real property owned or leased by BHS (the “Real Property”) and all leases
pertaining to any such Real Property to which BHS is a party (the “Real Property
Leases” and each “Real Property Lease”). With respect to all Real Property, BHS
has good and marketable fee simple title to, or a valid and subsisting leasehold
interest in, such Real Property and owns the same free and clear of all
mortgages, liens, leases, encumbrances, title defects and exceptions to title
other than (i) the lien of current taxes not yet due and payable, and (ii) such
imperfections of title and restrictions, covenants and easements (including
utility easements) which do not materially affect the value of the Real Property
and which do not and will not materially detract from, interfere with or
restrict the present or future use of the properties subject thereto or affected
thereby. With respect

 

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to each Real Property Lease (i) such lease is valid and enforceable in
accordance with its terms, (ii) there currently exists no circumstance or
condition which constitutes an event of default by BHS (as lessor or lessee) or
its respective lessor or which, with the passage of time or the giving of
required notices will or could constitute such an event of default, and
(iii) subject to any required consent of BHS’s lessor, each such Real Property
Lease may be assigned to the Bank or Bankshares and the execution and delivery
of this Agreement does not constitute an event of default thereunder. To the
best knowledge and belief of management of BHS, the Real Property complies with
all applicable federal, state and local laws, regulations, ordinances or orders
of any governmental authority, including those relating to zoning, building and
use permits, except for such noncompliance as does not or would not have a
Material Adverse Effect on BHS, and the Real Property may be used under
applicable zoning ordinances for commercial banking facilities as a matter of
right rather than as a conditional or nonconforming use. All improvements and
fixtures included in or on the Real Property are in good condition and repair,
ordinary wear and tear excepted, and there does not exist any condition which
materially adversely affects the economic value thereof or materially adversely
interferes (or will interfere after the Merger) with the contemplated use
thereof.

2.15 Loans, Accounts, Notes and Other Receivables.

(a) All loans, accounts, notes and other receivables reflected as assets on the
books and records of BHS (i) have resulted from bona fide business transactions
in the ordinary course of operations of BHS, (ii) were made in accordance with
the standard loan policies and procedures of BHS, and (iii) are owned by BHS
free and clear of all liens, encumbrances, assignments, participation or
repurchase agreements or other exceptions to title or to the ownership or
collection rights of any other person or entity.

(b) All of the records of BHS regarding all outstanding loans, accounts, notes
and other receivables, and all other real estate owned, are accurate in all
material respects, and, with respect to such loans the loan documentation of
which indicate are secured by any real or personal property or property rights
(“Loan Collateral”), such loans are in all material respects secured by valid,
perfected and enforceable liens on all such Loan Collateral having the priority
described in the records of such loan. BHS has not engaged in any form of
indirect lending and no such indirect loans are outstanding.

(c) To the best knowledge and belief of management of BHS, each loan reflected
as an asset on the books of BHS and each guaranty therefor, is the legal, valid
and binding obligation of the obligor or guarantor thereon, and no defense,
offset or counterclaim has been asserted with respect to any such loan or
guaranty.

(d) BHS has previously delivered to Bankshares (i) a written listing of each
loan, extension of credit or other asset of BHS which, as of December 15, 2005,
is classified by the FDIC or the SCBFI as “Loss,” “Doubtful,” “Substandard” or
“Special Mention” (or otherwise by words of similar import), or which it has
designated as a special asset or for special handling or placed on any “watch
list” because of concerns regarding the ultimate collectibility or deteriorating
condition of such asset or any obligor or Loan Collateral therefor, and (ii) a
written listing of each loan or extension of credit that, as of November 30,
2005, was past due as to the payment of principal or interest or both, or as to
which any obligor thereon (including the

 

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borrower or any guarantor) otherwise was in default, is the subject of a
proceeding in bankruptcy or otherwise has indicated any inability or intention
not to repay such loan or extension of credit. Each such listing is accurate and
complete in all material respects as of the date indicated.

(e) As of December 31, 2004 and as of November 30, 2005, BHS’s, reserve for
possible loan losses (the “Loan Loss Reserve”) has been established in
conformity with GAAP, sound banking practices and all applicable requirements,
rules and policies of the FDIC and the SCBFI and, in the best judgment of
management of BHS, is reasonable in view of the size and character of its loan
portfolio, current economic conditions and other relevant factors, and is
adequate to provide for losses relating to or the risk of loss inherent in its
loan portfolio.

(f) To the best knowledge and belief of management of BHS, each of the loans
carried on BHS’s books and records (with the exception of those loans Previously
Disclosed to Bankshares pursuant to subparagraph (d) of this Section 2.15) is
collectible in the ordinary course of BHS’s business in an amount which is not
less than the amount at which it is carried on BHS’s books and records.

2.16 Securities Portfolio and Investments. Except as Previously Disclosed, all
securities owned by BHS (whether owned of record or beneficially) are held free
and clear of all mortgages, liens, pledges, encumbrances or any other
restriction or rights of any other person or entity, whether contractual or
statutory, which would materially impair the ability of BHS to dispose freely of
any such security or otherwise to realize the benefits of ownership thereof at
any time. There are no voting trusts or other agreements or undertakings to
which BHS is a party with respect to the voting of any such securities. With
respect to all “repurchase agreements” to which BHS has “purchased” securities
under agreement to resell, BHS has a valid, perfected first lien or security
interest in the government securities or other collateral securing the
repurchase agreement, and the value of the collateral securing each such
repurchase agreement equals or exceeds the amount of the debt owed that is
secured by such collateral. Except for fluctuations in the market values of its
investment securities, since December 31, 2004, there has been no significant
deterioration or material adverse change in the quality, or any material
decrease in the value, of BHS’s securities portfolio as a whole.

2.17 Personal Property and Other Assets. All tangible personal property of BHS
material to the business operations of BHS (including, without limitation, all
banking equipment, data processing equipment, vehicles, and all other tangible
personal property located in any office of or used by BHS in the operation of
its business) is owned or leased by BHS free and clear of all liens,
encumbrances, leases, title defects or exceptions to title other than such as
are not material in character, amount or extent, and which do not materially
detract from the value of, or interfere with the present or future use or
ability to convey, the property subject thereto or affected thereby. All of
BHS’s tangible personal property material to its business is in good operating
condition and repair, ordinary wear and tear excepted.

2.18 Patents and Trademarks. BHS is a corporation in good standing registered
with the Secretary of State of South Carolina and has operated under its
original articles of incorporation, as it may have amended from time to time,
for in excess of 65 years and owns and possesses the right to the name “Bank of
Heath Springs” under the common law of South Carolina but does not possess or
own any statutory copyrights, tradenames or trademarks. BHS

 

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possesses such trade secrets and proprietary and confidential information
necessary to conduct its business as presently conducted; and BHS has not
knowingly violated, and is not now knowingly in conflict with, any patent,
license, trademark, tradename, copyright or proprietary right of any other
person or entity.

2.19 Environmental Matters.

(a) BHS has Previously Disclosed to Bankshares copies of all written reports,
correspondence, notices or other materials, if any, in its possession pertaining
to environmental surveys or assessments of the Real Property or any of its Loan
Collateral and any improvements thereon, or to any violation of “Environmental
Laws” (as defined in Section 2.19(f) below) on, affecting or otherwise involving
the Real Property or any Loan Collateral.

(b) There has been no presence, use, production, generation, handling,
transportation, treatment, storage, disposal, distribution, labeling, reporting,
testing, processing, emission, discharge, release, threatened release, control,
removal, clean-up or remediation of any “Hazardous Substances” (as defined in
Section 2.19(g) below) by any person prior to the date hereof on, from or
relating to the Real Property or, to the best knowledge and belief of management
of BHS, the Loan Collateral, which constitutes a violation of any Environmental
Laws.

(c) BHS has not violated any federal, state or local law, rule, regulation,
order, permit or other requirement relating to health, safety or the environment
or imposing liability, responsibility or standards of conduct applicable to
environmental conditions, and there has been no violation of any Environmental
Laws (as defined below) (including, to the best knowledge and belief of
management of BHS, any violation with respect to or relating to any Loan
Collateral) by any other person or entity for whose liability or obligation with
respect to any particular matter or violation BHS is or may be responsible or
liable, except to the extent any violations of which, when taken as a whole,
would not have a Material Adverse Effect on BHS.

(d) BHS is not subject to any claims, demands, causes of action, suits,
proceedings, losses, damages, penalties, liabilities, obligations, costs or
expenses of any kind and nature which arise out of, under or in connection with,
or which result from or are based upon the presence, use, production,
generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, reporting, testing, processing, emission, discharge,
release, threatened release, control, removal, clean-up or remediation of any
Hazardous Substances on, from or relating to the Real Property or, to the best
knowledge and belief of management of BHS, any Loan Collateral by any person or
entity.

(e) No facts, events or conditions relating to the Real Property or, to the best
knowledge and belief of management of BHS, any Loan Collateral, or the
operations of BHS, will prevent, hinder or limit continued compliance with
Environmental Laws, or give rise to any investigatory, emergency removal,
remedial or corrective actions, obligations or liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws.

 

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(f) For purposes of this Agreement, “Environmental Laws” shall include:

(i) all federal, state and local statutes, regulations, ordinances, orders,
decrees, and similar provisions having the force or effect of law,

(ii) all contractual agreements, and

(iii) all common law

concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all standards of
conduct and bases of obligations relating to the presence, use, production,
generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, reporting, testing, processing, discharge, release,
threatened release, control, emergency removal, clean-up or remediation of any
Hazardous Substances (including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, the Superfund Amendment
and Reauthorization Act, the Federal Insecticide, Fungicide and Rodenticide Act,
the Hazardous Materials Transportation Act, the Resource Conservation and
Recovery Act, the Clean Water Act, the Clean Air Act, the Toxic Substances
Control Act, any “Superfund” or “Superlien” law, the Americans with Disabilities
Act, and the Occupational Safety and Health Act), as such may now or at any time
hereafter be defined or in effect.

(g) For purposes of this Agreement, “Hazardous Substances” shall include
hazardous, toxic or otherwise regulated materials, substances or wastes;
chemical substances or mixtures; pesticides; pollutants; contaminants; toxic
chemicals; oil or other petroleum products, byproducts, or constituents
(including but not limited to crude oil, diesel oil, fuel oil, gasoline,
lubrication oil, oil refuse, oil mixed with other waste, oil sludge, and all
other liquid hydrocarbons regardless of specific gravity); asbestos or asbestos
containing material; flammable explosives; polychlorinated biphenyls (“PCBs”) or
any material containing PCBs; radioactive materials; biological micro organisms,
viruses, fungi, spores; environmental tobacco smoke; radon or radon gas;
formaldehyde or any material containing formaldehyde; fumigants; any material or
substance comprising or contributing to conditions known as “sick building
syndrome,” “building-related illness” or similar conditions or exposures; and/or
any hazardous, toxic, regulated or dangerous waste, substance or material
defined as such by the United States Environmental Protection Agency or any
other federal, state or local governmental agency or political subdivision
thereof, or for the purpose of or by any Environmental Laws, as now or at any
time hereafter may be in effect.

2.20 Brokerage or Finders’ Commissions. All negotiations relative to this
Agreement and the transactions described herein have been carried on by BHS or
its representative, Howe Barnes Investments, Inc., Chicago, Illinois (“Howe
Barnes”), directly with Bankshares or its representatives, and no person or firm
other than Howe Barnes has been retained by or has acted on behalf of, pursuant
to any agreement, arrangement or understanding with, or under the authority of,
BHS or its Board of Directors, as a broker, finder or agent or has performed
similar functions or otherwise is or may be entitled to receive or claim a
brokerage fee or other commission in connection with or as a result of the
transactions described herein.

 

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2.21 Material Contracts.

(a) Except as Previously Disclosed, BHS is not a party to or bound by any
agreement, other than loans made in the ordinary course of business,
(i) involving money or other property in an amount or with a value in excess of
$25,000, (ii) which calls for the provision of goods or services to BHS and
cannot be terminated without material penalty upon written notice to the other
party thereto, (iii) which is material to BHS and was not entered into in the
ordinary course of business, (iv) which involves hedging, options or any similar
trading activity, or interest rate exchanges or swaps, (v) which commits BHS to
extend any loan or credit (with the exception of letters of credit, lines of
credit and loan commitments extended in the ordinary course of business),
(vi) which involves the purchase or sale of any assets of BHS, or the purchase,
sale, issuance, redemption or transfer of any capital stock or other securities
of BHS, or (vii) with any director, officer or principal shareholder of BHS
(including, without limitation, any consulting agreement, but not including any
agreement relating to loans or other banking services which were made in the
ordinary course of its business and on substantially the same terms and
conditions as were prevailing at that time for similar agreements with unrelated
persons).

(b) BHS is not in default, and there has not occurred any event which with the
lapse of time or giving of notice or both would constitute such a default, under
any contract, lease, insurance policy, commitment or arrangement to which it is
a party or by which it or its property is or may be bound or affected or under
which it or its property receives benefits.

2.22 Employment Matters; Employee Relations.

(a) BHS (i) has paid in full to or accrued on behalf of all its respective
directors, officers and employees all wages, salaries, commissions, bonuses,
fees and other direct compensation for all labor or services rendered, including
all wages, salaries, commissions, bonuses, fees and other direct compensation
for all labor or services performed by them to the date of this Agreement and
all vacation pay, sick pay, severance pay and other amounts promised to the
extent required by law or its existing policies or practices, and (ii) is in
compliance in all material respects with all applicable federal, state and local
laws, statutes, rules and regulations with regard to employment and employment
practices, terms and conditions, and wages and hours and other compensation
matters; and no person has, to the best knowledge and belief of management of
BHS, asserted that BHS is liable in any amount for any arrearages in wages or
employment taxes or for any penalties for failure to comply with any of the
foregoing.

(b) There is no action, suit or proceeding by any person pending or, to the best
knowledge and belief of management of BHS, threatened against BHS (or its
employees), involving employment discrimination, harassment, wrongful discharge
or similar claims. BHS is not a party to or bound by any collective bargaining
agreement with any of its employees, any labor union or any other collective
bargaining unit or organization. There is no pending or, to BHS’s best
knowledge, threatened labor dispute, work stoppage or strike involving BHS, or
any of its employees, or any pending or, to BHS’s best knowledge, threatened
proceeding in which it is asserted that BHS has committed an unfair labor
practice; and, BHS is not aware of any activity involving it or any of its
employees seeking to certify a collective bargaining unit or engaging in any
other labor organization activity.

 

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2.23 Employment Agreements; Employee Benefit Plans.

(a) BHS has Previously Disclosed to Bankshares a true and complete list of all
bonus, deferred compensation, pension, retirement, profit-sharing, thrift,
savings, employee stock ownership, stock bonus, stock purchase, restricted stock
and stock option plans; all employment and severance contracts; all medical,
dental, health, and life insurance plans; all vacation, sickness and other leave
plans, disability and death benefit plans; and all other employee benefit plans,
contracts, or arrangements maintained or contributed to by BHS for the benefit
of any employees, former employees, directors, former directors or any of their
beneficiaries (collectively, the “Plans”). True and complete copies of all
Plans, including, but not limited to, any trust instruments or insurance
contracts, if any, forming a part thereof, and all amendments thereto,
previously have been supplied to Bankshares. BHS does not maintain, sponsor,
contribute to or otherwise participate in any “Employee Benefit Plan” within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended (“ERISA”), any “Multiemployer Plan” within the meaning of
Section 3(37) of ERISA, or any “Multiple Employer Welfare Arrangement” within
the meaning of Section 3(40) of ERISA. Each Plan that is an “employee pension
benefit plan” within the meaning of Section 3(2) of ERISA and which is intended
to be qualified under Section 401(a) of the Code, has received or applied for a
favorable determination letter from the IRS and BHS is not aware of any
circumstances reasonably likely to result in the revocation or denial of any
such favorable determination letter. All reports and returns with respect to the
Plans (and any Plans previously maintained by BHS) required to be filed with any
governmental department, agency, service or other authority, including, without
limitation, Internal Revenue Service Form 5500 (Annual Report), have been
properly and timely filed.

(b) All “Employee Benefit Plans” maintained by or otherwise covering employees
or former employees of BHS currently are, and at all times have been, in
compliance with all provisions and requirements of ERISA except those the
noncompliance of which, when taken as a whole, would not have a Material Adverse
Effect on BHS. There is no pending or, to BHS’s best knowledge, threatened
litigation relating to any Plan or any such Plan previously maintained by BHS.
BHS has not engaged in a transaction with respect to any Plan that has subjected
it, or absent the exemption under which the transaction was effected, would
subject it to a tax or penalty imposed by either Section 4975 of the Code or
Section 502(i) of ERISA.

(c) BHS has delivered to Bankshares a true, correct and complete copy (including
copies of all amendments thereto) of each of its retirement plans that is
intended to be qualified under Section 401(a) of the Code (collectively, the
“Retirement Plans”), together with true, correct and complete copies of the
summary plan descriptions relating to the Retirement Plans, the most recent
determination letters received from the IRS regarding the Retirement Plans, and
the most recent Annual Reports (Form 5500 series) and related schedules, if any,
for the Retirement Plans. The Retirement Plans are qualified under the
provisions of Section 401(a) of the Code, the trusts under the Retirement Plans
are exempt trusts under Section 501(a) of the Code, and determination letters
have been issued or applied for with respect to the Retirement Plans to said
effect, including determination letters covering the current terms and
provisions of the Retirement Plans. There are no issues relating to said
qualification or exemption of the Retirement Plans currently pending before the
IRS, the United States Department of Labor, the Pension Benefit Guaranty
Corporation or any court. The Retirement Plans and the administration thereof
meet (and have met since the establishment of the Retirement Plans) the
requirements of ERISA, the Code and all other laws, rules and regulations
applicable to the Retirement Plans and

 

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do not violate (and since the establishment of the Retirement Plans have not
violated) any of the provisions of ERISA, the Code and such other laws, rules
and regulations, except to the extent such violation, when taken as a whole,
would not have a Material Adverse Effect on BHS. Without limiting the generality
of the foregoing, all reports and returns with respect to the Retirement Plans
required to be filed with any governmental department, agency, service or other
authority have been properly and timely filed. There are no disputes or
unresolved disagreements with respect to the Retirement Plans or the
administration thereof currently existing between BHS, or any trustee or other
fiduciary thereunder, and any governmental agency, any current or former
employee of BHS, or beneficiary of any such employee or any other person or
entity. No “reportable event” within the meaning of Section 4043(b) of ERISA has
occurred at any time with respect to the Retirement Plans, other than those,
when taken as a whole, would not have a Material Adverse Effect on BHS.

(d) No liability under subtitle C or D of Title IV of ERISA has been or is
expected to be incurred by BHS with respect to the Retirement Plans or with
respect to any other ongoing, frozen or terminated defined benefit pension plan
currently or formerly maintained by BHS. BHS presently does not contribute to a
“Multiemployer Plan” or has ever contributed to such a plan. All contributions
required to be made pursuant to the terms of each of the Plans (including
without limitation the Retirement Plans and any other “pension plan” (as defined
in Section 3(2) of ERISA, provided such plan is intended to qualify under the
provisions of Section 401(a) of the Code) maintained by BHS have been timely
made. Neither the Retirement Plans nor any other “pension plan” maintained by
BHS have an “accumulated funding deficiency” (whether or not waived) within the
meaning of Section 412 of the Code or Section 302 of ERISA. BHS has not
provided, and is not required to provide, security to any “pension plan” or to
any “Single Employer Plan” pursuant to Section 401(a)(29) of the Code. Under the
Retirement Plans and any other “pension plan” maintained by BHS as of the last
day of the most recent plan year ended prior to the date hereof, the actuarially
determined present value of all “benefit liabilities,” within the meaning of
Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the plan’s most recent actuarial valuation) did not
exceed the then current value of the assets of such plan, and there has been no
material change in the financial condition of any such plan since the last day
of the most recent plan year.

(e) There are no restrictions on the rights of BHS to amend or terminate any
Plan. Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will (except as otherwise specifically
provided for or contemplated by the transactions described in this Agreement)
(i) result in any payment to any person (including, without limitation, any
severance compensation or payment, unemployment compensation, “golden parachute”
or “change in control” payment, or otherwise) becoming due under any plan or
agreement to any director, officer, employee or consultant, (ii) increase any
benefits otherwise payable under any plan or agreement, or (iii) result in any
acceleration of the time of payment or vesting of any such benefit.

2.24 Insurance. BHS has in effect a “financial institutions bond” and such other
policies of general liability, casualty, directors and officers liability,
employee fidelity, errors and omissions and other property and liability
insurance as have been Previously Disclosed to Bankshares (the “Policies”). The
Policies provide coverage in such amounts and against such liabilities,
casualties, losses or risks as is required by applicable law or regulation; and,
in the

 

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judgment of management of BHS, the insurance coverage provided under the
Policies is reasonable and adequate in all respects for BHS. Each of the
Policies is in full force and effect and is valid and enforceable in accordance
with its terms, and is underwritten by an insurer of recognized financial
responsibility that is qualified to transact business in South Carolina; and BHS
has taken all requisite actions (including the giving of required notices) under
each such Policy to preserve all rights thereunder with respect to all matters.
BHS is not in default under the provisions of, has received notice of
cancellation or nonrenewal of, or any premium increase on, or has any knowledge
of any failure to pay any premium on or any inaccuracy in any application for
any Policy. There are no pending claims under any Policy, and BHS has no
knowledge of any facts or of the occurrence of any event that is reasonably
likely to result in any such claim.

2.25 Insurance of Deposits. BHS is an “insured institution” as defined in the
Federal Deposit Insurance Act and applicable regulations thereunder. The
deposits of each depositor in BHS are insured by the FDIC to the maximum amount
provided by law, all deposit insurance premiums due from BHS to the FDIC have
been paid in full in a timely fashion, and, to the best knowledge and belief of
BHS, no proceedings have been commenced or are contemplated by the FDIC or
otherwise to terminate such insurance.

2.26 Compensation; Stock Ownership. BHS has Previously Disclosed (i) the name
and current salary or wage rate for each present employee of BHS, and (ii) the
name of and number of shares of BHS Stock beneficially owned by each of the
directors and officers of BHS and by any person or entity known to BHS to own
beneficially 5% or more of BHS Stock.

2.27 Disclosure. To the best knowledge and belief of management of BHS, no
written statement, certificate, schedule, list or other written information
furnished by or on behalf of BHS at any time to Bankshares in connection with
this Agreement (including without limitation the statements contained herein),
when considered as a whole, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements herein or therein, in light of the circumstances under
which they were made, not misleading. Each document delivered or to be delivered
by BHS to Bankshares is or will be a true and complete copy of such document,
unmodified except by another document delivered by BHS.

ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BANKSHARES

Except as otherwise specifically described herein or as “Previously Disclosed”
to BHS, Bankshares hereby makes the following representations and warranties to
BHS. (“Previously Disclosed” shall mean, as to Bankshares, the disclosure of
information in a letter delivered by Bankshares to BHS specifically referring to
this Agreement and arranged in sections corresponding to the sections,
subsections and items of this Agreement applicable thereto, and which letter has
been delivered prior to the execution of this Agreement. Information shall be
deemed Previously Disclosed for the purpose of a given section, subsection or
item of this Agreement only to the extent a specific reference thereto is made
in connection with disclosure of such information at the time of such delivery.)

 

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3.1 Corporate Organization, Capacity and Authority.

(a) Organization. Bankshares is a corporation duly organized and validly
existing under the laws of the State of North Carolina and is registered with
the Commissioner as a commercial bank holding company and with the Federal
Reserve Board as a bank holding company under the Bank Holding Company Act of
1956, as amended.

(b) Subsidiaries. Bankshares has one wholly owned bank subsidiary, the Bank.
Bankshares also owns 100% of the issued and outstanding common securities of
Waccamaw Statutory Trust I, a special purpose entity organized as a statutory
trust under the laws of the State of Connecticut and formed to allow Bankshares
to issue trust preferred securities. The Bank has one wholly owned subsidiary,
Waccamaw Financial Services, Inc. Other than the Bank, Waccamaw Financial
Services, Inc. and Waccamaw Statutory Trust I, Bankshares has no subsidiaries,
direct or indirect, and does not own, directly or indirectly, any stock or other
equity interest in any other corporation, service corporation, joint venture,
partnership or other entity, except for equity issues reflected in Bankshares’
investment portfolio and securities held in a fiduciary capacity.

(c) Organization of Subsidiary. The Bank is duly organized and validly existing
under the laws of the State of North Carolina. All of the outstanding capital
stock of the Bank is owned of record and beneficially, free and clear of all
security interests and claims, by Bankshares. All of the outstanding shares of
capital stock of the Bank are duly authorized, validly issued, fully paid and
nonassessable, except to the extent set forth in N.C. General Statutes
Section 53-42.

(d) Power and Authority. Each of Bankshares and the Bank has all requisite power
and authority (corporate and other) to own, lease and operate its properties and
conduct its business as now being conducted, is duly qualified to do business
and is in good standing in each other jurisdiction in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary, except where failure so to qualify
would not have a Material Adverse Effect (as defined herein) on Bankshares and
the Bank, and is not transacting business, or operating any properties owned or
leased by it, in violation of any provision of federal or state law or any rule
or regulation promulgated thereunder, which violation would have a Material
Adverse Effect on Bankshares and the Bank. For purposes of this Article III,
“Material Adverse Effect” shall mean: (a) with respect to references to
Bankshares, any change in the business of Bankshares that is or could be
materially adverse to the financial condition, results of operations, prospects,
business, assets, investments, properties or operations of Bankshares, or
(b) with respect to references to the Bank, any change in the business of the
Bank that is or could be materially adverse to the financial condition, results
of operations, prospects, business, assets, loan portfolio, investments,
properties or operations of Bankshares and the Bank considered as one
enterprise.

(e) Constituent Documents. Bankshares has previously delivered to BHS true,
accurate and complete copies of the currently effective charter and bylaws or
equivalent organizational documents of each of Bankshares and the Bank,
including all amendments and proposed amendments thereto.

3.2 Authorization and Validity of Agreement. This Agreement has been duly and
validly approved by Bankshares’ and the Bank’s Boards of Directors.
(i) Bankshares and the

 

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Bank have the corporate power and authority to execute and deliver this
Agreement and to perform their obligations and agreements and carry out the
transactions described herein, (ii) all corporate proceedings and approvals
required to be taken to authorize Bankshares and the Bank to enter into this
Agreement and to perform its respective obligations and agreements and to carry
out the transactions described herein have been duly and properly taken, and
(iii) this Agreement constitutes the valid and binding agreement of Bankshares
and the Bank enforceable in accordance with its terms (except to the extent
enforceability may be limited by (A) applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect which
affect creditors’ rights generally, (B) legal and equitable limitations on the
availability of injunctive relief, specific performance and other equitable
remedies, and (C) general principles of equity and applicable laws or court
decisions limiting the enforceability of indemnification provisions).

3.3 Validity of Transactions; Absence of Required Consents or Waivers. Provided
the required approvals of governmental or regulatory authorities are obtained,
neither the execution and delivery of this Agreement, nor the consummation of
the transactions described herein, nor compliance by Bankshares or the Bank with
any of its obligations or agreements contained herein, will: (i) conflict with
or result in a breach of the terms and conditions of, or constitute a default or
violation under any provision of, the Articles of Incorporation or bylaws or the
equivalent organizational documents of Bankshares or the Bank, or any material
contract, agreement, lease, mortgage, note, bond, indenture, license, or
obligation or understanding (oral or written) to which Bankshares or the Bank,
is bound or by which it, its business, capital stock or any of its properties or
assets may be affected; (ii) result in the creation or imposition of any lien,
claim, interest, charge, restriction or encumbrance upon any of the properties
or assets of Bankshares or the Bank; (iii) violate any applicable federal or
state statute, law, rule or regulation, or any order, writ, injunction or decree
of any court, administrative or regulatory agency or governmental body;
(iv) result in the acceleration of any obligation or indebtedness of Bankshares
or the Bank; or (v) interfere with or otherwise adversely affect Bankshares’ or
the Bank’s ability to carry on its business as presently conducted. No consents,
approvals or waivers are required to be obtained from any governmental or
regulatory authority in connection with Bankshares’ or the Bank’s execution and
delivery of this Agreement, or the performance of its obligations or agreements
or the consummation of the transactions described herein, except for required
approvals of governmental or regulatory authorities described in Section 7.1
below and approvals previously obtained.

3.4 Books and Records. The books of account of Bankshares and the Bank have been
maintained in material compliance with all applicable legal and accounting
requirements and in accordance with good business practices, and such books of
account are complete and reflect accurately in all material respects Bankshares’
and the Bank’s, respectively, items of income and expense and all of its assets,
liabilities and shareholders’ equity. The minute books of each of Bankshares and
the Bank accurately reflect in all material respects the corporate actions which
its respective shareholders and board of directors, and all committees thereof,
have taken during the time periods covered by such minute books. All such minute
books have been or will be made available to BHS and its representatives.

3.5 Obstacles to Regulatory Approval. To the best of the knowledge and belief of
the management of Bankshares, no fact or condition relating to Bankshares exists
that may

 

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reasonably be expected to (i) prevent, impede or delay Bankshares or BHS from
obtaining the regulatory approvals required in order to consummate transactions
described herein; and, if any such fact or condition becomes known to the
executive officers of Bankshares, Bankshares promptly (and in any event within
three days after obtaining such knowledge) shall communicate such fact or
condition to the President of BHS.

3.6 Disclosure. To the best of the knowledge and belief of Bankshares, no
written statement, certificate, schedule, list or written information furnished
by or on behalf of Bankshares at any time to BHS in connection with this
Agreement (including, without limitation, the statements contained herein), when
considered as a whole, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements herein or therein, in light of the circumstances under
which they were made, not misleading. Each document delivered or to be delivered
by Bankshares to BHS is or will be a true and complete copy of such document,
unmodified except by another document delivered by Bankshares.

3.7 Liquidity. Bankshares has sufficient liquidity to fund the Exchange Fund up
to an aggregate amount of $8,000,000 and such funding will not result in the
impairment of Bankshares’ regulatory capital.

ARTICLE IV. COVENANTS OF BHS

4.1 Affirmative Covenants of BHS. BHS hereby covenants and agrees as follows
with Bankshares:

(a) Conduct of Business Prior to Effective Time. Between the date of this
Agreement and the Effective Time, except as otherwise agreed by Bankshares in
writing, BHS will carry on its business in and only in the regular and usual
course in substantially the same manner as such business heretofore was
conducted, and will:

(i) make all reasonable efforts to preserve intact its present business
organization, keep available its present officers and employees, and preserve
its relationships with customers, depositors, creditors, correspondents,
suppliers, and others having business relationships with them;

(ii) maintain all of its properties and equipment used in its business in
customary repair, order and condition, ordinary wear and tear excepted;

(iii) maintain its books of account and records in the usual, regular and
ordinary manner in accordance with sound business practices applied on a
consistent basis except to the extent otherwise reasonably required by
applicable laws or regulations;

 

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(iv) comply in all material respects with all laws, rules and regulations
applicable to it, its properties, assets or employees and to the conduct of its
business;

(v) not change its existing loan underwriting guidelines, policies or procedures
except as may be required by law;

(vi) continue to maintain in force insurance such as is described in
Section 2.24 above; not modify any bonds or policies of insurance in effect as
of the date hereof unless the same, as modified, provides substantially
equivalent coverage; and, not cancel, allow to be terminated or, to the extent
available, fail to renew, any such bond or policy of insurance unless the same
is replaced with a bond or policy providing substantially equivalent coverage;
and

(vii) promptly provide to Bankshares such information about its financial
condition, results of operations, prospects, businesses, assets, loan portfolio,
investments, properties or operations as Bankshares reasonably shall request.

(b) Loans. BHS will obtain Bankshares’ prior approval for each new extension of
credit (including the issuance of unfunded commitments, but excluding such new
extensions of credit as have been Previously Disclosed,) that it proposes to
make within the following categories: (i) loan participations, (ii) loans for
acquisition and development purposes, and (iii) non-residential construction
loans exceeding $50,000 in principal amount. BHS will not enter into any form of
indirect lending. Additionally, BHS will make available and provide to
Bankshares the following information with respect to its loans and other
extensions of credit (such assets herein referred to as “Loans”) as of
November 30, 2005 and as of the end of each month thereafter until the Effective
Time, such information for each month, or in the case of (ii) below, quarterly
to be in form and substance as is usual and customary in the conduct of its
business and to be furnished within 25 days of the end of each month ending
after the date hereof, except as otherwise provided:

(i) a list of Loans past due for 30 days or more as to principal or interest;

(ii) an analysis of the Loan Loss Reserve and management’s assessment of the
adequacy of the Loan Loss Reserve, which analysis and assessment shall include a
list of all classified or “watch list” Loans, along with the outstanding balance
and amount specifically allocated to the Loan Loss Reserve for each such
classified or “watch list” Loan;

(iii) a list of Loans in nonaccrual status;

(iv) a list of all Loans over $50,000 without principal reduction for a period
of longer than one year;

(v) a list of all foreclosed real property or other real estate owned and all
repossessed personal property;

 

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(vi) a list of reworked or restructured Loans over $50,000 and still
outstanding, including original terms, restructured terms and status; and

(vii) a list of any actual or threatened litigation by or against BHS pertaining
to any Loans or credits, together with the pleadings and other filed documents
related thereto.

(c) Accruals for Loan Loss Reserve, Expenses and Other Accounting Matters. BHS
will make such appropriate accounting entries in their books and records and
take such other actions as Bankshares, in its sole discretion, deems to be
required by GAAP, or which Bankshares otherwise reasonably deems to be
necessary, appropriate or desirable in anticipation of the Merger and which are
not in violation of GAAP or applicable law, including without limitation
additional provisions to BHS’s Loan Loss Reserve or accruals or the creation of
reserves for employee benefit and Merger-related expenses; provided, however,
that notwithstanding any provision of this Agreement to the contrary, and except
as otherwise agreed to by BHS and Bankshares, BHS shall not be required to make
any such accounting entries until immediately prior to the Closing and only
following receipt of written confirmation from Bankshares that it is not aware
of any fact or circumstance that would prevent completion of the Merger; and,
provided further, however, that no such entry made as a result of such a request
by Bankshares shall, itself alone, constitute a breach by BHS of any
representation, warranty or covenant made by BHS in this Agreement.

(d) Loan Charge-Offs. BHS will make such appropriate accounting entries in their
books and records and take such other actions which are not in violation of GAAP
or applicable law as Bankshares reasonably deems to be necessary, appropriate or
desirable to charge-off any Loans on BHS’s books, or any portions thereof, that
Bankshares, in its sole discretion, considers to be losses or that Bankshares
otherwise believes, in good faith, are required to be charged off pursuant to
applicable banking regulations, GAAP or otherwise, or that otherwise would be
charged off by Bankshares after the Effective Time in accordance with its Loan
administration and charge-off policies and procedures; provided, however, that
notwithstanding any provision of this Agreement to the contrary, and except as
otherwise agreed to by BHS and Bankshares, BHS shall not be required to make any
such accounting entries or take any such actions until immediately prior to the
Closing and only following receipt of written confirmation from Bankshares that
it is not aware of any fact or circumstance that would prevent completion of the
Merger; and, provided further, however, that no such entry made as a result of
such a request by Bankshares shall, itself alone, constitute a breach by BHS of
any representation, warranty or covenant made by BHS in this Agreement.

(e) Notice of Certain Changes or Events. Following the execution of this
Agreement and up to the Effective Time, BHS promptly will notify Bankshares in
writing of and provide to it such information as it shall request regarding
(i) any material adverse change in its financial condition, results of
operations, prospects, business, assets, loan portfolio, investments, properties
or operations, or of the actual or prospective occurrence of any condition or
event which, with the lapse of time or otherwise, may or could cause, create or
result in any such material adverse change, or of (ii) the actual or prospective
existence or occurrence of any

 

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condition or event which, with the lapse of time or otherwise, has caused or may
or could cause any statement, representation or warranty of BHS herein to be or
become inaccurate, misleading or incomplete, or which has resulted or may or
could cause, create or result in the breach or violation of any of BHS’s
covenants or agreements contained herein or in the failure of any of the
conditions described in Sections 7.1 or 7.3 below.

(f) Consents to Assignment of Contracts and Leases. BHS will use its best
efforts to obtain all required consents to the assignment to Bankshares of BHS’s
rights and obligations under any contracts or personal or real property leases,
each of which consents shall be in such form as shall be specified by
Bankshares.

(g) Qualified Plans. BHS shall take all appropriate action as shall be necessary
to maintain the Bank of Heath Springs 401(k) Plan (the “BHS 401(k) Plan”), as a
qualified plan for purposes of ERISA. BHS acknowledges that Bankshares intends
(i) that the BHS 40l(k) Plan will be merged into the Waccamaw Bank
Section 401(k) Savings Plan (the “Waccamaw 401(k) Plan”) as soon as practicable
after the Effective Time. BHS shall take all such actions with respect to such
plans as shall be necessary to accomplish such intent and, until the Effective
Time, will not take any other extraordinary actions with respects to such plans
without the written consent of Bankshares.

(h) Further Action; Instruments of Transfer. BHS shall (i) use its best efforts
in good faith to take or cause to be taken all action required of it hereunder
as promptly as practicable so as to permit the expeditious consummation of the
transactions described herein, (ii) perform all acts and execute and deliver to
Bankshares all documents or instruments required herein or as otherwise shall be
reasonably necessary or useful to or requested of BHS in consummating such
transactions and (iii) cooperate with Bankshares fully in carrying out, and will
pursue diligently the expeditious completion of, such transactions.

4.2 Negative Covenants of BHS. Between the date hereof and the Effective Time,
BHS will not do any of the following things or take any of the following actions
without the prior written consent and authorization of the President of
Bankshares:

(a) Amendments to Articles of Incorporation or Bylaws. Amend its Articles of
Incorporation or bylaws.

(b) Change in Capital Stock. Make any change in its authorized capital stock, or
create any other or additional authorized capital stock or other securities, or
issue, sell, purchase, redeem, retire, reclassify, combine or split any shares
of its capital stock or other securities (including securities convertible into
capital stock), or enter into any agreement or understanding with respect to any
such action.

(c) Options, Warrants and Rights. Grant or issue any options, warrants, calls,
puts or other rights of any kind relating to the purchase, redemption or
conversion of shares of its capital stock or any other securities (including
securities convertible into capital stock) or enter into any agreement or
understanding with respect to any such action.

(d) Dividends. Declare or pay any dividends on the outstanding shares of capital
stock or make any other distributions on or in respect of any shares of its
capital stock or

 

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otherwise to its shareholders, provided however, that BHS shall be permitted to
declare a dividend on or after January 1, 2006 in an aggregate amount equal to
the lesser of: (i) $150,000; or (ii) the actual federal income tax liability
incurred by the shareholders of BHS as a result of pass through income
attributed to them as a result of their ownership of BHS Stock during 2005.

(e) Employment, Benefit or Retirement Agreements or Plans. Except as required by
law, contemplated by this Agreement or Previously Disclosed, (i) enter into,
become bound by, renew or extend any oral or written contract, agreement or
commitment for the employment or compensation of any director, officer, employee
or consultant which is not immediately terminable by BHS without cost or other
liability on no more than 30 days’ notice; (ii) amend any existing, or adopt,
enter into or become bound by any new or additional, profit-sharing, bonus,
incentive, change in control or “golden parachute,” stock option, stock
purchase, pension, retirement, insurance (hospitalization, life or other), paid
leave (sick leave, vacation leave or other) or similar contract, agreement,
commitment, understanding, plan or arrangement (whether formal or informal) with
respect to or which provides for benefits for any of its current or former
directors, officers, employees or consultants; (iii) make contributions to any
401(k) Plan other than basic and matching contributions in accordance with the
terms of such 401(k) Plan as Previously Disclosed; or (iv) enter into or become
bound by any contract with or commitment to any labor or trade union or
association or any collective bargaining group.

(f) Increase in Compensation. With the exception of the anticipated increases in
annual salary and annual officer and employee bonuses Previously Disclosed to
Bankshares and such other raises as are in the ordinary course of business and
in accordance with historical practices, increase the compensation or benefits
of, or pay any bonus or other special or additional compensation to, any of its
directors, officers, employees or consultants.

(g) Accounting Practices. Make any changes in its accounting methods, practices
or procedures or in depreciation or amortization policies, schedules or rates
heretofore applied (except as required by GAAP or governmental regulations).

(h) Acquisitions; Additional Branch Offices. Directly or indirectly (i) acquire
or merge with, or acquire any branch or all or any significant part of the
assets of, any other person or entity, (ii) open any new branch office, or
(iii) enter into or become bound by any contract, agreement, commitment or
letter of intent relating to, or otherwise take or agree to take any action in
furtherance of, any such transaction or the opening of a new branch office.

(i) Changes in Business Practices. Except as may be required by the FDIC, the
SCBFI or any other governmental or other regulatory agency or as shall be
required by applicable law, regulation or this Agreement, (i) change in any
material respect the nature of its business or the manner in which it conducts
its business, (ii) discontinue any material portion or line of its business or
(iii) change in any material respect its lending, investment, asset-liability
management or other material banking or business policies (except to the extent
required by Section 4.1 above and Section 6.8 below).

(j) Exclusive Merger Agreement. Directly or indirectly, through any person
(i) encourage, solicit or attempt to initiate or procure discussions,
negotiations or offers with or from any person or entity (other than Bankshares)
relating to a merger or other acquisition of

 

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BHS or the purchase or acquisition of any BHS Stock or all or any significant
part of BHS’s assets; or, except as required by law or by fiduciary obligations
owed to the person assisted, provide assistance to any person in connection with
any such offer; (ii) except to the extent required by law, disclose to any
person or entity any information not customarily disclosed to the public
concerning BHS or its business, or afford to any other person or entity access
to its properties, facilities, books or records; (iii) sell or transfer all or
any significant part of BHS’s assets to any other person or entity; or
(iv) enter into or become bound by any contract, agreement, commitment or letter
of intent relating to, or otherwise take or agree to take any action in
furtherance of, any such transaction.

(k) Acquisition or Disposition of Assets.

(i) Except in the ordinary course of business consistent with its past
practices, sell or lease (as lessor), or enter into or become bound by any
contract, agreement, option or commitment relating to the sale, lease (as
lessor) or other disposition of any real estate; or sell or lease (as lessor),
or enter into or become bound by any contract, agreement, option or commitment
relating to the sale, lease (as lessor) or other disposition of any equipment or
any other fixed or capital asset (other than real estate) having a book value or
a fair market value, whichever is greater, of more than $25,000 for any
individual item or asset, or more than $50,000 in the aggregate for all such
items or assets; provided, however, that for the purposes of this Agreement, the
sale of “other assets owned,” “other real estate owned” or any similar property
obtained upon foreclosure of loans by BHS, shall not be considered to be in the
ordinary course of business.

(ii) Except in the ordinary course of business consistent with past practices,
purchase or lease (as lessee), or enter into or become bound by any contract,
agreement, option or commitment relating to the purchase, lease (as lessee) or
other acquisition of any real property; or purchase or lease (as lessee), or
enter into or become bound by any contract, agreement, option or commitment
relating to the purchase, lease (as lessee) or other acquisition of any
equipment or any other fixed assets (other than real estate) having a purchase
price, or involving aggregate lease payments, in excess of $25,000 for any
individual item or asset, or more than $50,000 in the aggregate for all such
items or assets;

(iii) Enter into any purchase commitment for supplies or services which calls
for prices of goods or fees for services materially higher than current market
prices or fees or which obligates BHS for a period longer than six months;

(iv) Except in the ordinary course of its business consistent with its past
practices, sell, purchase or repurchase, or enter into or become bound by any
contract, agreement, option or commitment to sell, purchase or repurchase, any
loan or other receivable or any participation in any loan or other receivable;
or

(v) Sell or dispose of, or enter into or become bound by any contract,
agreement, option or commitment relating to the sale or other disposition of,
any other asset (whether tangible or intangible, and including without
limitation any

 

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trade name, trademark, copyright, service mark or intellectual property right or
license) other than assets that are obsolete or no longer used in BHS’s
business; or assign its right to or otherwise give any other person its
permission or consent to use or do business under the corporate name of BHS or
any name similar thereto; or release, transfer or waive any license or right
granted to it by any other person to use any trademark, trade name, copyright,
service mark or intellectual property right.

(l) Debt; Liabilities. Except in the ordinary course of its business consistent
with its past practices, (i) enter into or become bound by any promissory note,
loan agreement or other agreement or arrangement pertaining to its borrowing of
money, (ii) assume, guarantee, endorse or otherwise become responsible or liable
for any obligation of any other person or entity, or (iii) incur any other
liability or obligation (absolute or contingent).

(m) Liens; Encumbrances. Mortgage, pledge or subject any of its assets to, or
permit any of its assets to become or (with the exception of those liens and
encumbrances Previously Disclosed to Bankshares with specificity) remain subject
to, any lien or any other encumbrance (other than in the ordinary course of
business consistent with its past practices in connection with borrowings from
the Federal Home Loan Bank of Atlanta, securing of public funds deposits,
repurchase agreements or other similar operating matters).

(n) Waiver of Rights. Waive, release or compromise any material rights in its
favor (except in the ordinary course of business) except in good faith for fair
value in money or money’s worth, nor waive, release or compromise any rights
against or with respect to any of its officers, directors or shareholders or
members of families of officers, directors or shareholders.

(o) Other Contracts. Except as Previously Disclosed, enter into or become bound
by any contracts, agreements, commitments or understandings (other than those
described elsewhere in this Section 4.2) (i) for or with respect to any
charitable contributions in excess of $1,000; (ii) with any governmental or
regulatory agency or authority; (iii) pursuant to which BHS would assume,
guarantee, endorse or otherwise become liable for the debt, liability or
obligation of any other person or entity; (iv) which is entered into other than
in the ordinary course of its business; or (v) which, in the case of any one
contract, agreement, commitment or understanding and whether or not in the
ordinary course of its business, would obligate or commit BHS to make
expenditures of more than $15,000 (other than contracts, agreements, commitments
or understandings entered into in the ordinary course of BHS’s lending
operations).

(p) Deposit Liabilities. Following the date of this Agreement and up to the
Effective Time, BHS will make pricing decisions with respect to its deposit
accounts in a manner consistent with its past practices based on competition and
prevailing market rates in its banking markets.

 

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4.3 Shareholder Approval.

(a) Meeting of Shareholders. BHS shall cause a special meeting of its
shareholders to be duly called and held as soon as practicable for the purpose
of voting on the approval and adoption of this Agreement and Plan of Merger, or
in lieu thereof shall obtain the unanimous written consent of its shareholders
approving and adopting this Agreement and Plan of Merger and waiving all
procedural formalities of meeting, including, but not limited to, time, date,
notice, place and purpose of meeting. In connection with the call and conduct of
and all other matters relating to its shareholders’ meeting or other shareholder
approval, BHS shall fully comply with all provisions of applicable federal and
state law and regulations and with its Articles of Incorporation and bylaws.

(b) Recommendation of Board of Directors. Subject to its fiduciary obligations,
the Board of Directors of BHS shall recommend to the shareholders of BHS that
they vote their shares at the shareholders’ meeting contemplated by
Section 4.3(a) above to approve this Agreement and Plan of Merger or, in the
event that the shareholders of BHS approve this Agreement and Plan of Merger by
unanimous written consent, such unanimous written consent of the shareholders
shall indicate and state that BHS’s Board of Directors considers the Merger to
be advisable and in the best interests of BHS and its shareholders.

ARTICLE V. COVENANTS OF BANKSHARES

Bankshares hereby covenants and agrees as follows with BHS:

5.1 Employment.

(a) Contracts. At the Effective Time, the Bank will enter into Employment
Agreements with Jane Blackmon, Dwight Bridges and Mark Bridges substantially in
the form attached hereto as Exhibits A, B and C hereto.

(b) Other Employees. After the Effective Time, Bankshares will use its best
efforts to retain other employees of BHS. Any such person retained shall be an
employee of Bankshares or the Bank on an “at-will” basis, and nothing in this
Agreement shall be deemed to constitute an employment agreement with any such
person or to obligate Bankshares or the Bank to employ any such person for any
specific period of time or in any specific position or location or to restrict
Bankshares’ or the Bank’s right to change the rate of compensation or terminate
the employment of any such person at any time and for any reason.

(c) Severance Policy. Any employee of BHS at the Effective Time who shall not be
offered employment with the Bank after the Effective Time, or who shall be
terminated other than for cause within one (1) year after the effective time,
shall be paid a severance in an amount equal to two (2) weeks of compensation of
such employee for every full or partial year of employment with BHS; provided,
however, that in no event shall such severance payment for any employee exceed
six (6) months of compensation of such employee.

(d) Special Retirement Benefit. In the event that James Bruce elects to retire
at the Effective Time, the Bank will make a one-time severance payment to James
Bruce equal to his then current annual salary.

 

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5.2 Employee Benefits.

(a) Generally. Except as otherwise provided herein and to the extent permitted
by contribution and deduction limitations of ERISA and the Code with respect to
Bankshares’ qualified plans, any employee of BHS who continues employment with
Bankshares or the Bank at the Effective Time (a “New Employee”) shall become
entitled to receive all employee benefits and to participate in all benefit
plans provided by Bankshares or the Bank, as applicable, on the same basis and
subject to the same eligibility and vesting requirements, and to the same
conditions, restrictions and limitations, as generally are in effect and
applicable to other newly hired employees of Bankshares or the Bank. However,
each New Employee shall be given credit for his or her full years of service
with BHS for purposes of (i) entitlement to vacation and sick leave and for
participation in all Bankshares welfare, insurance and other fringe benefit
plans, and (ii) eligibility for participation and vesting in the Waccamaw Bank
401(k) Plan. Notwithstanding any provision herein to the contrary, neither the
Bank nor Bankshares will not be required to take any action that could adversely
affect the continuing qualification of the Waccamaw Bank 40l(k) Plan. The Bank
will grant to each New Employee a pro rata amount of sick leave and vacation
leave, in accordance with the Bank’s standard leave policies, for the period
between the Effective Time and the end of the calendar year during which the
Effective Time occurs. Each New Employee will be permitted to carry over accrued
and unused sick leave and vacation leave earned at BHS but shall thereafter be
subject to the Bank’s leave policies.

(b) Health Insurance. Each New Employee shall be entitled to participate in the
Bank’s group health insurance plan at a cost equal to the cost, if any, for any
the Bank employee and such participation shall be without regard to pre-existing
condition requirements under the Bank’s group health insurance plan, to the
extent any such condition at the Effective Time would have been covered under
the health insurance plans of BHS.

5.3 BHS Directors.

Each member of the Board of Directors of BHS serving at the Effective Time shall
be appointed to serve on an advisory board of the Bank for Heath Springs, South
Carolina. Such members shall be compensated in the same manner as was in effect
for members of the BHS Board of Directors immediately prior to the Effective
Time for a period of no less than two (2) years.

5.4 Indemnification of Directors and Officers.

(a) After the Effective Time, without releasing any insurance carrier and after
exhaustion of all applicable director and liability insurance coverage for BHS
and its directors and officers, Bankshares shall indemnify, hold harmless and
defend the directors and officers of BHS in office at the Effective Time, to the
same extent as it indemnifies its own directors and officers, from and against
any and all claims, disputes, demands, causes of action, suits, proceedings,
losses, damages, liabilities, obligations, costs and expenses of every kind and
nature including, without limitation, reasonable attorneys’ fees and legal costs
and expenses therewith whether known or unknown and whether now existing or
hereafter arising which may be threatened against, incurred, undertaken,
received or paid by such persons in connection with or

 

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which arise out of or result from or are based upon any action or failure to act
by such person in the ordinary scope of his duties as a director or officer of
BHS (including service as a fiduciary of any of the BHS Plans (as defined in
Section 2.23(a)) through the Effective Time; provided, however, that Bankshares
shall not be obligated to indemnify such person for (i) any act not available
for statutory or permissible indemnification under North Carolina law or South
Carolina law, (ii) any penalty, decree, order, finding or other action imposed
or taken by any regulatory authority, (iii) any violation or alleged violation
of federal or state securities laws to the extent that indemnification is
prohibited by law, or (iv) any claim of sexual or other unlawful harassment, or
any form of employment discrimination prohibited by federal or state law;
further, provided, however, that (A) Bankshares shall have the right to assume
the defense thereof and upon such assumption Bankshares shall not be liable to
any director or officer of BHS for any legal expenses of other counsel or any
other expenses subsequently incurred by such director or officer in connection
with the defense thereof, except that if Bankshares elects not to assume such
defense or counsel for such director or officer or reasonably advises such
director or officer that there are issues which raise conflicts of interest
between Bankshares and such director or officer, such director or officer may
retain counsel reasonably satisfactory to him, and Bankshares shall pay the
reasonable fees and expenses of such counsel, (B) Bankshares shall not be liable
for any settlement effected without its prior written consent, and
(C) Bankshares shall have no obligation hereunder to any director or officer of
BHS when and if a court of competent jurisdiction shall determine that
indemnification of such director or officer in the manner contemplated hereby is
prohibited by applicable law. The indemnification provided herein shall be in
addition to any indemnification rights an indemnitee may have by law, pursuant
to the charter or bylaws of BHS or pursuant to any BHS Plan for which the
indemnity serves as a fiduciary.

(b) From and after the Effective Time, Bankshares will directly or indirectly
cause the persons who served as directors or officers of BHS at the Effective
Time to be covered by BHS’s existing directors’ and officers’ liability
insurance policy (provided that Bankshares may substitute therefor policies of
at least the same coverage in amounts contained and terms and conditions which
are not less advantageous than such policy). Such insurance coverage shall
commence at the Effective Time and will be provided for a period of no less than
three years after the Effective Time.

(c) The indemnification provided by this Section 5.4 is the sole indemnification
provided by Bankshares to the directors and officers of BHS for service in such
positions up to and through the Effective Time. This Section 5.4 is intended to
create personal rights in the directors and officers of BHS, who shall be deemed
to be third-party beneficiaries hereof. Notwithstanding any other provision of
this Agreement, at the Effective Time, the indemnification rights provided
herein shall not be extinguished but shall instead survive for a period of three
years after the Effective Time.

5.5 Continued Operation Under the Name “Bank of Heath Springs, a Division of
Waccamaw Bank”. Following the Effective Time and for a period of twenty-four
(24) months following the Effective Time, Bankshares will operate the branch
office of Waccamaw Bank located in Heath Springs, South Carolina under the name
“Bank of Heath Springs, a Division of Waccamaw Bank,” provided however, that
such covenant shall be explicitly conditioned upon the prior approval of the
operation of a branch office under such assumed name by appropriate regulatory
authorities, including, but not limited to, the SCBFI. Bankshares will use its
best efforts to secure the regulatory approval(s) referred to in this
Section 5.5.

 

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5.6 Notice of Certain Changes or Events. Following the execution of this
Agreement and up to the Effective Time, Bankshares promptly will notify BHS in
writing of and provide to it such information as it shall request regarding
(i) any material adverse change in Bankshares’ consolidated financial condition,
consolidated results of operations, prospects, business, assets, loan portfolio,
investments, properties or operations, or of the actual or prospective
occurrence of any condition or event which, with the lapse of time or otherwise,
may or could cause, create or result in any such material adverse change, or
(ii) the actual or prospective existence or occurrence of any condition or event
which, with the lapse of time or otherwise, has caused or may or could cause any
statement, representation or warranty of Bankshares herein to be or become
inaccurate, misleading or incomplete, or which has resulted or may or could
cause, create or result in the breach or violation of any of Bankshares’
covenants or agreements contained herein or in the failure of any of the
conditions described in Sections 7.1 or 7.2 below.

5.7 Further Action; Instruments of Transfer. Bankshares shall (i) use its best
efforts in good faith to take or cause to be taken all action required of it
hereunder as promptly as practicable so as to permit the expeditious
consummation of the transactions described herein, (ii) perform all acts and
execute and deliver to BHS all documents or instruments required herein or as
otherwise shall be reasonably necessary or useful to or requested of Bankshares
in consummating such transactions and (iii) cooperate with BHS fully in carrying
out, and will pursue diligently the expeditious completion of, such
transactions.

ARTICLE VI. MUTUAL AGREEMENTS

6.1 Shareholder Approval.

(a) Preparation and Distribution of Notice of Special Meeting of Shareholders.
Bankshares and BHS jointly shall prepare either (i) a notice of special meeting
of shareholders for distribution to the shareholders of BHS; or (ii) a unanimous
written consent to action without a meeting for the purpose of approving this
Agreement and Plan of Merger. Such notice of special meeting or unanimous
written consent shall be in such form and shall contain or be accompanied by
such information regarding the shareholders’ meeting, this Agreement, the
parties hereto, the Merger and other transactions described herein as is
required by applicable law and regulations and otherwise as shall be agreed upon
by Bankshares and BHS. BHS shall mail any notice of special meeting prior to the
scheduled date of its shareholders’ meeting in accordance with its bylaws and
South Carolina law.

(b) Information for Regulatory Applications. Each of Bankshares and BHS shall
promptly respond, and use its best efforts to cause its directors, officers,
accountants and affiliates to promptly respond, to requests by the other party
and its counsel for information for inclusion in the various applications for
regulatory approvals. Each of Bankshares and BHS hereby covenants with the other
that none of such information provided will contain any untrue statement of a
material fact or omit any material fact required to be stated therein or
necessary in order to make the statements contained therein, in light of the
circumstances under which they

 

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were made, not misleading; and, at all times up to and including the Effective
Time, none of such information as it may be amended or supplemented, will
contain any untrue statement of a material fact or omit any material fact
required to be stated therein or necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading.

6.2 Regulatory Approvals. Within 60 days after the date of this Agreement, each
of Bankshares and BHS shall prepare and file, or cause to be prepared and filed,
all applications for regulatory approvals and actions as may be required of it,
by applicable law and regulations with respect to the transactions described
herein (including applications to the FDIC, the Commissioner, the SCBFI and to
any other applicable federal or state banking, securities or other regulatory
authority). Each party shall use its best efforts in good faith to obtain all
necessary regulatory approvals required for consummation of the transactions
described herein. Each party shall cooperate with the other party in the
preparation of all applications to regulatory authorities and, upon request,
promptly shall furnish all documents, information, financial statements or other
material that may be required by any other party to complete any such
application; and, before the filing therefor, each party to this Agreement shall
have the right to review and comment on the form and content of any such
application to be filed by any other party. Should the appearance of any of the
officers, directors, employees or counsel of any of the parties hereto be
requested by any other party or by any governmental agency at any hearing in
connection with any such application, such party shall promptly use its best
efforts to arrange for such appearance.

6.3 Access. Following the date of this Agreement and to and including the
Effective Time, BHS and Bankshares shall each provide the other party and such
other party’s employees, accountants, counsel or other representatives, access
to all its books, records, files and other information (whether maintained
electronically or otherwise), to all its properties and facilities, and to all
its employees, accountants, counsel and consultants as BHS and Bankshares, as
the case may be, shall, in its sole discretion, consider to be necessary or
appropriate; provided, however, that any investigation or reviews conducted by
Bankshares or BHS shall be performed in such a manner as will not interfere
unreasonably with the other party’s normal operations or with relationship with
its customers or employees, and shall be conducted in accordance with procedures
established by the parties having due regard for the foregoing.

6.4 Costs. Subject to the provisions of Section 8.2(b)(iv) below, and whether or
not this Agreement shall be terminated or the Merger shall be consummated, each
of Bankshares and BHS shall pay its own legal, accounting and financial advisory
fees and all its other costs and expenses incurred or to be incurred in
connection with the execution and performance of its obligations under this
Agreement including, in the case of BHS, payments to Howe Barnes, or otherwise
in connection with this Agreement and the transactions described herein
(including, without limitation, all accounting fees, legal fees, filing fees,
printing costs, mailing costs, travel expenses, and investment banking fees).

6.5 Announcements. No person other than the parties to this Agreement is
authorized to make any public announcements or statements about this Agreement
or any of the transactions described herein, and, without the prior review and
consent of the others (which consent shall not unreasonably be denied or
delayed), no party hereto may make any public

 

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announcement, statement or disclosure as to the terms and conditions of this
Agreement or the transactions described herein, except for such disclosures as
may be required incidental to obtaining the prior approval of any regulatory
agency or official to the consummation of the transactions described herein.
However, notwithstanding anything contained herein to the contrary, prior review
and consent shall not be required if in the good faith opinion of counsel to
Bankshares or BHS any such disclosure by Bankshares or BHS, as the case may be,
is required by law or otherwise is prudent.

6.6 Confidentiality. Bankshares and BHS each shall treat as confidential and not
disclose to any unauthorized person any documents or other information obtained
from or learned about the other during the course of the negotiation of this
Agreement and the carrying out of the events and transactions described herein
(including any information obtained during the course of any due diligence
investigation or review provided for herein or otherwise) and which documents or
other information relates in any way to the business, operations, personnel,
customers or financial condition of such other party; and that it will not use
any such documents or other information for any purpose except for the purposes
for which such documents and information were provided to it and in furtherance
of the transactions described herein. However, the above obligations of
confidentiality shall not prohibit the disclosure of any such document or
information by any party to this Agreement to the extent (i) such document or
information is then available generally to the public or is already known to the
person or entity to whom disclosure is proposed to be made (other than through
the previous actions of such party in violation of this Section 6.6), (ii) such
document or information was available to the disclosing party on a
nonconfidential basis prior to the same being obtained pursuant to this
Agreement, (iii) disclosure is required by subpoena or order of a court or
regulatory authority of competent jurisdiction, or by the SEC or other
regulatory authorities in connection with the transactions described herein, or
(iv) to the extent that, in the reasonable opinion of legal counsel to such
party, disclosure otherwise is required by law. In the event this Agreement is
terminated for any reason, then each of the parties hereto immediately shall
return to the other party all copies of any and all documents or other written
materials or information (including computer generated and stored data) of or
relating to such other party which were obtained from them during the course of
the negotiation of this Agreement and the carrying out of the events and
transactions described herein (whether during the course of any due diligence
investigation or review provided for herein or otherwise) and which documents or
other information relates in any way to the business, operations, personnel,
customers or financial condition of such other party. The parties’ obligations
of confidentiality under this Section 6.6 shall survive and remain in effect
following any termination of this Agreement.

6.7 Environmental Studies. At its option, Bankshares may cause to be conducted
Phase I environmental assessments of the Real Property, the real estate subject
to any Real Property Lease, or the Loan Collateral, or any portion thereof,
together with such other studies, testing and intrusive sampling and analyses as
Bankshares shall deem necessary or desirable (collectively, the “Environmental
Survey”); provided, however, that the Environmental Survey, as much as possible,
shall be performed in such a manner as will not interfere unreasonably with
BHS’s normal operations, and provided further, however, that BHS shall use its
best efforts to obtain any required consents of third parties to permit any
Environmental Survey of any Loan Collateral. Bankshares shall attempt in good
faith to complete all such Phase I environmental assessments within 60 days
following the date of this Agreement and thereafter to conduct and

 

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complete any such additional studies, testing, sampling and analyses as promptly
as practicable. Subject to the provisions of Section 8.2(b)(iv) below, the costs
of the Environmental Survey shall be paid by Bankshares. If (i) the final
results of any Environmental Survey (or any related analytical data) reflect
that there likely has been any discharge, disposal, release or emission by any
person of any Hazardous Substance on, from or relating to any of the Real
Property, real estate subject to a Real Property Lease or Loan Collateral at any
time prior to the Effective Time, or that any action has been taken or not
taken, or a condition or event likely has occurred or exists, with respect to
any of the Real Property, real estate subject to a Real Property Lease or Loan
Collateral which constitutes or would constitute a violation of any
Environmental Laws, and if, (ii) based on the advice of its legal counsel or
other consultants, Bankshares believes that BHS or, following the Merger,
Bankshares or the Bank, could become responsible for the remediation of such
discharge, disposal, release or emission or for other corrective action with
respect to any such violation, or that BHS or, following the Merger, Bankshares
or the Bank, could become liable for monetary damages (including without
limitation any civil or criminal penalties or assessments) resulting therefrom
(or that, in the case of any of the Loan Collateral, BHS or, following the
Merger, Bankshares or the Bank, could incur any such liability if it acquired
title to such Loan Collateral), and if, (iii) based on the advice of their legal
counsel or other consultants, Bankshares reasonably believes the amount of
expenses or liability which either of them could incur or for which either of
them could become responsible or liable on account of any and all such
remediation, corrective action or monetary damages at any time during the next
twenty years could equal or exceed an aggregate of $250,000, then Bankshares
shall give BHS prompt written notice thereof (together with all information in
its possession relating thereto) and, at Bankshares’ sole option and discretion,
at any time thereafter and up to the Effective Time, it may terminate this
Agreement without further obligation or liability to BHS or its shareholders.

6.8 Certain Modifications. Bankshares and BHS shall consult with each other with
respect to BHS’s loan, litigation and real estate valuation policies and
practices (including loan classifications and levels of reserves) and BHS shall
make such modifications or changes to its policies and practices, if any, prior
to the Effective Time, as may be mutually agreed upon. Bankshares and BHS also
shall consult with each other with respect to the character, amount and timing
of restructuring and Merger-related expense charges to be taken by each of them
in connection with the transactions contemplated by this Agreement and shall
take such charges in accordance with GAAP as may be mutually agreed upon by
them. The representations, warranties and covenants of each of Bankshares and
BHS contained in this Agreement shall not be deemed to be inaccurate or breached
in any respect as a consequence of any modifications or charges undertaken by
reason of this Section 6.8.

6.9 Transition Team. Bankshares and BHS shall create a transition team comprised
of staff and representatives of BHS and staff and representatives of the Bank
(the “Transition Team”). The purpose of the Transition Team shall be to provide
detailed guidance to Bankshares in fulfilling and consummating the Merger, to
maintain open lines of communication between BHS and Bankshares, and to handle
customer inquiries regarding the Merger. The Transition Team shall meet as
necessary until the Effective Time. Members of the Transition Team shall receive
no separate compensation for such service.

 

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ARTICLE VII. CONDITIONS PRECEDENT TO MERGER

7.1 Conditions to all Parties’ Obligations. Notwithstanding any other provision
of this Agreement to the contrary, the obligations of each of the parties to
this Agreement to consummate the transactions described herein shall be
conditioned upon the satisfaction of each of the following conditions precedent
on or prior to the Closing Date:

(a) Corporate Action. All corporate action necessary to authorize the execution,
delivery and performance of this Agreement and the Plan of Merger in
consummation of the transactions contemplated hereby and thereby shall have been
duly and validly taken, including, without limitation, the approval of the
shareholders of BHS of this Agreement and Plan of Merger.

(b) Regulatory Approvals. (i) The Merger and other transactions described herein
shall have been approved, to the extent required by law, by the FDIC, the
Commissioner, the SCBFI and by all other governmental or regulatory agencies or
authorities having jurisdiction over such transactions, (ii) no governmental or
regulatory agency or authority shall have withdrawn its approval of such
transactions or imposed any condition on such transactions or conditioned its
approval thereof, which condition is reasonably deemed by Bankshares or BHS to
be materially disadvantageous or burdensome or to so adversely affect the
economic or business benefits of this Agreement to Bankshares or BHS’s
shareholders as to render it inadvisable for it to consummate the Merger;
(iii) all applicable waiting periods following regulatory approvals shall have
expired without objection to the Merger by the FDIC or other applicable
regulatory authorities; and (iv) all other consents, approvals and permissions,
and the satisfaction of all of the requirements prescribed by law or regulation,
necessary to the carrying out of the transactions contemplated herein shall have
been procured.

(c) Adverse Proceedings, Injunction, Etc. There shall not be (i) any order,
decree or injunction of any court or agency of competent jurisdiction which
enjoins or prohibits the Merger or any of the other transactions described
herein or any of the parties hereto from consummating any such transaction,
(ii) any pending or threatened investigation of the Merger or any of such other
transactions by the FDIC, or any actual or threatened litigation under federal
antitrust laws relating to the Merger or any other such transaction, (iii) any
suit, action or proceeding by any person (including any governmental,
administrative or regulatory agency), pending or threatened before any court or
governmental agency in which it is sought to restrain or prohibit BHS,
Bankshares or the Bank from consummating the Merger or carrying out any of the
terms or provisions of this Agreement, or (iv) any other suit, claim, action or
proceeding pending or threatened against BHS, Bankshares or the Bank or any of
their respective officers or directors which shall reasonably be considered by
BHS or Bankshares to be materially burdensome in relation to the proposed Merger
or materially adverse in relation to the financial condition, results of
operations, prospects, businesses, assets, loan portfolio, investments,
properties or operations of either such corporation, and which has not been
dismissed, terminated or resolved to the satisfaction of all parties hereto
within 90 days of the institution or threat thereof.

7.2 Additional Conditions to BHS’s Obligations. Notwithstanding any other
provision of this Agreement to the contrary, BHS’s separate obligation to
consummate the transactions described herein shall be conditioned upon the
satisfaction of each of the following conditions precedent on or prior to the
Closing Date:

 

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(a) Compliance with Laws. Bankshares and the Bank shall have complied in all
material respects with all federal and state laws and regulations applicable to
the transactions described herein, except where the violation of or failure to
comply with any such law or regulation would not result in a material adverse
change to the consolidated financial condition, results of operations,
prospects, businesses, assets, loan portfolio, investments, properties or
operations of Bankshares and the Bank considered as one enterprise.

(b) Bankshares’ Representations and Warranties and Performance of Agreements;
Officers’ Certificate. Unless waived in writing by BHS as provided in
Section 10.3 below, (i) each of the representations and warranties of Bankshares
and the Bank contained in this Agreement shall have been true and correct as of
the date hereof and shall be true and correct on and as of the Effective Time
with the same force and effect as though made on and as of such date, except
(A) for changes which are not, in the aggregate, material and adverse to the
consolidated financial condition, results of operations, prospects, businesses,
assets, loan portfolio, investments, properties or operations of Bankshares and
the Bank considered as one enterprise, and (B) for the effect of any activities
or transactions that may have taken place after the date of this Agreement and
are expressly contemplated by this Agreement; and (ii) Bankshares shall have
performed in all material respects all of its obligations, covenants and
agreements hereunder to be performed by it on or before the Closing Date. BHS
shall have received a certificate dated as of the Closing Date and executed by
the chief executive officer and chief financial officer of Bankshares to the
foregoing effect and as to such other matters as may be reasonably requested by
BHS.

(c) Legal Opinion of Bankshares’ Counsel. BHS shall have received from Gaeta &
Eveson, P.A., Raleigh, North Carolina, counsel for Bankshares, a written opinion
dated as of the Closing Date in form and substance customary for transactions of
this nature and otherwise reasonably satisfactory to BHS and its counsel.

(d) Fairness Opinion. BHS shall have received from its financial advisor, Howe
Barnes, an opinion dated as of the date of this Agreement to the effect that the
consideration to be received by BHS’s shareholders in the Merger is fair, from a
financial point of view, to BHS and its shareholders.

(e) Other Documents and Information from Bankshares. Bankshares shall have
provided to BHS correct and complete copies of its Articles of Incorporation,
bylaws and Board of Directors resolutions approving this Agreement and the
Merger (all certified by its Secretary), together with certificates of the
incumbency of its officers and such other closing documents and information as
may be reasonably requested by BHS or its counsel.

7.3 Additional Conditions to Bankshares’ Obligations. Notwithstanding any other
provision of this Agreement to the contrary, Bankshares’ obligations to
consummate the transactions described herein shall be conditioned upon the
satisfaction of each of the following conditions precedent on or prior to the
Closing Date:

 

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(a) Material Adverse Change. There shall not have occurred any material adverse
change in the financial condition, results of operations, prospects, businesses,
assets, loan portfolio, investments, properties or operations of BHS and there
shall not have occurred any event or development and there shall not exist any
condition or circumstance which, with the lapse of time or otherwise, may or
could cause, create or result in any such material adverse change.

(b) Compliance with Laws. BHS shall have complied in all material respects with
all federal and state laws and regulations applicable to the transactions
described herein, except where the violation of or failure to comply with any
such law or regulation would not have a Material Adverse Effect on the financial
condition, results of operations, prospects, businesses, assets, loan portfolio,
investments, properties or operations of BHS.

(c) BHS’s Representations and Warranties and Performance of Agreements;
Officers’ Certificate. Unless waived in writing by Bankshares as provided in
Section 10.3 below, (i) each of the representations and warranties of BHS
contained in this Agreement shall have been true and correct as of the date
hereof and shall be true and correct at and as of the Effective Time with the
same force and effect as though made on and as of such date, except (A) for
changes which are not, in the aggregate, material and adverse to the financial
condition, results of operations, prospects, businesses, assets, loan portfolio,
investments, properties or operations of BHS, and (B) for the effect of any
activities or transactions that may have taken place after the date of this
Agreement and are expressly contemplated by this Agreement, and (ii) BHS shall
have performed in all material respects all its obligations, covenants and
agreements hereunder to be performed by it on or before the Closing Date.
Bankshares shall have received a certificate dated as of the Closing Date and
executed by the chief executive officer and chief financial officer of BHS to
the foregoing effect and as to such other matters as may be reasonably requested
by Bankshares.

(d) Legal Opinion of BHS’s Counsel. Bankshares shall have received from Savage,
Royall and Sheheen, L.L.P., Camden, South Carolina counsel to BHS, a written
opinion, dated as of the Closing Date in form and substance customary for
transactions of this nature and otherwise reasonably satisfactory to Bankshares
and its counsel.

(e) Other Documents and Information from BHS. BHS shall have provided to
Bankshares correct and complete copies of BHS’s Articles of Incorporation,
bylaws and Board and shareholder resolutions (all certified by BHS’s Secretary),
together with certificates of the incumbency of BHS’s officers and such other
closing documents and information as may be reasonably requested by Bankshares
or its counsel.

(f) Property. BHS shall have obtained all required consents to the assignment to
Bankshares of its rights and obligations under any personal property lease and
any Real Property Lease material to the business of BHS, and such consents shall
be in such form and substance as shall be satisfactory to Bankshares; and each
of the lessors of BHS shall have confirmed in writing that BHS is not in default
under the terms and conditions of any personal property lease or any Real
Property Lease. Bridges Construction Company (the “Construction Company”) shall
have accepted the Bank’s offer to purchase all of the Construction Company’s
right, title and interest in the facility housing the main office of BHS at the
corner of 202 North Main Street, Heath Springs, South Carolina.

 

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(g) Employee Agreements. Ms. Jane Blackmon and Messrs. Dwight Bridges and Mark
Bridges shall have entered into the Agreements described in Section 5.1(a)
hereof.

ARTICLE VIII. TERMINATION; BREACH; REMEDIES

8.1 Mutual Termination. At any time prior to the Effective Time (and whether
before or after approval hereof by the shareholders of BHS), this Agreement may
be terminated by the mutual agreement of Bankshares and BHS. Upon any such
mutual termination, all obligations of BHS and Bankshares hereunder shall
terminate and each party shall pay costs and expenses as provided in Section 6.4
above.

8.2 Unilateral Termination. This Agreement may be terminated by either
Bankshares or BHS (whether before or after approval hereof by BHS’s
shareholders) upon written notice to the other parties and under the
circumstances described below.

(a) Termination by Bankshares. This Agreement may be terminated by Bankshares by
action of its Board of Directors:

(i) if any of the conditions to the obligations of Bankshares (as set forth in
Section 7.1 and 7.3 above) shall not have been satisfied or effectively waived
in writing by Bankshares by May 31, 2006 (except to the extent that the failure
of such condition to be satisfied has been caused by the failure of Bankshares
to satisfy any of its obligations, covenants or agreements contained herein);

(ii) if BHS shall have violated or failed to fully perform any of its
obligations, covenants or agreements contained in Article IV or Article VI
herein in any material respect;

(iii) if Bankshares determines at any time that any of BHS’s representations or
warranties contained in Article II above or in any other certificate or writing
delivered pursuant to this Agreement shall have been false or misleading in any
material respect when made, or that there has occurred any event or development
or that there exists any condition or circumstance which has caused or, with the
lapse of time or otherwise, may or could cause any such representations or
warranties to become false or misleading in any material respect;

(iv) if BHS’s shareholders do not approve this Agreement and Plan of Merger;

(v) if the Merger shall not have become effective on or before May 31, 2006
unless such date is extended as evidenced by the written mutual agreement of the
parties hereto; provided, however, that in the event there is a delay of not

 

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more than 30 days caused by circumstances beyond the control of the parties
hereto, the dates set forth in this Section 8.2(a) shall be extended by mutual
agreement for up to an additional 60 days;

(vi) under the circumstances described in Section 6.7 above; and

However, before Bankshares may terminate this Agreement for any of the reasons
specified above in (i), (ii) or (iii) of this Section 8.2(a), it shall give
written notice to BHS as provided herein stating its intent to terminate and a
description of the specific breach, default, violation or other condition giving
rise to its right to so terminate, and, such termination by Bankshares shall not
become effective if, within 30 days following the giving of such notice, BHS
shall cure such breach, default or violation or satisfy such condition to the
reasonable satisfaction of Bankshares. In the event BHS cannot or does not cure
such breach, default or violation or satisfy such condition to the reasonable
satisfaction of Bankshares within such 30-day period, Bankshares shall have 30
days to notify BHS of its intention to terminate this Agreement. A failure to so
notify BHS will be deemed to be a waiver by Bankshares of the breach, default or
violation pursuant to Section 10.3 below.

(b) Termination by BHS. This Agreement may be terminated by BHS by action of its
Board of Directors:

(i) if any of the conditions of the obligations of BHS (as set forth in
Section 7.1 and 7.2 above) shall not have been satisfied or effectively waived
in writing by BHS by May 31, 2006 (except to the extent that the failure of such
condition to be satisfied has been caused by the failure of BHS to satisfy any
of its obligations, covenants or agreements contained herein);

(ii) if Bankshares shall have violated or failed to fully perform any of its
obligations, covenants or agreements contained in Article V or Article VI herein
in any material respect;

(iii) if BHS determines that any of Bankshares’ representations and warranties
contained in Article III herein or in any other certificate or writing delivered
pursuant to this Agreement shall have been false or misleading in any material
respect when made, or that there has occurred any event or development or that
there exists any condition or circumstance which has caused or, with the lapse
of time or otherwise, may or could cause any such representations or warranties
to become false or misleading in any material respect;

(iv) if, prior to the Effective Time, a corporation, partnership, person, or
other entity or group shall have made a bona fide proposal to acquire all or
substantially all of the capital stock of BHS or to merge with BHS (an
“Acquisition Transaction”) that the BHS Board of Directors determines, in its
good faith judgment and in the exercise of its fiduciary duties, with respect to
legal matters on the written opinion of legal counsel and as to financial
matters on the written opinion of Howe Barnes or other investment banking firm
of national

 

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reputation, is more favorable to the BHS shareholders and that the failure to
terminate this Agreement and accept such alternative Acquisition Transaction
would be inconsistent with the proper exercise of such fiduciary duties;
provided, however, that in the event this Agreement is terminated by BHS
pursuant to this Section 8.2(b)(iv), BHS shall reimburse Bankshares for its
reasonable out-of-pocket expenses relating to the Merger in an amount not to
exceed $100,000.

However, before BHS may terminate this Agreement for any of the reasons
specified above in clause (i), (ii) or (iii) of this Section 8.2(b), it shall
give written notice to Bankshares as provided herein stating its intent to
terminate and a description of the specific breach, default, violation or other
condition giving rise to its right to so terminate, and, such termination by BHS
shall not become effective if, within 30 days following the giving of such
notice, Bankshares shall cure such breach, default or violation or satisfy such
condition to the reasonable satisfaction of BHS. In the event Bankshares cannot
or does not cure such breach, default or violation or satisfy such condition to
the reasonable satisfaction of BHS within such 30-day period, BHS shall have 30
days to notify Bankshares of its intention to terminate this Agreement. A
failure to so notify Bankshares will be deemed to be a waiver by BHS of the
breach, default or violation pursuant to Section 10.3 below.

8.3 Effect of Termination.

(a) In the event that this Agreement is terminated by BHS pursuant to
Section 8.2(b)(iv) and within eighteen (18) months of such termination, BHS
enters into a definitive agreement regarding an Acquisition Transaction, BHS
shall, immediately upon the consummation of such Acquisition Transaction, make a
cash payment to Bankshares in the amount of $400,000.

(b) Except as set forth in subsection (a) of this Section 8.3 and
Section 8.2(b)(iv), in the event of the termination of this Agreement, this
Agreement shall become void and have no effect except that the provisions of
Section 10.2 and Section 6.6 of this Agreement shall survive such termination,
and neither party hereto shall have any liability to the other party in
connection with such termination.

ARTICLE IX. INDEMNIFICATION

9.1 Agreement to Indemnify. In the event this Agreement is terminated for any
reason and the Merger is not consummated, then BHS and Bankshares will indemnify
each other as provided below.

(a) By BHS. BHS shall indemnify, hold harmless and defend Bankshares from and
against any and all claims, disputes, demands, causes of action, suits,
proceedings, losses, damages, liabilities, obligations, costs and expenses of
every kind and nature that arise from or are related to claims by third parties,
including without limitation reasonable attorneys’ fees and legal costs and
expenses in connection therewith, whether known or unknown, and whether now
existing or hereafter arising, which may be threatened against, incurred,
undertaken, received or paid by Bankshares:

 

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(i) in connection with or which arise out of or result from or are based upon
(A) BHS’s operations or business transactions or its relationship with any of
its employees, or (B) BHS’s failure to comply with any statute or regulation of
any federal, state or local government or agency (or any political subdivision
thereof) in connection with the transactions described in this Agreement;

(ii) in connection with or which arise out of or result from or are based upon
any fact, condition or circumstance that constitutes a breach by BHS of, or any
inaccuracy, incompleteness or inadequacy in, any of its representations or
warranties under or in connection with this Agreement, or any failure of BHS to
perform any of its covenants, agreements or obligations under or in connection
with this Agreement;

(iii) in connection with or which arise out of or result from or are based upon
any information provided by BHS which is included in the Proxy Statement and
which information causes the Proxy Statement at the time of its mailing to BHS’s
shareholders to contain any untrue statement of a material fact or to omit any
material fact required to be stated therein or necessary in order to make the
statements contained therein, in light of the circumstances under which they
were made, not false or misleading; and

(iv) in connection with or which arise out of or result from or are based upon
the presence, use, production, generation, handling, transportation, treatment,
storage, disposal, distribution, labeling, reporting, testing, processing,
emission, discharge, release, threatened release, control, removal, clean-up or
remediation on, from or relating to the Real Property by BHS or any other person
of any Hazardous Substances, or any action taken or any event or condition
occurring or existing with respect to the Real Property which constitutes a
violation of any Environmental Laws by BHS or any other person.

(b) By Bankshares. Bankshares shall indemnify, hold harmless and defend BHS from
and against any and all claims, disputes, demands, causes of action, suits,
proceedings, losses, damages, liabilities, obligations, costs and expenses of
every kind and nature that arise from or are related to claims by third parties,
including without limitation reasonable attorneys’ fees and legal costs and
expenses in connection therewith, whether known or unknown, and whether now
existing or hereafter arising, which may be threatened against, incurred,
undertaken, received or paid by BHS:

(i) in connection with or which arise out of or result from or are based upon
(A) Bankshares’ operations or business transactions or its relationship with any
of its employees, or (B) Bankshares’ failure to comply with any statute or
regulation of any federal, state or local government or agency (or any political
subdivision thereof) in connection with the transactions described in this
Agreement;

(ii) in connection with or which arise out of or result from or are based upon
any fact, condition or circumstance that constitutes a breach by Bankshares

 

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of, or any inaccuracy, incompleteness or inadequacy in, any of its
representations or warranties under or in connection with this Agreement, or any
failure of Bankshares to perform any of its covenants, agreements or obligations
under or in connection with this Agreement; and,

(iii) in connection with or which arise out of or result from or are based upon
any information provided by Bankshares which is included in the Proxy Statement
and which information causes the Proxy Statement at the time of its mailing to
BHS’s shareholders to contain any untrue statement of a material fact or to omit
any material fact required to be stated therein or necessary in order to make
the statements contained therein, in light of the circumstances under which they
were made, not false or misleading.

9.2 Procedure for Claiming Indemnification.

(a) By Bankshares. If any matter subject to indemnification hereunder arises in
the form of a claim against Bankshares or its successors and assigns (herein
referred to as a “Third Party Claim”), Bankshares promptly shall give notice and
details thereof, including copies of all pleadings and pertinent documents, to
BHS. Within 15 days of such notice, BHS either (i) shall pay the Third Party
Claim either in full or upon agreed compromise or (ii) shall notify Bankshares
that BHS disputes the Third Party Claim and intends to defend against it, and
thereafter shall so defend and pay any adverse final judgment or award in regard
thereto. Such defense shall be controlled by BHS and the cost of such defense
shall be borne by BHS except that Bankshares shall have the right to participate
in such defense at its own expense and provided that BHS shall have no right in
connection with any such defense or the resolution of any such Third Party Claim
to impose any cost, restriction, limitation or condition of any kind upon
Bankshares or its successors or assigns. Bankshares agrees that it shall
cooperate in all reasonable respects in the defense of any such Third Party
Claim, including making personnel, books and records relevant to the Third Party
Claim available to BHS without charge therefor except for out-of-pocket
expenses. If BHS fails to take action within 15 days as hereinabove provided or,
having taken such action, thereafter fails diligently to defend and resolve the
Third Party Claim, Bankshares shall have the right to pay, compromise or defend
the Third Party Claim and to assert the indemnification provisions hereof.
Bankshares also shall have the right, exercisable in good faith, to take such
action as may be necessary to avoid a default prior to the assumption of the
defense of the Third Party Claim by BHS.

(b) By BHS. If any matter subject to indemnification hereunder arises in the
form of a claim against BHS or its successors and assigns (herein referred to as
a “Third Party Claim”), BHS promptly shall give notice and details thereof,
including copies of all pleadings and pertinent documents, to Bankshares. Within
15 days of such notice, Bankshares either (i) shall pay the Third Party Claim
either in full or upon agreed compromise or (ii) shall notify BHS that
Bankshares disputes the Third Party Claim and intends to defend against it, and
thereafter shall so defend and pay any adverse final judgment or award in regard
thereto. Such defense shall be controlled by Bankshares and the cost of such
defense shall be borne by Bankshares except that BHS shall have the right to
participate in such defense at its own expense and provided that Bankshares
shall have no right in connection with any such defense or the resolution of any
such Third Party Claim to impose any cost, restriction, limitation or condition

 

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of any kind upon BHS or its successors and assigns. BHS agrees that it shall
cooperate in all reasonable respects in the defense of any such Third Party
Claim, including making personnel, books and records relevant to the Third Party
Claim available to Bankshares without charge therefor except for out-of-pocket
expenses. If Bankshares fails to take action within 15 days as hereinabove
provided or, having taken such action, thereafter fails diligently to defend and
resolve the Third Party Claim, BHS shall have the right to pay, compromise or
defend the Third Party Claim and to assert the indemnification provisions
hereof. BHS also shall have the right, exercisable in good faith, to take such
action as may be necessary to avoid a default prior to the assumption of the
defense of the Third Party Claim by Bankshares.

ARTICLE X. MISCELLANEOUS PROVISIONS

10.1 Reservation of Right to Revise Structure. Notwithstanding any provision
herein to the contrary, Bankshares shall have the unilateral right to revise the
structure of the Merger for any reason Bankshares may deem advisable; provided,
however, that no such change will (i) alter or change the amount or kind of
consideration to be received by the shareholders of BHS in the Merger or
(ii) adversely affect the tax treatment to the shareholders of BHS as a result
of receiving such consideration. In the event of such election by Bankshares,
the parties hereto shall execute one or more appropriate amendments to this
Agreement.

10.2 Survival of Representations, Warranties, Indemnification and Other
Agreements.

(a) Representations, Warranties and Other Agreements. None of the
representations, warranties or agreements herein shall survive the effectiveness
of the Merger, and no party shall have any right after the Effective Time to
recover damages or any other relief from any other party to this Agreement by
reason of any breach of representation or warranty, any nonfulfillment or
nonperformance of any agreement contained herein, or otherwise; provided,
however, that the parties’ agreements contained in Section 6.6 above, and
Bankshares’ covenants contained in Sections 5.1 through 5.5 above shall survive
the effectiveness of the Merger.

(b) Indemnification. The parties’ indemnification agreements and obligations
pursuant to Section 9.1 above shall become effective only in the event this
Agreement is terminated, and neither of the parties shall have any obligations
under Section 9.1 in the event of or following consummation of the Merger.

10.3 Waiver. Any term or condition of this Agreement may be waived (except as to
matters of regulatory approvals and approvals required by law), either in whole
or in part, at any time by the party which is, and whose shareholders are,
entitled to the benefits thereof, provided, however, that any such waiver shall
be effective only upon a determination by the waiving party (through action of
its Board of Directors) that such waiver would not adversely affect the
interests of the waiving party or its shareholders; and, provided further, that
no waiver of any term or condition of this Agreement by any party shall be
effective unless such waiver is in writing and signed by the waiving party or as
provided in Sections 8.2(a) and 8.2(b) above, or be construed to be a waiver of
any succeeding breach of the same term or condition. No failure or delay of any
party to exercise any power, or to insist upon a strict compliance by any other
party of any obligation, and no custom or practice at variance with any terms
hereof, shall constitute a waiver of the right of any party to demand full and
complete compliance with such terms.

 

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10.4 Amendment. This Agreement may be amended, modified or supplemented at any
time or from time to time prior to the Effective Time, and either before or
after its approval by the shareholders of BHS, by an agreement in writing
approved by a majority of the Boards of Directors of Bankshares and BHS executed
in the same manner as this Agreement; provided however, that the provisions of
this Agreement relating to the manner or basis in which shares of BHS Stock are
converted into cash shall not be amended after the approval of this Agreement
and Plan of Merger by the shareholders of BHS without the requisite approval of
such shareholders of such amendment.

10.5 Notices. All notices and other communications hereunder shall be in writing
and shall be deemed to have been duly given if delivered personally or by
courier, or mailed by certified mail, return receipt requested, postage prepaid,
and addressed as follows:

(a) If to BHS, to:

Attn: Mr. Mark Bridges

Bank of Heath Springs

Main and Caston Streets, N.W.

Heath Springs, South Carolina 29058

With copy to:

Robert J. Sheheen, Esq.

Savage, Royall and Sheheen, L.L.P.

Post Office Drawer 10

Camden, SC 29020

(b) If to Bankshares, to:

Attention: Mr. James G. Graham

Waccamaw Bankshares, Inc.

110 North J. K. Powell Boulevard

Whiteville, North Carolina 28472

With copy to:

Anthony Gaeta, Jr., Esq.

Gaeta & Eveson, P.A.

8305 Falls of Neuse Road, Suite 203

Raleigh, North Carolina 27615

 

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10.6 Further Assurance. BHS and Bankshares shall each furnish to the other such
further assurances with respect to the matters contemplated herein and their
respective agreements, covenants, representations and warranties contained
herein, including the opinion of legal counsel, as such other party may
reasonably request.

10.7 Headings and Captions. Headings and captions of the sections and Sections
of this Agreement have been inserted for convenience of reference only and do
not constitute a part hereof.

10.8 Entire Agreement. This Agreement (including all schedules and exhibits
attached hereto and all documents incorporated herein by reference) contains the
entire agreement of the parties with respect to the transactions described
herein and supersedes any and all other oral or written agreement(s) heretofore
made, and there are no representations or inducements by or to, or any
agreements between, any of the parties hereto other than those contained herein
in writing.

10.9 Severability of Provisions. The invalidity or unenforceability of any term,
phrase, clause, Section, restriction, covenant, agreement or other provision
hereof shall in no way affect the validity or enforceability of any other
provision or part hereof.

10.10 Assignment. This Agreement may not be assigned by either party hereto
except with the prior written consent of the other party hereto.

10.11 Counterparts. Any number of counterparts of this Agreement may be signed
and delivered, each of which shall be considered an original and all of which
together shall constitute one agreement.

10.12 Governing Law. This Agreement is made in and shall be construed and
enforced in accordance with the laws of North Carolina.

10.13 Inspection. Any right of Bankshares or BHS hereunder to investigate or
inspect the assets, books, records, files and other information of the other in
no way shall establish any presumption that Bankshares or BHS should have
conducted any investigation or that such right has been exercised by Bankshares
or BHS or their agents, representatives or others. Any investigations or
inspections that have been made by Bankshares or BHS or their agents,
representatives or others prior to the Closing Date shall not be deemed in any
way in derogation or limitation of the covenants, representations and warranties
made by or on behalf of BHS or Bankshares in this Agreement.

 

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IN WITNESS WHEREOF, BHS and Bankshares each has caused this Agreement to be
executed in its name by its duly authorized officers and its corporate seal to
be affixed hereto as of the date first above written.

 

    BANK OF HEATH SPRINGS     By  

/s/ Mark Bridges

ATTEST:      

/s/ Jane Blackmon

      Asst. Secretary           WACCAMAW BANKSHARES, INC.     By  

/s/ James G. Graham

      James G. Graham       President and Chief Executive Officer ATTEST:      

/s/ Janet Smith

      Asst. Secretary           WACCAMAW BANK     By  

/s/ James G. Graham

      James G. Graham       President and Chief Executive Officer ATTEST:      

/s/ Janet Smith

      Asst. Secretary      

 

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INDUCEMENT

As a result of the consideration to be received by the W.H. Bridges Marital
Trust (the “Trust”) in exchange for its ownership of 4,648 shares of the common
stock of the Bank of Heath Springs (the “Bank”), which ownership amounts to 93%
of the issued and outstanding shares of the Bank, the Trust, acting in
accordance with its fiduciary duties, believes it to be prudent and in the best
interests of the Trust and its beneficiaries, for the Bank to enter into the
Agreement and Plan of Reorganization and Merger dated December 19, 2005 with
Waccamaw Bankshares, Inc. and Waccamaw Bank (the “Agreement”). As an inducement
to Waccamaw Bankshares, Inc. and Waccamaw Bank to enter into the Agreement, the
Trust agrees that it will deposit an amount not less than $4,000,000 into a
thirty-six (36) month certificate of deposit (the “CD”) at a fixed annual
percentage rate (APR) of 2.5%, provided, however, the trustee of the Trust shall
not be bound to comply with this inducement agreement should a court of
competent jurisdiction render a judgment that compliance by the trustee with the
provisions of the inducement agreement would be a violation of his fiduciary
duty as trustee or in the event of the death of Joan A. Bridges, principal
beneficiary of the Trust, which event would end the Trust and require the
trustee to distribute the assets of the Trust to the designated beneficiaries.
In either of said events, the withdrawal of the funds on deposit at the Bank
shall be permitted without the payment of any premature withdrawal or other
penalties.

 

W. H. Bridges Marital Trust By:  

/s/ Mark Bridges

  Mark Bridges, Trustee

 

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SCHEDULES AND EXHIBITS TO

AGREEMENT AND PLAN OF REORGANIZATION AND MERGER

 

SCHEDULE

 

DESCRIPTION

A

 

Plan of Merger

EXHIBIT

 

DESCRIPTION

A

 

Employment Agreement with Jane Blackmon

B

 

Employment Agreement with Dwight Bridges

C

 

Employment Agreement with Mark Bridges

 

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SCHEDULE A

PLAN OF MERGER

By and Between

WACCAMAW BANK

and

BANK OF HEATH SPRINGS

1.01. Names of the Merging Corporations. The names of the banking corporations
proposed to be merged are Waccamaw Bank (“Waccamaw”) and the Bank of Heath
Springs (“BHS”).

1.02. Nature of Transaction; Plan of Merger. Subject to the provisions of this
Plan of Merger, at the “Effective Time” specified in the Articles of Merger
filed with the North Carolina Secretary of State and the South Carolina
Secretary of State, BHS will be merged into and with Waccamaw pursuant to
Section 53-12 of the North Carolina General Statutes and Title 34 of the South
Carolina Code of Laws (the “Merger”).

1.03. Effect of Merger. At the Effective Time, and by reason of the Merger, the
separate corporate existence of BHS shall cease while the corporate existence of
Waccamaw, as the surviving corporation in the Merger, shall continue with all of
its purposes, objects, rights, privileges, powers and franchises, all of which
shall be unaffected and unimpaired by the Merger.

1.04 Surviving Corporation. Following the Merger, Waccamaw shall continue to
operate as a North Carolina banking corporation and will conduct its business at
the then legally established branch and main offices of Waccamaw and BHS. The
duration of the corporate existence of Waccamaw, as the surviving corporation in
the Merger, shall be perpetual and unlimited.

1.05. Terms and Conditions of the Merger. The Merger shall be effected pursuant
to the terms and conditions of this Plan of Merger and of the Agreement and Plan
of Reorganization and Merger, dated as of December 19, 2005, by and among BHS,
Waccamaw and Waccamaw’s sole shareholder, Waccamaw Bankshares, Inc. (the
“Agreement”).

1.06 Assets and Liabilities of BHS. At the Effective Time, and by reason of the
Merger, and in accordance with applicable law, all property, assets and rights
of every kind and character of BHS (including without limitation all real,
personal or mixed property, all debts due on whatever account, all other choses
in action and every other interest of or belonging to or due to BHS, whether
tangible or intangible) shall be transferred to and vest in Waccamaw, and
Waccamaw shall succeed to all the rights, privileges, immunities, powers,
purposes and franchises of a public or private nature of BHS (including all
trust and other fiduciary properties, powers and rights), all without any
conveyance, assignment or further act or deed; and, Waccamaw shall become
responsible for all other liabilities, duties and obligations of every kind,
nature and description of BHS (including duties as trustee or fiduciary) as of
the Effective Time.

 

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1.07. Articles of Incorporation, Bylaws and Management. The Articles of
Incorporation and Bylaws of Waccamaw in effect at the Effective Time shall be
the Articles of Incorporation and Bylaws of Waccamaw as the surviving
corporation in the Merger.

1.08. Conversion of Shares and Merger Consideration.

(a) Bankshares and Bank Stock. Each share of common stock of Waccamaw, par value
$5.00 per share, issued and outstanding immediately prior to the Effective Time
shall continue to be issued and outstanding and shall not be affected by the
Merger.

(b) BHS Stock. Except as otherwise provided herein, at the Effective Time, all
rights of BHS’s shareholders with respect to all then outstanding shares of the
common stock of BHS, $10.00 par value per share (“BHS Stock”), shall cease to
exist, and the holders of shares of BHS Stock shall cease to be and shall have
no further rights as shareholders of BHS. At the Effective Time, each such
outstanding share of BHS Stock (except for shares held, other than in a
fiduciary capacity or as a result of debts previously contracted, by BHS, the
Bank or Bankshares, which shall be canceled in the Merger, and for Dissenting
Shares (as defined in Section 1.7 of the Agreement) shall be converted, without
any action on the part of the holder of such shares, into the right to receive
the Per Share Cash Consideration (as defined in Article 1.08(c) below) in
accordance with this Article 1.08. Following the Effective Time, certificates
representing shares of BHS Stock outstanding at the Effective Time shall
evidence only the right to receive the Per Share Cash Consideration. No share of
BHS Stock, other than Dissenting Shares (as defined in Section 1.7 of the
Agreement), shall be deemed to be outstanding or have any rights other than
those set forth in this Article 1.08 after the Effective Time.

(c) Per Share Cash Consideration. For purposes of this Agreement, the “Per Share
Cash Consideration” shall be the quotient of Eight Million Dollars ($8,000,000)
divided by the number of shares of BHS Stock issued and outstanding as of the
Effective Time.

1.10 Closing; Effective Time. The closing of the Merger and other transactions
contemplated by the agreement between Waccamaw Bankshares, Inc., Waccamaw and
BHS shall take place at the offices of Waccamaw in Whiteville, North Carolina,
or at such other place as Waccamaw shall designate, on a date mutually agreeable
to Waccamaw and BHS (the “Closing Date”) after the expiration of any and all
required waiting periods following the effective date of required approvals of
the Merger by governmental or regulatory authorities (but in no event more that
sixty (60) days following the expiration of all such required waiting periods).

 

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