Exhibit 13



2003 Annual Report



Table of Contents



|                                                           |  |   
|---------------------------------------------------------- |  | --
|                                                           | 
|Letter to Stockholders                                     |  | 1 
|                                                           | 
|Significant Trends                                         |  | 2 
|                                                           | 
|Financial Highlights Summary                               |  | 3 
|                                                           | 
|Consolidated Balance Sheets                                |  | 4 
|                                                           | 
|Consolidated Statements of Income                          |  | 5 
|                                                           | 
|Consolidated Statements of Changes in Stockholders Equity |  | 6 
|                                                           | 
|Consolidated Statements of Cash Flows                      |  | 8 
|                                                           | 
|Notes to Consolidated Financial Statements                 |  | 9 
|                                                           | 
|Independent Auditors Report                               |  | 28
|                                                           | 
|Managements Discussion and Analysis                       |  | 29
|                                                           | 
|Board of Directors and Officers                            |  | 45
|                                                           | 
|Bank Employees                                             |  | 46
|                                                           | 
|Stockholder Information                                    |  | 47



---

January 29, 2004



Dear Stockholder:



The year of 2003 represented another year of solid performance for Waccamaw Bankshares, Inc. with strong trends in earnings and total assets. Net Income
for the year ending December 31, 2003 was $2,006,783, surpassing the $2 million milestone for the first time. This represents a 29% increase in earnings over 2002 and is equal to $1.09 basic earnings per share compared with $.85 basic earnings per
share in 2002. Total Assets for the corporation were $193,206,943, a 20% increase over the previous year. We are pleased to report to you our financial results and other accomplishments for 2003, our sixth anniversary year, in more detail in the
accompanying financial statements.



Perhaps the most important
issue regarding the financial results reported here is the strong base which provides for future growth and earnings opportunities. Waccamaw Bankshares, Inc. remains committed to sound credit quality, a strong capital base, efficient use of
technology and the strength of its employees in order to provide consistent, long term financial performance. As the corporation grows, we continue to attract high quality individuals to compliment our existing strong core staff in order to achieve
growth and excellent performance.



These financial results have
not gone unnoticed in the equity markets as the performance of Waccamaw Bankshares stock has improved significantly since being listed on the NASDAQ SmallCap Market in March 2003. In the third quarter of the year the bank completed the conversion of
its main information systems software. In August Waccamaw Bankshares initiated a 6 for 5 stock split effected as a stock dividend which was, in effect, the third such transaction in our history. In the fourth quarter the bank completed an $8 million
Trust Preferred offering. This offering enabled the bank to obtain the capital required for future growth without dilution of the earnings per share of our present stockholders. The corporations efforts are focused on achieving the banks
full potential for growth and fulfilling the vision that our Stockholders established at the banks inception six years ago.



So, we are pleased with our performance in 2003. On behalf of the Waccamaw Team, which includes the staff, management and Board of Directors, we wish to
express our appreciation for your support of our efforts. Without our dedicated base of Stockholders, this performance would not have been possible. We look forward to continuing growth and creating value in 2004 and beyond.



Sincerely,



|                |  |                      
|--------------- |  | ---------------------
|James G. Graham |  | Michael K. Jones     
|President/CEO   |  | Chairman of the Board



---

Significant Trends



LOGO



LOGO



2



---

Financial Highlights Summary1



|                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|-------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------ | -
|                                 |  | 2003 |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |       
|Summary of Operations            |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                 |  |      |         |   |     
|Interest income                  |  | $    | 9,957   |   |      | $ | 9,594   |      |  | $ | 8,789   |   |  | $    | 6,476  |   |  | $ | 3,689  |  
|Interest expense                 |  |      | 3,627   |   |      |   | 3,978   |      |  |   | 4,518   |   |  |      | 3,261  |   |  |   | 1,686  |  
|                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net interest income              |  |      | 6,330   |   |      |   | 5,616   |      |  |   | 4,271   |   |  |      | 3,215  |   |  |   | 2,003  |  
|Provision for credit losses      |  |      | 730     |   |      |   | 794     |      |  |   | 612     |   |  |      | 348    |   |  |   | 240    |  
|Other income                     |  |      | 2,053   |   |      |   | 1,370   |      |  |   | 1,243   |   |  |      | 601    |   |  |   | 400    |  
|Other expense                    |  |      | 4,436   |   |      |   | 3,893   |      |  |   | 3,890   |   |  |      | 2,815  |   |  |   | 1,771  |  
|Income tax (expense) benefit     |  |      | (1,210  | ) |      |   | (740    | )    |  |   | 12      |   |  |      |       |   |  |   |       |  
|                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net income                       |  | $    | 2,007   |   |      | $ | 1,559   |      |  | $ | 1,024   |   |  | $    | 653    |   |  | $ | 392    |  
|                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                 |  |      |         |   |     
|Per Share Data2                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                 |  |      |         |   |     
|Basic earnings per share         |  | $    | 1.09    |   |      | $ | .85     |      |  | $ | .57     |   |  | $    | .40    |   |  | $ | .29    |  
|Diluted earnings per share       |  |      | 1.03    |   |      |   | .82     |      |  |   | .55     |   |  |      | .38    |   |  |   | .29    |  
|Book value                       |  |      | 9.12    |   |      |   | 7.96    |      |  |   | 7.11    |   |  |      | 6.46   |   |  |   | 4.94   |  
|                                 |  |      |         |   |     
|Average Balance Sheet Summary    |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                 |  |      |         |   |     
|Loans, net                       |  | $    | 137,403 |   |      | $ | 114,823 |      |  | $ | 84,209  |   |  | $    | 53,965 |   |  | $ | 31,197 |  
|Securities                       |  |      | 19,663  |   |      |   | 18,309  |      |  |   | 18,577  |   |  |      | 16,117 |   |  |   | 14,411 |  
|Total assets                     |  |      | 177,563 |   |      |   | 152,559 |      |  |   | 120,646 |   |  |      | 82,968 |   |  |   | 49,686 |  
|Deposits                         |  |      | 147,663 |   |      |   | 125,725 |      |  |   | 100,220 |   |  |      | 66,840 |   |  |   | 39,342 |  
|Shareholders equity             |  |      | 15,633  |   |      |   | 13,611  |      |  |   | 12,247  |   |  |      | 9,712  |   |  |   | 6,567  |  
|                                 |  |      |         |   |     
|Selected Ratios                  |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                 |  |      |         |   |     
|Average equity to average assets |  |      | 8.80    | % |      |   | 8.92    | %    |  |   | 10.15   | % |  |      | 11.71  | % |  |   | 13.22  | %
|Return on average assets         |  |      | 1.13    | % |      |   | 1.02    | %    |  |   | 0.85    | % |  |      | .79    | % |  |   | .79    | %
|Return on average equity         |  |      | 12.84   | % |      |   | 11.46   | %    |  |   | 8.36    | % |  |      | 6.72   | % |  |   | 5.95   | %

---

|1 | In thousands of dollars, except per share data.
|- | -----------------------------------------------

|2 | Adjusted for the effects of 6 for 5 stock splits in 2000, 2001 and 2003.
|- | ------------------------------------------------------------------------



3



---

Consolidated Balance Sheets

December 31, 2003 and 2002



|                                                                                                                    |  |      |             |      |   |            
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                                                                                                    |  | 2003 |             | 2002
|Assets                                                                                                              |  |      |             |      |   |            
|                                                                                                                    |  |     
|Cash and due from banks                                                                                             |  | $    | 5,044,835   |      | $ | 4,442,307  
|Interest-bearing deposits with banks                                                                                |  |      | 318,482     |      |   | 576,218    
|Federal funds sold                                                                                                  |  |      | 10,116,000  |      |   | 2,708,000  
|Investment securities, available for sale                                                                           |  |      | 22,951,020  |      |   | 19,650,205 
|Restricted equity securities                                                                                        |  |      | 1,102,344   |      |   | 1,046,094  
|Loans, net of allowance for loan losses of $2,218,053 in 2003 and $1,854,194 in 2002                                |  |      | 142,342,430 |      |   | 125,669,331
|Property and equipment, net                                                                                         |  |      | 3,155,719   |      |   | 3,387,798  
|Intangible assets, net                                                                                              |  |      | 1,332,097   |      |   | 1,559,278  
|Accrued income                                                                                                      |  |      | 872,709     |      |   | 1,061,965  
|Bank owned life insurance                                                                                           |  |      | 4,817,698   |      |   |           
|Other assets                                                                                                        |  |      | 1,153,609   |      |   | 1,213,812  
|                                                                                                                    |  |      |             |      |   |            
|Total assets                                                                                                        |  | $    | 193,206,943 |      | $ | 161,315,008
|                                                                                                                    |  |      |             |      |   |            
|Liabilities and Stockholders Equity                                                                                |  |      |             |      |   |            
|                                                                                                                    |  |     
|Liabilities                                                                                                         |  |      |             |      |   |            
|Noninterest-bearing deposits                                                                                        |  | $    | 16,369,500  |      | $ | 13,192,797 
|Interest-bearing deposits                                                                                           |  |      | 138,426,429 |      |   | 117,530,639
|                                                                                                                    |  |      |             |      |   |            
|Total deposits                                                                                                      |  |      | 154,795,929 |      |   | 130,723,436
|                                                                                                                    |  |     
|Securities sold under agreements to repurchase                                                                      |  |      | 3,654,000   |      |   | 6,071,000  
|Long-term debt                                                                                                      |  |      | 8,500,000   |      |   | 8,600,000  
|Guaranteed preferred beneficial interest in the companys junior subordinated debentures                            |  |      | 8,000,000   |      |   |           
|Accrued interest payable                                                                                            |  |      | 492,241     |      |   | 752,317    
|Other liabilities                                                                                                   |  |      | 801,800     |      |   | 574,595    
|                                                                                                                    |  |      |             |      |   |            
|Total liabilities                                                                                                   |  |      | 176,243,970 |      |   | 146,721,348
|                                                                                                                    |  |      |             |      |   |            
|                                                                                                                    |  |     
|Commitments and contingencies                                                                                       |  |      |            |      |   |           
|                                                                                                                    |  |     
|Stockholders equity                                                                                                |  |      |             |      |   |            
|Preferred stock, no par value; 1,000,000 shares authorized; none outstanding                                        |  |      |            |      |   |           
|Common stock, no par; 5,000,000 shares authorized; 1,859,772 shares issued in 2003; 1,528,110 shares issued in 2002 |  |      | 12,760,330  |      |   | 12,445,385 
|Retained earnings                                                                                                   |  |      | 4,115,183   |      |   | 2,108,400  
|Accumulated other comprehensive income                                                                              |  |      | 87,460      |      |   | 39,875     
|                                                                                                                    |  |      |             |      |   |            
|Total stockholders equity                                                                                          |  |      | 16,962,973  |      |   | 14,593,660 
|                                                                                                                    |  |      |             |      |   |            
|Total liabilities and stockholders equity                                                                          |  | $    | 193,206,943 |      | $ | 161,315,008
|                                                                                                                    |  |      |             |      |   |            



See Notes to Consolidated
Financial Statements



4



---

Consolidated Statements of Income

Years ended December 31, 2003, 2002, and 2001



|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|-------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                                                           |  | 2003 |            |   | 2002 |   |           | 2001
|Interest income                                                            |  |      |            |   |      |   |           |      |  |   |          
|Loans and fees on loans                                                    |  | $    | 8,968,847  |   |      | $ | 8,405,239 |      |  | $ | 7,272,593
|Money market investments                                                   |  |      | 88,882     |   |      |   | 126,415   |      |  |   | 427,552  
|Investment securities, taxable                                             |  |      | 831,482    |   |      |   | 1,020,308 |      |  |   | 1,088,669
|Investment securities, nontaxable                                          |  |      | 67,937     |   |      |   | 41,747    |      |  |   |         
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Total interest income                                                      |  |      | 9,957,148  |   |      |   | 9,593,709 |      |  |   | 8,788,814
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|                                                                           |  |      |           
|Interest expense                                                           |  |      |            |   |      |   |           |      |  |   |          
|Deposits                                                                   |  |      | 3,304,587  |   |      |   | 3,676,912 |      |  |   | 4,178,471
|Federal funds purchased and securities sold under agreements to repurchase |  |      | 29,082     |   |      |   | 59,200    |      |  |   | 196,088  
|Other borrowed funds                                                       |  |      | 293,882    |   |      |   | 241,692   |      |  |   | 143,567  
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Total interest expense                                                     |  |      | 3,627,551  |   |      |   | 3,977,804 |      |  |   | 4,518,126
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Net interest income                                                        |  |      | 6,329,597  |   |      |   | 5,615,905 |      |  |   | 4,270,688
|                                                                           |  |      |           
|Provision for loan losses                                                  |  |      | 730,000    |   |      |   | 794,106   |      |  |   | 612,000  
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Net interest income after provision for loan losses                        |  |      | 5,599,597  |   |      |   | 4,821,799 |      |  |   | 3,658,688
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|                                                                           |  |      |           
|Noninterest income                                                         |  |      |            |   |      |   |           |      |  |   |          
|Service charges on deposit accounts                                        |  |      | 989,517    |   |      |   | 801,380   |      |  |   | 652,840  
|Other operating income                                                     |  |      | 730,902    |   |      |   | 561,020   |      |  |   | 460,496  
|Income from mortgage banking investee                                      |  |      | 249,254    |   |      |   |          |      |  |   |         
|Earnings on bank owned life insurance                                      |  |      | 18,930     |   |      |   |          |      |  |   |         
|Net realized gains on sale or maturity of investment securities            |  |      | 64,802     |   |      |   | 7,689     |      |  |   | 129,279  
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Total noninterest income                                                   |  |      | 2,053,405  |   |      |   | 1,370,089 |      |  |   | 1,242,615
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|                                                                           |  |      |           
|Noninterest expense                                                        |  |      |            |   |      |   |           |      |  |   |          
|Salaries and employee benefits                                             |  |      | 2,273,418  |   |      |   | 2,087,852 |      |  |   | 1,827,990
|Occupancy and equipment                                                    |  |      | 640,473    |   |      |   | 593,220   |      |  |   | 549,114  
|Data processing                                                            |  |      | 340,913    |   |      |   | 194,260   |      |  |   | 386,284  
|Amortization expense                                                       |  |      | 227,181    |   |      |   | 227,181   |      |  |   | 227,181  
|Other expense                                                              |  |      | 954,483    |   |      |   | 790,676   |      |  |   | 899,046  
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Total noninterest expense                                                  |  |      | 4,436,468  |   |      |   | 3,893,189 |      |  |   | 3,889,615
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Income before income taxes                                                 |  |      | 3,216,534  |   |      |   | 2,298,699 |      |  |   | 1,011,688
|                                                                           |  |      |           
|Income tax (expense) benefit                                               |  |      | (1,209,751 | ) |      |   | (739,271  | )    |  |   | 12,667   
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Net income                                                                 |  | $    | 2,006,783  |   |      | $ | 1,559,428 |      |  | $ | 1,024,355
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|                                                                           |  |      |           
|Basic earnings per share                                                   |  | $    | 1.09       |   |      | $ | .85       |      |  | $ | .57      
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Diluted earnings per share                                                 |  | $    | 1.03       |   |      | $ | .82       |      |  | $ | .55      
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Weighted average shares outstanding                                        |  |      | 1,846,239  |   |      |   | 1,828,202 |      |  |   | 1,789,697
|                                                                           |  |      |            |   |      |   |           |      |  |   |          
|Weighted average dilutive shares outstanding                               |  |      | 1,943,609  |   |      |   | 1,908,963 |      |  |   | 1,872,051
|                                                                           |  |      |            |   |      |   |           |      |  |   |          



See Notes to Consolidated
Financial Statements



5



---

Consolidated Statements of Changes in Stockholders Equity

Years ended December 31, 2003, 2002 and 2001



|                                                                                                                    |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------- |  | --------- | - |  | ----------- | ---------- | - | ------- | - | ---------- | ------------------------- |  | - | ------------------------------------------ | - |  | ----- | -------- | - |  | - | ---------- | -
|                                                                                                                    |  | Shares    |   |  | CommonStock |            |   | Surplus |   |            | RetainedEarnings(Deficit) |  |   | AccumulatedOtherComprehensiveIncome (Loss) |   |  | Total |         
|December 31, 2000                                                                                                   |  | 1,227,490 |   |  | $           | 6,137,450  |   |         | $ | 5,807,255  |                           |  | $ | (475,383                                   | ) |  | $     | (54,009  | ) |  | $ | 11,415,313 |  
|                                                                                                                    |  |           |   |  |             |           
|Comprehensive income                                                                                                |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   |            |  
|Net income                                                                                                          |  |          |   |  |             |           |   |         |   |           |                           |  |   | 1,024,355                                  |   |  |       |         |   |  |   | 1,024,355  |  
|Net change in unrealized appreciation on investment securities available for sale                                   |  |          |   |  |             |           |   |         |   |           |                           |  |   |                                           |   |  |       | 293,524  |   |  |   | 293,524    |  
|Reclassification adjustment                                                                                         |  |          |   |  |             |           |   |         |   |           |                           |  |   |                                           |   |  |       | (129,279 | ) |  |   | (129,279   | )
|                                                                                                                    |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   |            |  
|Total comprehensive income                                                                                          |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   | 1,188,600  |  
|                                                                                                                    |  |           |   |  |             |           
|Issuance of common stock                                                                                            |  | 2,860     |   |  |             | 14,300     |   |         |   | 31,460     |                           |  |   |                                           |   |  |       |         |   |  |   | 45,760     |  
|Exercise of stock options                                                                                           |  | 17,108    |   |  |             | 85,540     |   |         |   | 71,340     |                           |  |   |                                           |   |  |       |         |   |  |   | 156,880    |  
|Recapitalization to no par stock                                                                                    |  |          |   |  |             | 5,910,055  |   |         |   | (5,910,055 | )                         |  |   |                                           |   |  |       |         |   |  |   |           |  
|Stock issuance costs                                                                                                |  |          |   |  |             | (21,548    | ) |         |   |           |                           |  |   |                                           |   |  |       |         |   |  |   | (21,548    | )
|Stock split                                                                                                         |  | 249,492   |   |  |             |           |   |         |   |           |                           |  |   |                                           |   |  |       |         |   |  |   |           |  
|Redemption of fractional shares                                                                                     |  | (68       | ) |  |             | (1,082     | ) |         |   |           |                           |  |   |                                           |   |  |       |         |   |  |   | (1,082     | )
|Exercise of stock options                                                                                           |  | 8,848     |   |  |             | 67,599     |   |         |   |           |                           |  |   |                                           |   |  |       |         |   |  |   | 67,599     |  
|                                                                                                                    |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   |            |  
|December 31, 2001                                                                                                   |  | 1,505,730 |   |  |             | 12,192,314 |   |         |   |           |                           |  |   | 548,972                                    |   |  |       | 110,236  |   |  |   | 12,851,522 |  
|                                                                                                                    |  |           |   |  |             |           
|Comprehensive income                                                                                                |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   |            |  
|Net income                                                                                                          |  |          |   |  |             |           |   |         |   |           |                           |  |   | 1,559,428                                  |   |  |       |         |   |  |   | 1,559,428  |  
|Net change in unrealized appreciation on investment securities available for sale, net of income taxes of $(29,672) |  |          |   |  |             |           |   |         |   |           |                           |  |   |                                           |   |  |       | (65,287  | ) |  |   | (65,287    | )
|Reclassification adjustment, net of income taxes of $(2,614)                                                        |  |          |   |  |             |           |   |         |   |           |                           |  |   |                                           |   |  |       | (5,074   | ) |  |   | (5,074     | )
|                                                                                                                    |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   |            |  
|Total comprehensive income                                                                                          |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   | 1,489,067  |  
|                                                                                                                    |  |           |   |  |             |           
|Issuance of common stock                                                                                            |  | 12,575    |   |  |             | 178,161    |   |         |   |           |                           |  |   |                                           |   |  |       |         |   |  |   | 178,161    |  
|Exercise of stock options                                                                                           |  | 9,805     |   |  |             | 74,910     |   |         |   |           |                           |  |   |                                           |   |  |       |         |   |  |   | 74,910     |  
|                                                                                                                    |  |           |   |  |             |            |   |         |   |            |                           |  |   |                                            |   |  |       |          |   |  |   |            |  
|December 31, 2002                                                                                                   |  | 1,528,110 |   |  |             | 12,445,385 |   |         |   |           |                           |  |   | 2,108,400                                  |   |  |       | 39,875   |   |  |   | 14,593,660 |  



See Notes to Consolidated
Financial Statements



6



---

Consolidated Statements of Changes in Stockholders Equity, continued

Years ended December 31, 2003, 2002 and 2001



|                                                                                                                   |  |           |  |             |            |   |         |   |                           |  |                                            |           |  |       |         |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------ |  | --------- |  | ----------- | ---------- | - | ------- | - | ------------------------- |  | ------------------------------------------ | --------- |  | ----- | ------- | - |  | - | ---------- | -
|                                                                                                                   |  | Shares    |  | CommonStock |            |   | Surplus |   | RetainedEarnings(Deficit) |  | AccumulatedOtherComprehensiveIncome (Loss) |           |  | Total |        
|December 31, 2002, forward                                                                                         |  | 1,528,110 |  |             | 12,445,385 |   |         |   |                          |  |                                            | 2,108,400 |  |       | 39,875  |   |  |   | 14,593,660 |  
|                                                                                                                   |  |           |  |             |            |  
|Comprehensive income                                                                                               |  |           |  |             |            |   |         |   |                           |  |                                            |           |  |       |         |   |  |   |            |  
|Net income                                                                                                         |  |          |  |             |           |   |         |   |                          |  |                                            | 2,006,783 |  |       |        |   |  |   | 2,006,783  |  
|Net change in unrealized appreciation on investment securities available for sale, net of income taxes of $ 46,546 |  |          |  |             |           |   |         |   |                          |  |                                            |          |  |       | 90,354  |   |  |   | 90,354     |  
|Reclassification adjustment, net of income taxes of ($22,033)                                                      |  |          |  |             |           |   |         |   |                          |  |                                            |          |  |       | (42,769 | ) |  |   | (42,769    | )
|                                                                                                                   |  |           |  |             |            |   |         |   |                           |  |                                            |           |  |       |         |   |  |   |            |  
|Total comprehensive income                                                                                         |  |           |  |             |            |   |         |   |                           |  |                                            |           |  |       |         |   |  |   | 2,054,368  |  
|                                                                                                                   |  |           |  |             |            |  
|Issuance of common stock                                                                                           |  | 5,589     |  |             | 125,529    |   |         |   |                          |  |                                            |          |  |       |        |   |  |   | 125,529    |  
|Exercise of stock options                                                                                          |  | 18,598    |  |             | 206,590    |   |         |   |                          |  |                                            |          |  |       |        |   |  |   | 206,590    |  
|Stock split                                                                                                        |  | 307,475   |  |             |           |   |         |   |                          |  |                                            |          |  |       |        |   |  |   |           |  
|Stock issuance costs                                                                                               |  |          |  |             | (17,174    | ) |         |   |                          |  |                                            |          |  |       |        |   |  |   | (17,174    | )
|                                                                                                                   |  |           |  |             |            |   |         |   |                           |  |                                            |           |  |       |         |   |  |   |            |  
|December 31, 2003                                                                                                  |  | 1,859,772 |  | $           | 12,760,330 |   |         | $ |                          |  | $                                          | 4,115,183 |  | $     | 87,460  |   |  | $ | 16,962,973 |  
|                                                                                                                   |  |           |  |             |            |   |         |   |                           |  |                                            |           |  |       |         |   |  |   |            |  



See Notes to Consolidated
Financial Statements



7



---

Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2002 and 2001



|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                          |  | 2003 |             |   | 2002 |   |             | 2001 | 
|Cash flows from operating activities                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                                |  | $    | 2,006,783   |   |      | $ | 1,559,428   |      |  | $ | 1,024,355   |  
|Adjustments to reconcile net income to net cash provided by operations:   |  |      |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                             |  |      | 474,689     |   |      |   | 465,745     |      |  |   | 436,650     |  
|Provision for loan losses                                                 |  |      | 730,000     |   |      |   | 794,106     |      |  |   | 612,000     |  
|Accretion of discount on securities, net of amortization of premiums      |  |      | 141,632     |   |      |   | (20,998     | )    |  |   | (7,265      | )
|Gain on sale of investment securities                                     |  |      | (64,802     | ) |      |   | (7,689      | )    |  |   | (129,279    | )
|Deferred taxes                                                            |  |      | (123,277    | ) |      |   | (140,119    | )    |  |   | (432,768    | )
|Benefit of non qualified stock option exercise                            |  |      | 65,590      |   |      |   |            |      |  |   |            |  
|Changes in assets and liabilities:                                        |  |      |             |   |      |   |             |      |  |   |             |  
|Accrued income                                                            |  |      | 189,256     |   |      |   | (93,463     | )    |  |   | (110,426    | )
|Other assets                                                              |  |      | 183,481     |   |      |   | (492,197    | )    |  |   | 29,089      |  
|Accrued interest payable                                                  |  |      | (260,076    | ) |      |   | (399,853    | )    |  |   | 452,294     |  
|Other liabilities                                                         |  |      | 227,204     |   |      |   | (238,811    | )    |  |   | 645,799     |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                                 |  |      | 3,570,480   |   |      |   | 1,426,149   |      |  |   | 2,520,449   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|                                                                          |  |      |            
|Cash flows from investing activities                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net (increase) decrease in federal funds sold                             |  |      | (7,408,000  | ) |      |   | (698,000    | )    |  |   | 1,510,000   |  
|Purchases of investment securities                                        |  |      | (19,331,048 | ) |      |   | (16,013,612 | )    |  |   | (15,973,765 | )
|Maturities of investment securities                                       |  |      | 10,941,773  |   |      |   | 8,319,828   |      |  |   | 14,486,546  |  
|Net increase in loans                                                     |  |      | (17,403,099 | ) |      |   | (25,528,579 | )    |  |   | (35,063,644 | )
|Sales of investment securities                                            |  |      | 5,002,965   |   |      |   | 3,258,506   |      |  |   | 4,955,681   |  
|Investment in bank owned life insurance                                   |  |      | (4,817,698  | ) |      |   |            |      |  |   |            |  
|Purchases of property and equipment                                       |  |      | (15,429     | ) |      |   | (78,728     | )    |  |   | (1,540,179  | )
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                     |  |      | (33,030,536 | ) |      |   | (30,740,585 | )    |  |   | (31,625,361 | )
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|                                                                          |  |      |            
|Cash flows from financing activities                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in noninterest-bearing deposits                              |  |      | 3,176,702   |   |      |   | 783,285     |      |  |   | 3,114,320   |  
|Net increase in interest-bearing deposits                                 |  |      | 20,895,791  |   |      |   | 18,674,236  |      |  |   | 25,592,325  |  
|Net increase (decrease) in securities sold under agreements to repurchase |  |      | (2,417,000  | ) |      |   | 2,570,000   |      |  |   | (623,000    | )
|Net increase in junior subordinated debentures                            |  |      | 8,000,000   |   |      |   |            |      |  |   |            |  
|Repayment of long-term debt                                               |  |      | (100,000    | ) |      |   | 6,100,000   |      |  |   |            |  
|Proceeds from issuance of common stock                                    |  |      | 266,529     |   |      |   | 253,071     |      |  |   | 247,609     |  
|Stock issuance costs                                                      |  |      | (17,174     | ) |      |   |            |      |  |   |            |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                 |  |      | 29,804,848  |   |      |   | 28,380,592  |      |  |   | 28,331,254  |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Increase (decrease) in cash and cash equivalents                          |  |      | 344,792     |   |      |   | (933,844    | )    |  |   | (773,658    | )
|                                                                          |  |      |            
|Cash and cash equivalents, beginning                                      |  |      | 5,018,525   |   |      |   | 5,952,369   |      |  |   | 6,726,027   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, ending                                         |  | $    | 5,363,317   |   |      | $ | 5,018,525   |      |  | $ | 5,952,369   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|                                                                          |  |      |            
|Supplemental disclosure of cash flow information                          |  |      |             |   |      |   |             |      |  |   |             |  
|Interest paid                                                             |  | $    | 3,887,627   |   |      | $ | 4,377,657   |      |  | $ | 4,000,098   |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  
|Taxes paid                                                                |  | $    | 1,145,811   |   |      | $ | 1,026,655   |      |  | $ |            |  
|                                                                          |  |      |             |   |      |   |             |      |  |   |             |  



See Notes to Consolidated
Financial Statements



8



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies



Organization



Waccamaw Bank (Bank) was organized and incorporated under the laws of the State of North Carolina on August 28, 1997 and commenced
operations on September 2, 1997. The Bank currently serves Columbus County, North Carolina and surrounding areas through three banking offices and Brunswick County through two banking offices. As a state chartered bank which is a member of the
Federal Reserve, the Bank is subject to regulation by the State of North Carolina Banking Commission and the Federal Reserve.



During 2001, Waccamaw Bankshares, Inc. (Company), a financial holding company chartered in North Carolina was formed. On July 1, 2001, Waccamaw Bankshares, Inc. acquired
all the outstanding shares of Waccamaw Bank in a tax-free exchange.



The
accounting and reporting policies of the Company and Bank follow generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies.



Critical Accounting Policies



The notes to our audited consolidated financial statements for the year ended December 31,
2003 contain a summary of our significant accounting policies. We believe our policies, with respect to the methodology for our determination of the allowance for loan losses, and asset impairment judgments, including the recoverability of
intangible assets, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or
estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors.



Principles of Consolidation



The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany transactions and balances have been eliminated in
consolidation.



Business Segments



The Company reports its activities as a single business segment. In determining the
appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment.



Advertising Expense



The Company expenses advertising costs as they are incurred. Advertising expense for the
years presented are not material.



Use of Estimates



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



Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.



9



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Use of Estimates, continued



Primarily all of the Banks loan portfolio consists of loans in its market area.
Accordingly, the ultimate collectibility of a substantial portion of the Banks loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The
regional economy is diverse and healthy with manufacturing and agricultural segments playing a significant role. Management believes the economic outlook is positive.



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



Cash and Cash
Equivalents



For the purpose of presentation in the statement of cash
flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption cash and due from banks and interest-bearing deposits with banks.



Interest-Bearing Deposits in Banks



Interest-bearing deposits mature in one year and are carried at cost.



Trading Securities



The Bank does not hold securities for short-term resale and therefore does not maintain a
trading securities portfolio.



Securities Held to Maturity



Bonds, notes, and debentures, for which the Bank has the positive
intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. The Bank has no securities held to
maturity.



Securities Available for Sale



Available for sale securities are reported at fair value and consist of bonds, notes,
debentures, and certain equity securities not classified as trading securities or as held to maturity securities.



Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of stockholders equity.
Realized gains and losses on the sale of available for sale securities are recorded on the trade date and are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method
over the period to maturity or to call dates.



Declines in the fair value of
individual held to maturity and available for sale securities below cost that are other than temporary are reflected as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses.



Loans Receivable



Loans receivable that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their outstanding principal amount adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased
loans.



10



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Loans Receivable, continued



Loan origination fees and certain direct origination costs are capitalized and recognized as
an adjustment of the yield of the related loan. Discounts and premiums on any purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated
prepayments. Discounts and premiums on any purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.



Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans is
discontinued when, in managements opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received. When facts and circumstances indicate the borrower has regained the ability to meet required payments, the loan is returned to accrual status. Past due status of loans is determined based on contractual terms.



Allowance for Loan Losses



The allowance for loan losses is established as losses are estimated to have occurred
through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.



The allowance for loan losses is evaluated on a regular basis by management
and is based upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrowers ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.



A loan is considered impaired when, based on current information and events, it is probable
that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted
at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent.



Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and
residential loans for impairment disclosures.



Property and Equipment



Land is carried at cost. Bank premises, furniture and equipment, and
leasehold improvements are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:



|                        |  |      
|----------------------- |  | -----
|                        |  | Years
|Leasehold improvements  |  | 5-30 
|Furniture and equipment |  | 3-10 
|Banking house           |  | 10-40



11



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Stock-based Compensation



The Company accounts for its stock-based compensation plans using the accounting prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.The Company is not required to adopt the fair value based recognition provisions prescribed under SFAS No. 123, Accounting for Stock Based
Compensation (issued in October 1995), but complies with the disclosure requirements set forth in the Statement, which include disclosing pro forma net income as if the fair value based method of accounting had been applied.



Transfers of Financial Assets



Transfers of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.



Income Taxes



Provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal
securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets, net of a valuation allowance if appropriate, and
liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes.



Deferred income tax liability relating to unrealized appreciation (or the deferred tax asset in the case of unrealized depreciation) on investment securities available for sale is recorded in other liabilities
(assets). Such unrealized appreciation or depreciation is recorded as an adjustment to equity in the financial statements and not included in income determination until realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.



Basic Earnings per Share



Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.



Diluted Earnings per Share



The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common
shares.



Foreclosed Properties



Real estate properties acquired through or in lieu of, loan foreclosure are to be sold and
are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. The historical average holding period for such properties is less than 12
months.



12



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Comprehensive Income



Annual comprehensive income reflects the change in the Companys equity during the year
arising from transactions and events other than investments by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders equity
rather than as income or expense.



Financial Instruments



Derivatives that are used as part of the asset/liability management
process are linked to specific assets or liabilities and have high correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period. In addition, forwards and option contracts must reduce an
exposures risk, and for hedges of anticipatory transactions, the significant terms and characteristics of the transaction must be identified and the transactions must be probable of occurring. All derivative financial instruments held or
issued by the Company are held or issued for purposes other than trading. There were no derivatives for the years presented in this report.



In the ordinary course of business the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial and standby
letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.



Fair Value of Financial Instruments



Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.



The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial instruments:



Cash and due from banks: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.



Interest-bearing deposits with banks:The carrying amounts of interest-bearing deposits that mature in ninety days approximate their
fair value. Fair values of other interest-bearing deposits are estimated using a discounted cash flow analysis that applies interest rates currently offered on certificates to a schedule of aggregated contractual maturities on such time deposits.



Available for sale and held to maturity securities: Fair values for
securities, excluding restricted equity securities, are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.



Loans receivable:
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated
using discounted cash flow analysis or underlying collateral values, where applicable. The carrying amount of accrued interest receivable approximates its fair value.



13



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Fair Value of Financial Instruments, continued



Deposit liabilities: The fair values disclosed for demand and savings deposits are,
by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits. The carrying amount of accrued interest payable approximates fair value.



Short-term debt: The carrying amounts of short-term debt funds approximate their fair values.



Long-term debt:The fair values of the Companys long-term debt are estimated using discounted cash flow analysis based on the
Banks current incremental borrowing rates for similar types of borrowings.



Other liabilities: The carrying amounts of other liabilities approximate fair value.



Reclassification



Certain
reclassifications have been made to the prior years financial statements to place them on a comparable basis with the current year. Net income and stockholders equity previously reported were not affected by these reclassifications.



Note 2. Restrictions on Cash



To comply with banking regulation, the Bank is required to maintain certain average cash
reserve balances. The daily average cash reserve requirement was approximately $639,000 and $543,000 for the period including December 31, 2003 and 2002, respectively.



Note 3. Securities



Debt and equity securities have been classified in the balance sheet according to managements intent. The carrying amounts of securities (all available for sale)
and their approximate fair values follow:



|                                  |  |               |            |                 |   |                  |  |            |         |  |   |           
|--------------------------------- |  | ------------- | ---------- | --------------- | - | ---------------- |  | ---------- | ------- |  | - | ----------
|                                  |  | AmortizedCost |            | UnrealizedGains |   | UnrealizedLosses |  | Fair Value
|2003:                             |  |               |            |                 |   |                  |  |            |         |  |   |           
|U.S. Government agency securities |  | $             | 500,000    |                 | $ | 15,878           |  | $          |        |  | $ | 515,878   
|Mortgage backed securities        |  |               | 14,163,631 |                 |   | 33,622           |  |            | 125,555 |  |   | 14,071,698
|Corporate securities              |  |               | 5,040,213  |                 |   | 269,037          |  |            | 43,087  |  |   | 5,266,163 
|Municipal Securities              |  |               | 3,102,998  |                 |   | 15,195           |  |            | 20,912  |  |   | 3,097,281 
|Restricted equity securities      |  |               | 1,102,344  |                 |   |                 |  |            |        |  |   | 1,102,344 
|                                  |  |               |            |                 |   |                  |  |            |         |  |   |           
|                                  |  | $             | 23,909,186 |                 | $ | 333,732          |  | $          | 189,554 |  | $ | 24,053,364
|                                  |  |               |            |                 |   |                  |  |            |         |  |   |           
|2002:                             |  |               |            |                 |   |                  |  |            |         |  |   |           
|U.S. Government agency securities |  | $             | 1,527,000  |                 | $ |                 |  | $          | 29,133  |  | $ | 1,497,867 
|Mortgage backed securities        |  |               | 11,538,924 |                 |   | 100,863          |  |            | 43,448  |  |   | 11,596,339
|Corporate securities              |  |               | 5,592,488  |                 |   | 86,419           |  |            | 51,999  |  |   | 5,626,908 
|Municipal Securities              |  |               | 935,729    |                 |   | 2,892            |  |            | 9,530   |  |   | 929,091   
|Restricted equity securities      |  |               | 1,046,094  |                 |   |                 |  |            |        |  |   | 1,046,094 
|                                  |  |               |            |                 |   |                  |  |            |         |  |   |           
|                                  |  | $             | 20,640,235 |                 | $ | 190,174          |  | $          | 134,110 |  | $ | 20,696,299
|                                  |  |               |            |                 |   |                  |  |            |         |  |   |           



14



---

Notes to Consolidated Financial Statements



Note 3. Securities, continued



Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (FHLB), The Bankers Bank,
The Federal Reserve of Richmond (Federal Reserve), Sidus Financial, LLC (Sidus) and Sidus Title Services, LLC. All of those entities except Sidus and Sidus Title are correspondents of the Bank. Sidus is a mortgage broker and Sidus Title sells title
insurance. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow from it. The Bank is required to hold that stock so long as it borrows from the FHLB. The Federal Reserve requires Banks to purchase stock
as a condition of membership in the Federal Reserve system. The Banks stock in The Bankers Bank, Sidus and Sidus Title is restricted only in the fact that the stock may only be repurchased by the respective companies.



Investment securities with market values of $6,550,749 and $8,174,655 at December 31, 2003
and 2002, respectively were pledged as collateral on public deposits and for other banking purposes as required or permitted by law. Gross realized gains and losses for the years ended December 31, 2003, 2002 and 2001 are as follows:



|                |  |      |        |   |      |   |        |      |  |   |         |  
|--------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                |  | 2003 |        |   | 2002 |   |        | 2001 | 
|Realized gains  |  | $    | 65,637 |   |      | $ | 10,732 |      |  | $ | 131,837 |  
|Realized losses |  |      | (835   | ) |      |   | (3,043 | )    |  |   | (2,558  | )
|                |  |      |        |   |      |   |        |      |  |   |         |  
|                |  | $    | 64,802 |   |      | $ | 7,689  |      |  | $ | 129,279 |  
|                |  |      |        |   |      |   |        |      |  |   |         |  



The scheduled maturities of securities
(all available for sale) at December 31, 2003 are as follows:



|                              |  |               |            |            |   |           
|----------------------------- |  | ------------- | ---------- | ---------- | - | ----------
|                              |  | AmortizedCost |            | Fair Value
|Due in one year or less       |  | $             | 310,208    |            | $ | 311,426   
|Due in one through five years |  |               | 2,120,682  |            |   | 2,210,335 
|Due in five through ten years |  |               | 3,328,593  |            |   | 3,306,038 
|Due after ten years           |  |               | 17,047,359 |            |   | 17,123,221
|Restricted equity securities  |  |               | 1,102,344  |            |   | 1,102,344 
|                              |  |               |            |            |   |           
|                              |  | $             | 23,909,186 |            | $ | 24,053,364
|                              |  |               |            |            |   |           



The following table details unrealized
losses and related fair values in the Banks held to maturity and available for sale investment securities portfolios. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss
position as of December 31, 2003.



|                                      |  |                     |           |                  |                   |          |            |       |                  |           |  |            |         |                  |  |   |            |  |   |          |  
|------------------------------------- |  | ------------------- | --------- | ---------------- | ----------------- | -------- | ---------- | ----- | ---------------- | --------- |  | ---------- | ------- | ---------------- |  | - | ---------- |  | - | -------- | -
|                                      |  | Less Than 12 Months |           |                  | 12 Months or More |          |            | Total |                 
|                                      |  | Fair Value          |           | UnrealizedLosses |                   |          | Fair Value |       | UnrealizedLosses |           |  | Fair Value |         | UnrealizedLosses | 
|U.S. Government agency securities     |  | $                   |          |                  | $                 |         |            |       | $                |          |  | $          |        |                  |  | $ |           |  | $ |         |  
|Mortgage backed securities            |  |                     | 7,193,461 |                  |                   | (101,621 | )          |       |                  | 1,463,171 |  |            | (23,934 | )                |  |   | 8,656,632  |  |   | (125,555 | )
|Corporate securities                  |  |                     | 1,026,843 |                  |                   | (43,087  | )          |       |                  |          |  |            |        |                  |  |   | 1,026,843  |  |   | (43,087  | )
|Municipal securities                  |  |                     | 975,582   |                  |                   | (20,452  | )          |       |                  | 278,045   |  |            | (460    | )                |  |   | 1,253,627  |  |   | (20,912  | )
|Restricted equity securities          |  |                     |          |                  |                   |         |            |       |                  |          |  |            |        |                  |  |   |           |  |   |         |  
|                                      |  |                     |           |                  |                   |          |            |       |                  |           |  |            |         |                  |  |   |            |  |   |          |  
|Total temporarily impaired securities |  | $                   | 9,195,886 |                  | $                 | (165,160 | )          |       | $                | 1,741,216 |  | $          | (24,394 | )                |  | $ | 10,937,102 |  | $ | (189,554 | )
|                                      |  |                     |           |                  |                   |          |            |       |                  |           |  |            |         |                  |  |   |            |  |   |          |  



Management considers the nature of the
investment, the underlying causes of the decline in market value, the severity and duration of the decline in market value and other evidence, on a security by security basis, in determining if the decline in market value is other than temporary.
Management believes all unrealized losses presented in the table above to be temporary in nature.



15



---

Notes to Consolidated Financial Statements



Note 4. Loans Receivable



The major components of loans in the balance sheets at December 31 are as follows:



|                                  |  |              |         |   |      |   |         |  
|--------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                  |  | In Thousands |        
|                                  |  | 2003         |         |   | 2002 |  
|Commercial                        |  | $            | 43,068  |   |      | $ | 46,625  |  
|Real estate:                      |  |              |         |   |      |   |         |  
|Construction and land development |  |              | 23,389  |   |      |   | 23,690  |  
|Residential, 1-4 families         |  |              | 38,354  |   |      |   | 32,224  |  
|Residential, 5 or more families   |  |              | 1,899   |   |      |   | 1,487   |  
|Farmland                          |  |              | 2,141   |   |      |   | 1,297   |  
|Nonfarm, nonresidential           |  |              | 22,130  |   |      |   | 6,400   |  
|Agricultural                      |  |              | 3,238   |   |      |   | 3,223   |  
|Consumer                          |  |              | 8,775   |   |      |   | 11,109  |  
|Other                             |  |              | 1,819   |   |      |   | 1,661   |  
|                                  |  |              |         |   |      |   |         |  
|                                  |  |              | 144,813 |   |      |   | 127,716 |  
|                                  |  |             
|Deferred loan fees, net of costs  |  |              | (253    | ) |      |   | (193    | )
|Allowance for loan losses         |  |              | (2,218  | ) |      |   | (1,854  | )
|                                  |  |              |         |   |      |   |         |  
|                                  |  | $            | 142,342 |   |      | $ | 125,669 |  
|                                  |  |              |         |   |      |   |         |  



Approximately $24,000,000 in 1-4
family residential loans are pledged as collateral securing Federal Home Loan Bank advances included in long-term debt at December 31, 2003.



Note 5. Allowance for Loan Losses



Changes in the allowance for loan losses are as follows:



|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                              |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Balance, beginning                            |  | $    | 1,854,194 |   |      | $ | 1,421,548 |      |  | $ | 976,537   |  
|                                              |  |      |          
|Provision charged to expense                  |  |      | 730,000   |   |      |   | 794,106   |      |  |   | 612,000   |  
|Recoveries of amounts charged off             |  |      | 26,461    |   |      |   | 26,456    |      |  |   | 41,000    |  
|Amounts charged off                           |  |      | (392,602  | ) |      |   | (387,916  | )    |  |   | (207,989  | )
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Balance, ending                               |  | $    | 2,218,053 |   |      | $ | 1,854,194 |      |  | $ | 1,421,548 |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|                                              |  |      |           |   | 2003 |   |           | 2002 | 
|Impaired loans without a valuation allowance  |  |      |           |   |      | $ | 953,011   |      |  | $ | 2,186,653 |  
|Impaired loans with a valuation allowance     |  |      |           |   |      |   |          |      |  |   |          |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Total impaired loans                          |  |      |           |   |      | $ | 953,011   |      |  | $ | 2,186,653 |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  
|Valuation allowance related to impaired loans |  |      |           |   |      | $ |          |      |  | $ |          |  
|                                              |  |      |           |   |      |   |           |      |  |   |           |  



16



---

Notes to Consolidated Financial Statements



Note 5. Allowance for Loan Losses, continued



Nonaccrual loans and loans past due 90 days or more at December 31, 2003 were approximately $701,000 and $486,000, respectively. Nonaccrual
loans and loans past due 90 days or more at December 31, 2002 were approximately $1,800,000 and $173,000, respectively. The average annual recorded investment in impaired loans and interest income recognized on impaired loans for the last three
years (all approximate) is summarized below:



|                                                             |  |      |         |      |   |         |  |   |        
|------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                             |  | 2003 |         | 2002 |   | 2001   
|Average investment in impaired loans                         |  | $    | 494,189 |      | $ | 789,643 |  | $ | 128,751
|                                                             |  |      |         |      |   |         |  |   |        
|Interest income recognized on impaired loans                 |  | $    | 51,513  |      | $ | 42,658  |  | $ | 3,252  
|                                                             |  |      |         |      |   |         |  |   |        
|Interest income recognized on a cash basis on impaired loans |  | $    | 51,513  |      | $ | 42,658  |  | $ | 3,252  
|                                                             |  |      |         |      |   |         |  |   |        



No additional funds are committed to
be advanced in connection with impaired loans.



Note 6. Property and
Equipment



Components of Property and Equipment



Components of property and equipment and total accumulated depreciation are as follows:



|                              |  |      |           |      |   |          
|----------------------------- |  | ---- | --------- | ---- | - | ---------
|                              |  | 2003 |           | 2002
|Land                          |  | $    | 324,000   |      | $ | 357,000  
|Buildings                     |  |      | 1,963,600 |      |   | 2,070,705
|Leasehold improvements        |  |      | 427,931   |      |   | 417,603  
|Furniture and equipment       |  |      | 1,394,293 |      |   | 1,276,188
|                              |  |      |           |      |   |          
|                              |  |      | 4,109,824 |      |   | 4,121,496
|                              |  |     
|Less accumulated depreciation |  |      | 954,105   |      |   | 733,698  
|                              |  |      |           |      |   |          
|                              |  | $    | 3,155,719 |      | $ | 3,387,798
|                              |  |      |           |      |   |          



Depreciation expense reported in net
income was approximately $248,000, $239,000, and $209,000 for the years ended December 31, 2003, 2002 and 2001, respectively.



Leases



The Bank leases four banking facilities under agreements accounted for as operating leases. Rent expense was approximately $113,000, $112,000, and $136,000 in 2003, 2002, and 2001, respectively. Future minimum lease
payments under non-cancelable commitments are as follows.



|           |  |   |        
|---------- |  | - | -------
|2004       |  |   | 114,188
|2005       |  |   | 106,260
|2006       |  |   | 63,474 
|2007       |  |   | 63,474 
|2008       |  |   | 63,474 
|Thereafter |  |   | 60,000 
|           |  |   |        
|           |  | $ | 470,870
|           |  |   |        



17



---

Notes to Consolidated Financial Statements



Note 7. Intangible Assets



The book value of purchased intangible assets at December 31, 2003 and 2002 was $1,332,097 and $1,559,278, respectively. Details are as
follows:



|                            |  |                         |           |                         |   |                      |  |                         |           |  |   |        
|--------------------------- |  | ----------------------- | --------- | ----------------------- | - | -------------------- |  | ----------------------- | --------- |  | - | -------
|                            |  | As of December 31, 2003 |           | As of December 31, 2002
|                            |  | Gross CarryingAmount    |           | AccumulatedAmortization |   | Gross CarryingAmount |  | AccumulatedAmortization
|Amortized intangible assets |  |                         |           |                         |   |                      |  |                         |           |  |   |        
|Deposit premium             |  | $                       | 2,139,919 |                         | $ | 934,489              |  | $                       | 2,139,919 |  | $ | 727,308
|Other                       |  |                         | 200,000   |                         |   | 73,333               |  |                         | 200,000   |  |   | 53,333 
|                            |  |                         |           |                         |   |                      |  |                         |           |  |   |        
|Total                       |  | $                       | 2,339,919 |                         | $ | 1,007,822            |  | $                       | 2,339,919 |  | $ | 780,641
|                            |  |                         |           |                         |   |                      |  |                         |           |  |   |        



Amortization expense is calculated on
a straight-line basis over a period of ten years and was approximately $227,000 in 2003, 2002 and 2001. Management expects amortization expense to be approximately $227,000 in each of the next five years.



Note 8. Deposits



The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2003 and 2002 was approximately $34,642,000 and
$39,601,000, respectively. At December 31, 2003, the scheduled maturities of time deposits (in thousands) are as follows:



|                        |  |   |       
|----------------------- |  | - | ------
|Three months or less    |  | $ | 26,878
|Four months to one year |  |   | 45,133
|Two to three years      |  |   | 19,958
|Over three years        |  |   | 5,426 
|                        |  |   |       
|                        |  | $ | 97,395
|                        |  |   |       



Note 9. Borrowed Funds



Short-term debt



Short-term debt consists of securities sold under agreements to repurchase and federal funds
purchased, both of which generally mature within one to seven days from the transaction date. Additional information is summarized below:



|                                                       |  |      |           |   |      |   |           |  
|------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                                       |  | 2003 |           |   | 2002 |  
|Outstanding balance at December 31                     |  | $    | 3,654,000 |   |      | $ | 6,071,000 |  
|                                                       |  |      |           |   |      |   |           |  
|Year-end weighted average rate                         |  |      | .42       | % |      |   | .67       | %
|                                                       |  |      |           |   |      |   |           |  
|Daily average outstanding during the period            |  | $    | 4,508,315 |   |      | $ | 5,495,474 |  
|                                                       |  |      |           |   |      |   |           |  
|Average rate for the year                              |  |      | .65       | % |      |   | 1.08      | %
|                                                       |  |      |           |   |      |   |           |  
|Maximum outstanding at any month-end during the period |  | $    | 5,539,000 |   |      | $ | 6,725,000 |  
|                                                       |  |      |           |   |      |   |           |  



The Bank has established credit
facilities to provide additional liquidity if and as needed. These consist of unsecured lines of credit with correspondent banks for $7,000,000 and a secured line of credit with a correspondent bank for $5,000,000. In addition, the Bank has the
ability to borrow up to ten percent of total bank assets from the Federal Home Loan Bank of Atlanta, subject to the pledging of specific bank assets as collateral. At December 31, 2003 and 2002 there were no amounts outstanding under these credit
facilities.



18



---

Notes to Consolidated Financial Statements



Note 9. Borrowed Funds, continued



Long-term debt



At December 31, 2003 and 2002, $8,500,000 were outstanding under Federal Home Loan Bank advances. An advance of $2,500,000 matures on February 10, 2010 and bears interest
at a fixed rate of 5.85%. This advance is convertible by the Federal Home Loan Bank on a quarterly basis to a variable rate of three month London Interbank Offered Rate (LIBOR). An advance of $2,000,000 matures on May 29, 2012 and bears
interest at a fixed rate of 3.95%. This advance is convertible by the Federal Home Loan Bank to a variable rate of three month LIBOR effective May 29, 2005. An advance of $4,000,000 matures on May 9, 2005 and bears interest at an adjustable interest
rate using three month LIBOR plus (1) basis point on a quarterly basis. Approximately $24,000,000 in 1-4 family residential loans were pledged as collateral for the FHLB advances at December 31, 2003.



Note 10. Fair Value of Financial Instruments



The estimated fair values of the Banks financial instruments are as follows (dollars
in thousands):



|                                                                           |  |                   |         |                   |   |                |  |            |         |  |   |        
|-------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                                                           |  | December 31, 2003 |         | December 31, 2002
|                                                                           |  | CarryingAmount    |         | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial Assets                                                           |  |                   |         |                   |   |                |  |            |         |  |   |        
|Cash and due from banks                                                    |  | $                 | 5,045   |                   | $ | 5,045          |  | $          | 4,442   |  | $ | 4,442  
|Interest-bearing deposits with banks                                       |  |                   | 318     |                   |   | 318            |  |            | 576     |  |   | 576    
|Federal funds sold                                                         |  |                   | 10,116  |                   |   | 10,116         |  |            | 2,708   |  |   | 2,708  
|Investment securities                                                      |  |                   | 22,951  |                   |   | 22,951         |  |            | 19,650  |  |   | 19,650 
|Restricted equity securities                                               |  |                   | 1,102   |                   |   | 1,102          |  |            | 1,046   |  |   | 1,046  
|Loans, net of allowance for loan losses                                    |  |                   | 142,342 |                   |   | 142,873        |  |            | 125,669 |  |   | 125,251
|                                                                           |  |                   |         |                  
|Financial Liabilities                                                      |  |                   |         |                   |   |                |  |            |         |  |   |        
|Deposits                                                                   |  |                   | 154,796 |                   |   | 159,591        |  |            | 130,723 |  |   | 131,461
|Securities sold under agreements to repurchase and federal funds purchased |  |                   | 3,654   |                   |   | 3,654          |  |            | 6,071   |  |   | 6,071  
|Long-term debt                                                             |  |                   | 8,500   |                   |   | 8,629          |  |            | 8,600   |  |   | 8,949  
|Junior subordinated debentures                                             |  |                   | 8,000   |                   |   | 8,182          |  |            |        |  |   |       
|                                                                           |  |                   |         |                  
|Off-Balance-Sheet Assets (Liabilities)                                     |  |                   |         |                   |   |                |  |            |         |  |   |        
|Commitments to extend credit and standby letters of credit                 |  |                   |        |                   |   |               |  |            |        |  |   |       



Note 11. Earnings per Share



The following table details the computation of basic and diluted earnings
per share:



|                                                     |  |      |           |      |   |           |  |   |          
|---------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                     |  | 2003 |           | 2002 |   | 2001     
|Net income (income available to common shareholders) |  | $    | 2,006,783 |      | $ | 1,559,428 |  | $ | 1,024,355
|                                                     |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding           |  |      | 1,846,239 |      |   | 1,828,202 |  |   | 1,789,697
|Effect of dilutive securities, options               |  |      | 97,370    |      |   | 80,761    |  |   | 82,354   
|                                                     |  |      |           |      |   |           |  |   |          
|Weighted average common shares outstanding, diluted  |  |      | 1,943,609 |      |   | 1,908,963 |  |   | 1,872,051
|                                                     |  |      |           |      |   |           |  |   |          
|Basic earnings per share                             |  | $    | 1.09      |      | $ | .85       |  | $ | .57      
|                                                     |  |      |           |      |   |           |  |   |          
|Diluted earnings per share                           |  | $    | 1.03      |      | $ | .82       |  | $ | .55      
|                                                     |  |      |           |      |   |           |  |   |          



19



---

Notes to Consolidated Financial Statements



Note 12. Guaranteed Preferred Beneficial Interests in the Companys Junior Subordinated Debentures



Waccamaw Statutory Trust I, a statutory business trust (the
Trust), was created by the Company on December 17, 2003, at which time the Trust issued $8,000,000 in aggregate liquidation amount of $1 par value preferred capital trust securities which mature December 17, 2033. Distributions are
payable on the securities at a floating rate indexed to the 3-month London Interbank Offered Rate (LIBOR), and the securities may be prepaid at par by the Trust at any time after December 17, 2008. The principal assets of the Trust are
$8.2 million of the Companys junior subordinated debentures which mature on December 17, 2033, and bear interest at a floating rate indexed to the 3-month LIBOR, and which are callable by the Company after December 17, 2008. All $248 thousand
in aggregate liquidation of the Trusts common securities are held by the Company.



The Trusts preferred securities and common securities may be included in the Companys Tier I capital for regulatory capital adequacy purposes to the extent that they do not exceed 33.3% of the Companys total Tier I capital
excluding these securities. Amounts in excess of this ratio will not be considered Tier I capital but may be included in the calculation of the Companys total risk-based capital ratio. The Companys obligations with respect to the
issuance of the Trusts preferred securities and common securities constitute a full and unconditional guarantee by the Company of the Trusts obligations with respect to the preferred securities and common securities. Subject to certain
exceptions and limitations, the Company may elect from time to time to defer interest payments on its junior subordinated debentures, which would result in a deferral of distribution payments on the Trusts preferred trust securities and common
securities.



Note 13. Employee Benefit Plans



Defined Contribution Plan



The Bank maintains a profit sharing plan pursuant to Section 401(k) of the Internal Revenue
Code. The plan covers substantially all employees at least 21 years of age who have completed twelve months of service. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code. The bank contributes up to
3% of an employees compensation. The Bank contribution was $31,361, $28,129 and $23,616 for the years ended December 31, 2003, 2002 and 2001, respectively.



Stock Option Plans



The Company has adopted both the 1998 Incentive Stock Option Plan (Incentive Plan) and the 1998 Nonstatutory Stock Option Plan (Nonstatutory Plan). Under
each plan up to 133,384 shares may be issued for a total of 266,768 shares (adjusted for stock dividends). Options granted under both plans expire no more than 10 years from date of grant. Option exercise price, under both plans shall be set by the
Board of Directors at the date of grant, but shall not be less than 100% of fair market value of the related stock at the date of the grant. Under both plans, vesting is determined by the specific option agreements.



Activity under the plan during the years ended December 31, 2003 and 2002 (adjusted for stock
splits) is summarized below:



|                          |  |                    |   |  |                    |   |  |                    |  |         |  
|------------------------- |  | ------------------ | - |  | ------------------ | - |  | ------------------ |  | ------- | -
|                          |  | Incentive Plan     |   |  | Non-statutory Plan |  
|                          |  | Availablefor Grant |   |  | Granted            |   |  | Availablefor Grant |  | Granted |  
|Balance December 31, 2001 |  | 33,309             |   |  | 77,058             |   |  | 11,242             |  | 64,868  |  
|                          |  |                    |   | 
|Forfeited                 |  | 4,583              |   |  | (4,583             | ) |  |                   |  |        |  
|Granted                   |  | (2,000             | ) |  | 2,000              |   |  |                   |  |        |  
|Exercised                 |  |                   |   |  | (5,456             | ) |  |                   |  | (4,349  | )
|                          |  |                    |   |  |                    |   |  |                    |  |         |  
|Balance December 31, 2002 |  | 35,892             |   |  | 69,019             |   |  | 11,242             |  | 60,519  |  



20



---

Notes to Consolidated Financial Statements



Note 13. Employee Benefit Plans, continued



|                                   |  |                    |   |  |                    |   |  |                    |  |         |  
|---------------------------------- |  | ------------------ | - |  | ------------------ | - |  | ------------------ |  | ------- | -
|                                   |  | Incentive Plan     |   |  | Non-statutory Plan |  
|                                   |  | Availablefor Grant |   |  | Granted            |   |  | Availablefor Grant |  | Granted |  
|Balance December 31, 2002, forward |  | 35,892             |   |  | 69,019             |   |  | 11,242             |  | 60,519  |  
|Stock split                        |  | 7,178              |   |  | 13,804             |   |  | 2,248              |  | 12,104  |  
|Forfeited                          |  | 691                |   |  | (691               | ) |  |                   |  |        |  
|Granted                            |  | (15,000            | ) |  | 15,000             |   |  |                   |  |        |  
|Exercised                          |  |                   |   |  | (10,367            | ) |  |                   |  | (9,774  | )
|                                   |  |                    |   |  |                    |   |  |                    |  |         |  
|Balance December 31, 2003          |  | 28,761             |   |  | 86,765             |   |  | 13,490             |  | 62,849  |  
|                                   |  |                    |   |  |                    |   |  |                    |  |         |  



Additional information, adjusting for
stock splits, relating to the plan is listed below:



|                                                                               |  |      |           |   |      |   |           |      |  |   |         |  
|------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | -
|                                                                               |  | 2003 |           |   | 2002 |   |           | 2001 | 
|Outstanding options at December 31:                                            |  |      |           |   |      |   |           |      |  |   |         |  
|Weighted average exercise price:                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Beginning of the year                                                          |  | $    | 7.21      |   |      | $ | 7.08      |      |  | $ | 6.47    |  
|End of the year                                                                |  | $    | 9.03      |   |      | $ | 7.21      |      |  | $ | 7.08    |  
|Range of exercise prices:                                                      |  |      |           |   |      |   |           |      |  |   |         |  
|From                                                                           |  | $    | 6.37      |   |      | $ | 6.37      |      |  | $ | 6.37    |  
|To                                                                             |  | $    | 26.17     |   |      | $ | 15.00     |      |  | $ | 11.11   |  
|Weighted average remaining contractual life in months                          |  |      | 67        |   |      |   | 74        |      |  |   | 85      |  
|Exercisable options                                                            |  |      | 110,221   |   |      |   | 73,875    |      |  |   | 53,110  |  
|Weighted average exercise price of exercisable options                         |  | $    | 6.33      |   |      | $ | 6.65      |      |  | $ | 6.43    |  
|                                                                               |  |      |          
|Weighted average exercise price of options:                                    |  |      |           |   |      |   |           |      |  |   |         |  
|Granted during the year                                                        |  | $    | 25.86     |   |      | $ | 15.00     |      |  | $ | 11.11   |  
|Exercised during the year                                                      |  | $    | 7.00      |   |      | $ | 6.37      |      |  | $ | 6.37    |  
|Forfeited during the year                                                      |  | $    | 6.37      |   |      | $ | 8.73      |      |  | $ | 6.37    |  
|Expired during the year                                                        |  | $    |          |   |      | $ |          |      |  | $ |        |  
|                                                                               |  |      |          
|Grant-date fair value:                                                         |  |      |           |   |      |   |           |      |  |   |         |  
|Options granted during the year                                                |  | $    | 86,888    |   |      | $ | 2,600     |      |  | $ | 52,545  |  
|                                                                               |  |      |          
|Significant assumptions used in determining fair value:                        |  |      |           |   |      |   |           |      |  |   |         |  
|Risk-free interest rate                                                        |  |      | 2.00      | % |      |   | .75       | %    |  |   | 3.00    | %
|Expected life in years                                                         |  |      | 10        |   |      |   | 10        |      |  |   | 10      |  
|Expected dividends                                                             |  |      | 0.0       | % |      |   | 0.0       | %    |  |   | 0.0     | %
|Expected volatility                                                            |  |      | .17       | % |      |   | .10       | %    |  |   | .04     | %
|                                                                               |  |      |          
|Results of operations:                                                         |  |      |           |   |      |   |           |      |  |   |         |  
|Compensation cost recognized in income for all stock-based compensation awards |  | $    |          |   |      | $ |          |      |  | $ |        |  
|                                                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Pro forma net income, based on SFAS No. 123                                    |  | $    | 1,897,484 |   |      | $ | 1,450,468 |      |  | $ | 923,330 |  
|                                                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Pro forma earnings per common share, based on SFAS No. 123                     |  | $    | 1.03      |   |      | $ | .79       |      |  | $ | .52     |  
|                                                                               |  |      |           |   |      |   |           |      |  |   |         |  
|Pro forma earnings per fully dilutive common share, based on SFAS No. 123      |  | $    | .98       |   |      | $ | .76       |      |  | $ | .49     |  
|                                                                               |  |      |           |   |      |   |           |      |  |   |         |  



21



---

Notes to Consolidated Financial Statements



Note 14. Income Taxes



Current and Deferred Income Tax Components



The components of income tax expense are as follows:



|                                              |  |      |           |   |      |   |          |      |  |   |          |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                              |  | 2003 |           |   | 2002 |   |          | 2001 | 
|Current                                       |  | $    | 1,331,749 |   |      | $ | 862,510  |      |  | $ | 420,101  |  
|Deferred                                      |  |      | (121,998  | ) |      |   | (123,239 | )    |  |   | (127,516 | )
|Deferred tax asset valuation allowance change |  |      |          |   |      |   |         |      |  |   | (305,252 | )
|                                              |  |      |           |   |      |   |          |      |  |   |          |  
|Income tax expense (benefit)                  |  | $    | 1,209,751 |   |      | $ | 739,271  |      |  | $ | (12,667  | )
|                                              |  |      |           |   |      |   |          |      |  |   |          |  



Rate Reconciliation



A reconciliation of income tax expense (benefit) computed at the
statutory federal and state income tax rate included in the statement of income follows:



|                                              |  |      |           |   |      |   |         |      |  |   |          |  
|--------------------------------------------- |  | ---- | --------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                              |  | 2003 |           |   | 2002 |   |         | 2001 | 
|Tax at statutory federal rate                 |  | $    | 1,093,621 |   |      | $ | 781,558 |      |  | $ | 343,973  |  
|Tax exempt interest                           |  |      | (31,784   | ) |      |   | (24,061 | )    |  |   | (3,859   | )
|State income tax, net of federal benefit      |  |      | 132,079   |   |      |   | 15,069  |      |  |   |         |  
|Other                                         |  |      | 15,835    |   |      |   | (33,295 | )    |  |   | (47,529  | )
|Deferred tax asset valuation allowance change |  |      |          |   |      |   |        |      |  |   | (305,252 | )
|                                              |  |      |           |   |      |   |         |      |  |   |          |  
|Income tax expense (benefit)                  |  | $    | 1,209,751 |   |      | $ | 739,271 |      |  | $ | (12,667  | )
|                                              |  |      |           |   |      |   |         |      |  |   |          |  



Deferred Income Tax Analysis



The components of net deferred federal and state tax assets are
summarized as follows:



|                                                 |  |      |           |   |      |   |          |  
|------------------------------------------------ |  | ---- | --------- | - | ---- | - | -------- | -
|                                                 |  | 2003 |           |   | 2002 |  
|Deferred tax assets                              |  |      |           |   |      |   |          |  
|Allowance for loan losses                        |  | $    | 754,656   |   |      | $ | 621,375  |  
|Pre-opening expenses                             |  |      | 2,987     |   |      |   | 4,266    |  
|Accrued expenses                                 |  |      | 40,925    |   |      |   | 48,385   |  
|Deposit premium amortization                     |  |      | 139,643   |   |      |   | 104,665  |  
|Deferred loan fees                               |  |      | 94,045    |   |      |   | 69,115   |  
|Impairment of equity securities                  |  |      | 48,193    |   |      |   | 48,193   |  
|                                                 |  |      |           |   |      |   |          |  
|Deferred tax assets                              |  |      | 1,080,449 |   |      |   | 895,999  |  
|                                                 |  |      |           |   |      |   |          |  
|Deferred tax liabilities                         |  |      |           |   |      |   |          |  
|Unrealized gain on securities available-for-sale |  |      | (51,090   | ) |      |   | (23,292  | )
|Depreciation                                     |  |      | (266,719  | ) |      |   | (205,055 | )
|Accretion of bond discount                       |  |      | (11,051   | ) |      |   | (10,263  | )
|                                                 |  |      |           |   |      |   |          |  
|Deferred tax liabilities                         |  |      | (328,860  | ) |      |   | (238,610 | )
|                                                 |  |      |           |   |      |   |          |  
|Net deferred tax asset                           |  | $    | 751,589   |   |      | $ | 657,389  |  
|                                                 |  |      |           |   |      |   |          |  



Note 15. Commitments and
Contingencies



Litigation



In the normal course of business the Bank is involved in various legal proceedings. After
consultation with legal counsel, management believes that any liability resulting from such proceedings will not be material to the financial statements.



22



---

Notes to Consolidated Financial Statements



Note 15. Commitments and Contingencies, continued



Financial Instruments with Off-Balance-Sheet Risk



The Bank is party to financial instruments with off-balance-sheet risk in the normal course
of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized
in the balance sheet.



The Banks exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as for on-balance-sheet instruments. A summary of the Banks commitments are as follows:



|                             |  |      |            |      |   |           
|---------------------------- |  | ---- | ---------- | ---- | - | ----------
|                             |  | 2003 |            | 2002
|Commitments to extend credit |  | $    | 33,712,000 |      | $ | 24,380,000
|Stand-by letters of credit   |  |      | 161,000    |      |   | 1,264,000 
|                             |  |      |            |      |   |           
|                             |  | $    | 33,873,000 |      | $ | 25,644,000
|                             |  |      |            |      |   |           



Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential
real estate and income-producing commercial properties.



Standby letters of
credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.



Concentrations of Credit Risk



Substantially all of the Banks loans and commitments to extend credit have been
granted to customers in the Banks market area and such customers are generally depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. The Banks primary focus is toward commercial, consumer and small business transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related borrowers
in excess of $1,000,000.



The Bank from time to time has cash and cash
equivalents on deposit with financial institutions which exceed federally-insured limits.



Note 16. Regulatory Restrictions



Dividends



The Companys dividend payments will be
made from dividends received from the Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits (retained earnings) as determined pursuant to North Carolina General Statutes Section 53-87. However,
regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.



23



---

Notes to Consolidated Financial Statements



Note 16. Regulatory Restrictions, continued



Capital Requirements



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



Quantitative measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the regulations. Management
believes, as of December 31, 2003, that the Company and the Bank met all capital adequacy requirements to which they are subject.



As of December 31, 2003, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or
events since the notification that management believes have changed the Banks category.



The Companys and Banks actual capital amounts and ratios are also presented in the table.



|                                       |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|-------------------------------------- |  | ------ | ------ | ----- | ------------------------ | - | ------ | --------------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                       |  | Actual |        |       | Minimum Capital Required |   |        | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                       |  | Amount |        | Ratio |                          |   | Amount |                                                                       | Ratio  |  |     | Amount |  | Ratio |       
|December 31, 2003                      |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Total capital to risk-weighted assets  |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                           |  | $      | 21,436 |       | 14.24                    | % |        | $                                                                     | 12,109 |  | 8.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                   |  | $      | 20,794 |       | 13.81                    | % |        | $                                                                     | 12,044 |  | 8.0 | %      |  | $     | 15,055 |  | 10.0 | %
|                                       |  |        |        |       |                          |  
|Tier 1 capital to risk-weighted assets |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                           |  | $      | 19,544 |       | 12.91                    | % |        | $                                                                     | 6,054  |  | 4.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                   |  | $      | 18,913 |       | 12.56                    | % |        | $                                                                     | 6,022  |  | 4.0 | %      |  | $     | 9,033  |  | 6.0  | %
|                                       |  |        |        |       |                          |  
|Tier 1 capital to average assets       |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                           |  | $      | 19,544 |       | 10.47                    | % |        | $                                                                     | 7,464  |  | 4.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                   |  | $      | 18,913 |       | 10.16                    | % |        | $                                                                     | 7,447  |  | 4.0 | %      |  | $     | 9,309  |  | 5.0  | %



24



---

Notes to Consolidated Financial Statements



Note 16. Regulatory Restrictions, continued



|                                       |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|-------------------------------------- |  | ------ | ------ | ----- | ------------------------ | - | ------ | --------------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                       |  | Actual |        |       | Minimum Capital Required |   |        | Minimum To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                                       |  | Amount |        | Ratio |                          |   | Amount |                                                                       | Ratio  |  |     | Amount |  | Ratio |       
|December 31, 2002                      |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Total capital to risk-weighted assets  |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                           |  | $      | 14,628 |       | 11.22                    | % |        | $                                                                     | 10,452 |  | 8.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                   |  | $      | 14,393 |       | 11.06                    | % |        | $                                                                     | 10,414 |  | 8.0 | %      |  | $     | 13,017 |  | 10.0 | %
|                                       |  |        |        |       |                          |  
|Tier 1 capital to risk-weighted assets |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                           |  | $      | 12,995 |       | 9.97                     | % |        | $                                                                     | 5,226  |  | 4.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                   |  | $      | 12,763 |       | 9.80                     | % |        | $                                                                     | 5,207  |  | 4.0 | %      |  | $     | 7,835  |  | 6.0  | %
|                                       |  |        |        |       |                          |  
|Tier 1 capital to average assets       |  |        |        |       |                          |   |        |                                                                       |        |  |     |        |  |       |        |  |      |  
|Consolidated                           |  | $      | 12,995 |       | 8.05                     | % |        | $                                                                     | 6,466  |  | 4.0 | %      |  | $     | n/a    |  | n/a  |  
|Bank                                   |  | $      | 12,763 |       | 7.91                     | % |        | $                                                                     | 6,454  |  | 4.0 | %      |  | $     | 8,068  |  | 5.0  | %



Inter-company transactions



Legal lending limits on loans by the Bank to the Company are governed
by Federal Reserve Act 23A, and differ from legal lending limits on loans to external customers. Generally, a bank may lend up to 10% of its capital and surplus to its parent, if the loan is secured. If collateral is in the form of stocks, bonds,
debentures or similar obligations, it must have a market value when the loan is made of at least 20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least
10% more than the amount of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers acceptances eligible for rediscount or purchase by a Federal Reserve
Bank, requirements for collateral in excess of loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Company was approximately $1,700,000 at December 31, 2003. No 23A transactions existed at December
31, 2003 or 2002.



Note 17. Transactions with Related Parties



Loans



The Bank has entered into transactions with its directors, significant shareholders and
their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Aggregate loan transactions with related parties were as follows:



|                       |  |      |           |   |      |   |           |  
|---------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                       |  | 2003 |           |   | 2002 |  
|Balance, beginning     |  | $    | 1,678,472 |   |      | $ | 1,191,078 |  
|New loans and advances |  |      | 533,311   |   |      |   | 643,691   |  
|Repayments             |  |      | (606,701  | ) |      |   | (156,297  | )
|                       |  |      |           |   |      |   |           |  
|Balance, ending        |  | $    | 1,605,082 |   |      | $ | 1,678,472 |  
|                       |  |      |           |   |      |   |           |  



25



---

Notes to Consolidated Financial Statements



Note 18. Parent Company Financial Information



Condensed financial information of Waccamaw Bankshares, Inc. is presented as follows:



Balance Sheets

December 31, 2003 and 2002



|                                                                                 |  |      |            |      |   |           
|-------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                                                                 |  | 2003 |            | 2002
|Assets                                                                           |  |      |            |      |   |           
|Cash and due from banks                                                          |  | $    | 4,237,901  |      | $ | 36,210    
|Investment in subsidiary bank at equity                                          |  |      | 20,332,343 |      |   | 14,361,781
|Investment in Sidus Financial, LLC at cost                                       |  |      | 256,530    |      |   | 206,530   
|Investment in Sidus Title Services, LLC                                          |  |      | 6,250      |      |   |          
|Other assets                                                                     |  |      | 164,298    |      |   | 89,139    
|                                                                                 |  |      |            |      |   |           
|Total assets                                                                     |  | $    | 24,997,322 |      | $ | 14,693,660
|                                                                                 |  |      |            |      |   |           
|Liabilities                                                                      |  |      |            |      |   |           
|Long-term debt                                                                   |  | $    |           |      | $ | 100,000   
|Junior subordinated debt                                                         |  |      | 8,000,000  |      |   |          
|Other liabilities                                                                |  |      | 34,349     |      |   |          
|                                                                                 |  |      |            |      |   |           
|Total liabilities                                                                |  |      | 8,034,349  |      |   | 100,000   
|                                                                                 |  |      |            |      |   |           
|Stockholders equity                                                             |  |      |            |      |   |           
|Common stock                                                                     |  |      | 12,760,330 |      |   | 12,445,385
|Retained earnings                                                                |  |      | 4,115,183  |      |   | 2,108,400 
|Unrealized appreciation on subsidiarys investment securities available for sale |  |      | 87,460     |      |   | 39,875    
|                                                                                 |  |      |            |      |   |           
|Total stockholders equity                                                       |  |      | 16,962,973 |      |   | 14,593,660
|                                                                                 |  |      |            |      |   |           
|Total liabilities and stockholders equity                                       |  | $    | 24,997,322 |      | $ | 14,693,660
|                                                                                 |  |      |            |      |   |           



Statements of
Operations

Years ended December 31, 2003 and 2002



|                                                                                  |  |      |           |   |      |   |           |  
|--------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                                                  |  | 2003 |           |   | 2002 |  
|Income                                                                            |  |      |           |   |      |   |           |  
|Income from mortgage banking investee                                             |  | $    | 249,254   |   |      | $ |          |  
|                                                                                  |  |      |           |   |      |   |           |  
|Expenses                                                                          |  |      |           |   |      |   |           |  
|Professional fees                                                                 |  |      | 3,809     |   |      |   |          |  
|Franchise tax                                                                     |  |      | 21,890    |   |      |   | 19,277    |  
|Interest expense                                                                  |  |      | 14,061    |   |      |   |          |  
|Management fees                                                                   |  |      | 24,759    |   |      |   | 763       |  
|Other expenses                                                                    |  |      | 35,339    |   |      |   | 1,103     |  
|                                                                                  |  |      |           |   |      |   |           |  
|Total expenses                                                                    |  |      | 99,858    |   |      |   | 21,143    |  
|                                                                                  |  |      |           |   |      |   |           |  
|Income (loss) before tax benefit and equity in undistributed income of subsidiary |  |      | 149,396   |   |      |   | (21,143   | )
|                                                                                  |  |      |           |   |      |   |           |  
|Federal income tax (expense) benefit                                              |  |      | (54,525   | ) |      |   | 84,213    |  
|State income tax (expense)                                                        |  |      | (11,065   | ) |      |   |          |  
|                                                                                  |  |      |           |   |      |   |           |  
|Total income tax (expense) benefit                                                |  |      | (65,590   | ) |      |   | 84,213    |  
|                                                                                  |  |      |           |   |      |   |           |  
|Income before equity in undistributed income of subsidiary                        |  |      | 83,806    |   |      |   | 63,070    |  
|                                                                                  |  |     
|Equity in undistributed income of subsidiary                                      |  |      | 1,922,977 |   |      |   | 1,496,358 |  
|                                                                                  |  |      |           |   |      |   |           |  
|Net income                                                                        |  | $    | 2,006,783 |   |      | $ | 1,559,428 |  
|                                                                                  |  |      |           |   |      |   |           |  



26



---

Notes to Consolidated Financial Statements



Note 18. Parent Company Financial Information, continued



Statements of Cash Flows

Years ended December 31, 2003 and 2002



|                                                         |  |      |            |   |      |   |            |  
|-------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                         |  | 2003 |            |   | 2002 |  
|Cash flows from operating activities                     |  |      |            |   |      |   |            |  
|Net income                                               |  | $    | 2,006,783  |   |      | $ | 1,559,428  |  
|Adjustments:                                             |  |      |            |   |      |   |            |  
|Deferred taxes                                           |  |      | (20        | ) |      |   | (41,387    | )
|Increase in equity in undistributed income of subsidiary |  |      | (1,922,977 | ) |      |   | (1,496,358 | )
|(Increase) decrease in other assets                      |  |      | (75,139    | ) |      |   | (28,986    | )
|Increase (decrease) in other liabilities                 |  |      | 34,349     |   |      |   |           |  
|                                                         |  |      |            |   |      |   |            |  
|Net cash provided (used) by operating activities         |  |      | 42,996     |   |      |   | (7,303     | )
|                                                         |  |      |            |   |      |   |            |  
|Cash flows from investing activities                     |  |      |            |   |      |   |            |  
|Issuance of long-term debt to subsidiary                 |  |      | (4,000,000 | ) |      |   |           |  
|Purchases of investment securities                       |  |      | (56,250    | ) |      |   | (331,530   | )
|                                                         |  |      |            |   |      |   |            |  
|Net cash provided (used) by investing activities         |  |      | (4,056,250 | ) |      |   | (331,530   | )
|                                                         |  |      |            |   |      |   |            |  
|Cash flows from financing activities                     |  |      |            |   |      |   |            |  
|Proceeds from long-term debt                             |  |      |           |   |      |   | 100,000    |  
|Junior subordinated debentures                           |  |      | 8,000,000  |   |      |   |           |  
|Repayment of long-term debt                              |  |      | (100,000   | ) |      |   |           |  
|Issuance of common stock                                 |  |      | 314,945    |   |      |   | 253,071    |  
|                                                         |  |      |            |   |      |   |            |  
|Net cash provided (used) by financing activities         |  |      | 8,214,945  |   |      |   | 353,071    |  
|                                                         |  |      |            |   |      |   |            |  
|Increase (decrease) in cash and due from banks           |  |      | 4,201,691  |   |      |   | 14,238     |  
|Cash and cash equivalents, beginning                     |  |      | 36,210     |   |      |   | 21,972     |  
|                                                         |  |      |            |   |      |   |            |  
|Cash and cash equivalents, ending                        |  | $    | 4,237,901  |   |      | $ | 36,210     |  
|                                                         |  |      |            |   |      |   |            |  



27



---

Independent Auditors Report



Board of Directors and Stockholders

Waccamaw Bankshares, Inc.

Whiteville, North Carolina



We have audited the
consolidated balance sheets of Waccamaw Bankshares, Inc. and its subsidiary as of December 31, 2003 and 2002 and the related consolidated statements of income, changes in stockholders equity and cash flows for each of the three years in the
period ended December 31, 2003. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



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



In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Waccamaw Bankshares, Inc. and its subsidiary at December 31, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.



Galax, Virginia

January 16, 2004



28



---

Managements Discussion and Analysis



MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following presents managements discussion and analysis of the financial condition and results of operations of the Company as of December 31, 2003, 2002, and
2001 and the periods then ended. This discussion should be read in conjunction with the Companys Financial Statements and the Notes thereto.



There are no current recommendations by regulatory authorities which, if implemented, would have a material effect on its liquidity, capital resources or results of
operations. There are no agreements between the Bank and either the North Carolina Banking Commission or the Federal Reserve Bank, nor has either regulatory agency made any recommendations concerning the operations of the Bank that could have a
material effect on its liquidity, capital resources or results of operations.



Overview



Waccamaw Bank (the Bank) began operations on
September 2, 1997. The Bank operates by attracting deposits from the general public and using such deposit funds to make commercial, consumer, and residential construction and permanent mortgage real estate loans. Revenues are derived principally
from interest on loans and investments. Changes in the volume and mix of these assets and liabilities, as well as changes in the yields earned and rates paid, determine changes in net interest income. Waccamaw Bankshares, Inc. (the Company) was
formed during 2001 and acquired all the outstanding shares of the Bank on July 1, 2001.



The Companys total assets were $193.2 million at December 31, 2003 as compared to $161.3 million at December 31, 2002. Total assets were $132.1 million at December 31, 2001. Virtually all of this asset growth was funded by new
deposits and the issuance of common stock. Total deposits at December 31, 2003 increased 18.4% to $154.8 million. Total deposits were $130.7 million at December 31, 2002, an increase of $19.4 million over the $111.3 million total at December 31,
2001. The Bank used these resources primarily to fund new loans and purchase investment securities. The Banks net loans increased to $142.3 million at the end of 2003, an increase of $16.6 million over the 2002 amount of $125.7 million. Net
loans were $100.9 million at December 31, 2001. Investment securities were $24.1 million and $20.7 million at December 31, 2003 and 2002, respectively.



Critical Accounting Policies



The Companys financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The notes to the audited
consolidated financial statements included in the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003 contain a summary of its significant accounting policies. Management believes the Companys policies with respect
to the methodology for the determination of the allowance for loan losses, and asset impairment judgments, such as the recoverability of intangible assets, involve a higher degree of complexity and require management to make difficult and subjective
judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, the Company considers the policies related to those areas as critical.



The allowance for loan losses is an estimate of the losses that may be sustained in the Companys loan portfolio. The allowance is
based on two basic principles of accounting: (i) Statement of Financial Accounting Standards (SFAS) 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and
(ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary
market, and the loan balance.



29



---

Managements Discussion and Analysis



The Companys allowance for loan losses has three basic components: (i) the formula allowance,
(ii) the specific allowance, and (iii) the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses an historical loss view as an
indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance
uses various techniques to arrive at an estimate of loss. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The use of these values is inherently subjective and our actual losses
could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in
either the formula or specific allowance.



Accounting for intangible assets is
as prescribed by SFAS 142, Goodwill and Other Intangible Assets. The Company accounts for recognized intangible assets based on their estimated useful lives. Intangible assets with finite useful lives are amortized while intangible assets with an
indefinite useful life are not amortized. Currently, the Companys recognized intangible assets consist primarily of purchased core deposit intangible assets, having estimated useful lives of 10 years, and are being amortized. The useful life
is the period over which the assets are expected to contribute directly or indirectly to future cash flows. Estimated useful lives of intangible assets are based on an analysis of pertinent factors, including (as applicable):



| |  | the expected use of the asset;
| | - | ------------------------------



| |  | the expected useful life of another asset or group of assets to which the useful life of the intangible asset may relate;
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | any legal, regulatory, or contractual provisions that may limit the useful life;
| | - | --------------------------------------------------------------------------------



| |  | any legal, regulatory, or contractual provisions that enable renewal and extension of the assets legal or contractual life without substantial cost;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the effects of obsolescence, demand, competition, and other economic factors; and
| | - | ---------------------------------------------------------------------------------



| |  | the level of maintenance expenditures required to obtain the expected future cash flows from the asset.
| | - | -------------------------------------------------------------------------------------------------------



Straight-line amortization is used to expense recognized amortizable intangible assets since a method that more closely reflects the pattern
in which the economic benefits of the intangible assets are consumed cannot readily be determined. Intangible assets are not written off in the period of acquisition unless they become impaired during that period.



Waccamaw Bankshares evaluates the remaining useful life of each intangible asset that is
being amortized each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible assets remaining useful life is changed, the remaining carrying
amount of the intangible asset shall be amortized prospectively over that revised remaining useful life.



If an intangible asset that is being amortized is subsequently determined to have an indefinite useful life, the asset will be tested for impairment. That intangible asset will no longer be amortized and will be
accounted for in the same manner as intangible assets that are not subject to amortization.



Intangible assets that are not subject to amortization are reviewed for impairment in accordance with SFAS 121 and tested annually, or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount
equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset becomes its new accounting basis. Subsequent reversal of a previously recognized impairment loss is not allowed. Based on the
aforementioned testing, the Company has determined that its recorded intangible assets are not impaired.



30



---

Managements Discussion and Analysis



Net Interest Income and Average Balances (thousands)



|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|-------------------------------------------- |  | -------------- | ------- | ---------------------- | ---- | ---------- |  | ---- | -------------- |  | ---------------------- | ------- | ---------- | - | ----- | -------------- | ---- | ---------------------- |  | ---- | ------- |  | - | ----- |  | ---- | -
|                                             |  | 2003           |         |                        | 2002 |            |  | 2001 |               
|                                             |  | AverageBalance |         | InterestIncome/Expense |      | Yield/Cost |  |      | AverageBalance |  | InterestIncome/Expense |         | Yield/Cost |   |       | AverageBalance |      | InterestIncome/Expense |  | Cost |        
|Interest-earning assets                      |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Investment securities                        |  | $              | 19,663  |                        | $    | 894        |  | 4.55 | %              |  | $                      | 18,309  |            | $ | 1,038 |                | 5.67 | %                      |  | $    | 18,577  |  | $ | 1,088 |  | 5.86 | %
|Federal funds sold                           |  |                | 8,333   |                        |      | 89         |  | 1.07 |                |  |                        | 7,354   |            |   | 126   |                | 1.72 |                        |  |      | 4,798   |  |   | 228   |  | 4.75 |  
|Deposits with banks                          |  |                | 448     |                        |      | 5          |  | 1.12 |                |  |                        | 1,494   |            |   | 25    |                | 1.65 |                        |  |      | 4,470   |  |   | 200   |  | 4.47 |  
|Loans, net                                   |  |                | 137,403 |                        |      | 8,969      |  | 6.53 |                |  |                        | 114,823 |            |   | 8,405 |                | 7.32 |                        |  |      | 84,209  |  |   | 7,273 |  | 8.63 |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Total interest-earning assets                |  |                | 165,847 |                        |      | 9,957      |  |      |                |  |                        | 141,980 |            |   | 9,594 |                |      |                        |  |      | 112,054 |  |   | 8,789 |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Yield on average interest-earning assets     |  |                |         |                        |      |            |  | 6.00 | %              |  |                        |         |            |   |       |                | 6.76 | %                      |  |      |         |  |   |       |  | 7.84 | %
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |               
|Noninterest-earning assets:                  |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Cash and due from banks                      |  |                | 4,923   |                        |      |            |  |      |                |  |                        | 4,027   |            |   |       |                |      |                        |  |      | 3,586   |  |   |       |  |      |  
|Premises and equipment                       |  |                | 3,341   |                        |      |            |  |      |                |  |                        | 3,461   |            |   |       |                |      |                        |  |      | 3,246   |  |   |       |  |      |  
|Interest receivable and other                |  |                | 3,452   |                        |      |            |  |      |                |  |                        | 3,091   |            |   |       |                |      |                        |  |      | 1,760   |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Total noninterest-earning assets             |  |                | 11,716  |                        |      |            |  |      |                |  |                        | 10,579  |            |   |       |                |      |                        |  |      | 8,592   |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Total assets                                 |  | $              | 177,563 |                        |      |            |  |      |                |  | $                      | 152,559 |            |   |       |                |      |                        |  | $    | 120,646 |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |               
|Interest-bearing liabilities:                |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Demand deposits                              |  | $              | 12,901  |                        |      | 61         |  | .48  | %              |  | $                      | 10,652  |            |   | 34    |                | .32  | %                      |  | $    | 8,494   |  |   | 137   |  | 1.61 | %
|Savings deposits                             |  |                | 22,298  |                        |      | 265        |  | 1.19 |                |  |                        | 19,733  |            |   | 326   |                | 1.65 |                        |  |      | 17,702  |  |   | 469   |  | 2.65 |  
|Time deposits                                |  |                | 97,923  |                        |      | 2,978      |  | 3.04 |                |  |                        | 81,701  |            |   | 3,317 |                | 4.06 |                        |  |      | 63,289  |  |   | 3,572 |  | 5.64 |  
|Short-term borrowings                        |  |                | 4,510   |                        |      | 29         |  | .64  |                |  |                        | 5,495   |            |   | 59    |                | 1.08 |                        |  |      | 4,416   |  |   | 196   |  | 4.44 |  
|Long-term debt                               |  |                | 8,806   |                        |      | 294        |  | 3.34 |                |  |                        | 6,292   |            |   | 242   |                | 3.84 |                        |  |      | 2,500   |  |   | 144   |  | 5.76 |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Total interest-bearing liabilities           |  |                | 146,438 |                        |      | 3,627      |  |      |                |  |                        | 123,873 |            |   | 3,978 |                |      |                        |  |      | 96,401  |  |   | 4,518 |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Cost of average interest-bearing liabilities |  |                |         |                        |      |            |  | 2.48 | %              |  |                        |         |            |   |       |                | 3.21 | %                      |  |      |         |  |   |       |  | 4.69 | %
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |               
|Noninterest-bearing liabilities:             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Demand deposits                              |  |                | 14,541  |                        |      |            |  |      |                |  |                        | 13,640  |            |   |       |                |      |                        |  |      | 10,735  |  |   |       |  |      |  
|Interest payable and other                   |  |                | 951     |                        |      |            |  |      |                |  |                        | 1,435   |            |   |       |                |      |                        |  |      | 1,263   |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Total noninterest-bearing liabilities        |  |                | 15,492  |                        |      |            |  |      |                |  |                        | 15,075  |            |   |       |                |      |                        |  |      | 11,988  |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Total liabilities                            |  |                | 161,930 |                        |      |            |  |      |                |  |                        | 138,948 |            |   |       |                |      |                        |  |      | 108,399 |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |               
|Stockholders equity                         |  |                | 15,633  |                        |      |            |  |      |                |  |                        | 13,611  |            |   |       |                |      |                        |  |      | 12,247  |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|Total liabilities and stockholders equity   |  | $              | 177,563 |                        |      |            |  |      |                |  | $                      | 152,559 |            |   |       |                |      |                        |  | $    | 120,646 |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |               
|Net interest income                          |  |                |         |                        | $    | 6,330      |  |      |                |  |                        |         |            | $ | 5,616 |                |      |                        |  |      |         |  | $ | 4,271 |  |      |  
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  
|                                             |  |                |         |                        |      |            |  |      |               
|Net yield on interest-earning assets         |  |                |         |                        |      |            |  | 3.82 | %              |  |                        |         |            |   |       |                | 3.96 | %                      |  |      |         |  |   |       |  | 3.81 | %
|                                             |  |                |         |                        |      |            |  |      |                |  |                        |         |            |   |       |                |      |                        |  |      |         |  |   |       |  |      |  



31



---

Managements Discussion and Analysis



Net Interest Income



Net interest income, the principal source of income for the Bank, is the amount of income generated by earning assets (primarily loans and investment securities) less
the interest expense incurred on interest-bearing liabilities (primarily deposits used to fund earning assets). Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates,
have a significant impact on the level of net interest income. The preceding table presents the average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of
assets, liabilities and stockholders equity, and the related income, expense, and corresponding weighted average yields and costs. The average balances used for the purposes of this table and other statistical disclosures were calculated by
using the daily average balances.



Interest income during 2003 was $10.0
million, an increase of 3.8% over the 2002 total of $9.6 million. Interest income for 2001 was $8.8 million. These increases are due to the increase in the level of average earning assets in the past three years. Average earning assets were $165.8
million during 2003, an increase of 16.8%. Average earning assets increased 26.7% to $142 million during 2002. The increase in 2001 was 46.9% to $112.1 million. Yields on interest-earning assets during 2003, 2002, and 2001 were 6.0%, 6.8%, and 7.8%,
respectively.



Interest rates charged on loans vary with the degree of risk,
maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government regulation also influence interest rates. On average, loans yielded 6.5%, 7.3% and 8.6% during 2003, 2002, and 2001, respectively.
Yield on loans decreased in 2003 and 2002 primarily as a result of the falling interest rate environment.



Interest expense was $3.6 million during 2003, a decrease of 8.8%. Interest expense in 2002 was $4.0 million, a decrease of 12.0% over 2001. The decrease in 2003 and 2002 is a result of the falling interest rate
environment. The rate paid on interest-bearing liabilities during 2003, 2002, and 2001 was 2.5%, 3.2%, and 4.7%, respectively.



Net interest income was $6.3 million during 2003, an increase of 12.7% over 2002. During 2002 net interest income increased to $5.6 million. Net interest income was $4.3
million in 2001. These increases are due to increased levels of average earning assets and liabilities, while yields and costs of funds decreased. Net interest margin was 3.8%, 4.0%, and 3.8% in 2003, 2002, and 2001, respectively.



32



---

Managements Discussion and Analysis



The effects of changes in volumes and rates on net interest income for 2003, 2002 and 2001 are shown in the table
below.



Rate/Volume Variance Analysis (thousands)



|                              |  |                                         |                 |   |                       |        |                 |                       |  |      |                                        |   |        |   |       |   |      |   |        |                                |  |   |       |   |  |   |       |   |  |   |      |   |  |   |       |  
|----------------------------- |  | --------------------------------------- | --------------- | - | --------------------- | ------ | --------------- | --------------------- |  | ---- | -------------------------------------- | - | ------ | - | ----- | - | ---- | - | ------ | ------------------------------ |  | - | ----- | - |  | - | ----- | - |  | - | ---- | - |  | - | ----- | -
|                              |  | 2003 Compared to 2002                   |                 |   | 2002 Compared to 2001 |        |                 | 2001 Compared to 2000 | 
|                              |  | InterestIncome/Variance ExpenseVariance |                 |   |                       |        |                 |                       |  |      | InterestIncome/VarianceExpenseVariance |   |        |   |       |   |      |   |        | InterestIncome/ExpenseVariance |  |   |       |   |  |   |      
|                              |  |                                         | Attributable to |   |                       |        | Attributable to |                       |  |      | Attributable to                        |  
|                              |  |                                         | Rate            |   |                       | Volume |                 |                       |  | Rate |                                        |   | Volume |   |       |   | Rate |   |        | Volume                         | 
|Interest-earning assets:      |  |                                         |                 |   |                       |        |                 |                       |  |      |                                        |   |        |   |       |   |      |   |        |                                |  |   |       |   |  |   |       |   |  |   |      |   |  |   |       |  
|Loans                         |  | $                                       | 564             |   |                       | $      | (686            | )                     |  | $    | 1,250                                  |   |        | $ | 1,132 |   |      | $ | (1,512 | )                              |  | $ | 2,644 |   |  | $ | 2,206 |   |  | $ | (634 | ) |  | $ | 2,840 |  
|Investment securities         |  |                                         | (144            | ) |                       |        | (230            | )                     |  |      | 86                                     |   |        |   | (50   | ) |      |   | (34    | )                              |  |   | (16   | ) |  |   | 87    |   |  |   | (66  | ) |  |   | 153   |  
|Deposits with banks           |  |                                         | (20             | ) |                       |        | (7              | )                     |  |      | (13                                    | ) |        |   | (175  | ) |      |   | (42    | )                              |  |   | (133  | ) |  |   | 171   |   |  |   | 64   |   |  |   | 107   |  
|Federal funds sold            |  |                                         | (37             | ) |                       |        | (57             | )                     |  |      | 20                                     |   |        |   | (102  | ) |      |   | (223   | )                              |  |   | 121   |   |  |   | (151  | ) |  |   | (89  | ) |  |   | (62   | )
|                              |  |                                         |                 |   |                       |        |                 |                       |  |      |                                        |   |        |   |       |   |      |   |        |                                |  |   |       |   |  |   |       |   |  |   |      |   |  |   |       |  
|Total                         |  |                                         | 363             |   |                       |        | (980            | )                     |  |      | 1,343                                  |   |        |   | 805   |   |      |   | (1,811 | )                              |  |   | 2,616 |   |  |   | 2,313 |   |  |   | (725 | ) |  |   | 3,038 |  
|                              |  |                                         |                 |   |                       |        |                 |                       |  |      |                                        |   |        |   |       |   |      |   |        |                                |  |   |       |   |  |   |       |   |  |   |      |   |  |   |       |  
|                              |  |                                         |                 |   |                       |        |                 |                       | 
|Interest-bearing liabilities: |  |                                         |                 |   |                       |        |                 |                       |  |      |                                        |   |        |   |       |   |      |   |        |                                |  |   |       |   |  |   |       |   |  |   |      |   |  |   |       |  
|Demand deposits               |  |                                         | 27              |   |                       |        | 19              |                       |  |      | 8                                      |   |        |   | (103  | ) |      |   | (138   | )                              |  |   | 35    |   |  |   | 64    |   |  |   | 37   |   |  |   | 27    |  
|Savings deposits              |  |                                         | (61             | ) |                       |        | (114            | )                     |  |      | 53                                     |   |        |   | (143  | ) |      |   | (192   | )                              |  |   | 49    |   |  |   | (192  | ) |  |   | (283 | ) |  |   | 91    |  
|Time deposits                 |  |                                         | (339            | ) |                       |        | (1,621          | )                     |  |      | 1,282                                  |   |        |   | (255  | ) |      |   | (1,294 | )                              |  |   | 1,039 |   |  |   | 1,381 |   |  |   | (106 | ) |  |   | 1,487 |  
|Short-term borrowings         |  |                                         | (30             | ) |                       |        | (21             | )                     |  |      | (9                                     | ) |        |   | (137  | ) |      |   | (187   | )                              |  |   | 50    |   |  |   | 11    |   |  |   | (56  | ) |  |   | 67    |  
|Long-term debt                |  |                                         | 52              |   |                       |        | (25             | )                     |  |      | 77                                     |   |        |   | 98    |   |      |   | (120   | )                              |  |   | 218   |   |  |   | (7    | ) |  |   | (7   | ) |  |   |      |  
|                              |  |                                         |                 |   |                       |        |                 |                       |  |      |                                        |   |        |   |       |   |      |   |        |                                |  |   |       |   |  |   |       |   |  |   |      |   |  |   |       |  
|Total                         |  |                                         | (351            | ) |                       |        | (1,762          | )                     |  |      | 1,411                                  |   |        |   | (540  | ) |      |   | (1,931 | )                              |  |   | 1,391 |   |  |   | 1,257 |   |  |   | (415 | ) |  |   | 1,672 |  
|                              |  |                                         |                 |   |                       |        |                 |                       |  |      |                                        |   |        |   |       |   |      |   |        |                                |  |   |       |   |  |   |       |   |  |   |      |   |  |   |       |  
|Net interest income           |  | $                                       | 714             |   |                       | $      | 782             |                       |  |      | (68                                    | ) |        | $ | 1,345 |   |      | $ | 120    |                                |  |   | 1,225 |   |  | $ | 1,056 |   |  | $ | (310 | ) |  | $ | 1,366 |  
|                              |  |                                         |                 |   |                       |        |                 |                       |  |      |                                        |   |        |   |       |   |      |   |        |                                |  |   |       |   |  |   |       |   |  |   |      |   |  |   |       |  



Provision for Loan Losses



The provision for loan losses is charged to income in an amount necessary
to maintain an allowance for loan losses adequate to provide for expected losses in the Banks loan portfolio. The level of the allowance for loan losses is determined by managements assessment of a variety of factors, including the
collectibility of past due loans, volume of new loans, composition of the loan portfolio, and general economic outlook. Loan losses and recoveries are charged or credited directly to the allowance for loan losses.



The provision for loan loss expense was $730,000, $794,106, and $612,000 during 2003, 2002,
and 2001 respectively. The Banks allowance for loan losses as a percentage of gross loans was 1.5%, 1.5% and 1.4% at the end of 2003, 2002, and 2001, respectively. Additional information regarding loan loss provisions is discussed in
Nonperforming and Problem Assets.



Noninterest Income



Noninterest income consists of revenues generated from a variety of
financial services and activities. The majority of noninterest income is a result of service charges on deposit accounts including charges for insufficient funds, checks and fees charged for nondeposit services. Noninterest income also includes fees
charged for various bank services such as safe deposit box rental fees and letter of credit fees. A portion of noninterest income can be from gain on the sale of investment securities. Although the Bank generally follows a buy and hold philosophy
with respect to investment securities, occasionally the need to sell some investment securities is created by changes in market rate conditions or by efforts to restructure the portfolio to improve the Banks liquidity or interest rate risk
positions.



Noninterest income totaled $2.1 million, $1.4 million, and $1.2
million during 2003, 2002, and 2001 respectively. The majority of the noninterest income is from service charges on deposit accounts. This will most likely increase as the number of deposit accounts grow. This is also true of ATM and check cashing
fees. The Banks fee structure is reviewed annually to determine if adjustments to fees are warranted.



33



---

Managements Discussion and Analysis



Mortgage origination fees increased 31.7% to $285,000 due to increased loan and refinancing demand as a result of
falling interest rates. The sources of noninterest income for the past three years are summarized in the following table.



Sources of Noninterest Income (thousands)



|                                      |  |      |       |   |      |   |       |  |   |      
|------------------------------------- |  | ---- | ----- | - | ---- | - | ----- |  | - | -----
|                                      |  | 2003 |       |   | 2002 |   | 2001 
|Service charges in deposit accounts   |  | $    | 990   |   |      | $ | 801   |  | $ | 653  
|Check sales                           |  |      | (1    | ) |      |   | 6     |  |   | 9    
|ATM and check cashing fees            |  |      | 256   |   |      |   | 190   |  |   | 164  
|Gain on sale of investment securities |  |      | 65    |   |      |   | 8     |  |   | 129  
|Mortgage origination                  |  |      | 285   |   |      |   | 216   |  |   | 142  
|Investment fee income                 |  |      | 94    |   |      |   | 19    |  |   |     
|Insurance commission                  |  |      | 37    |   |      |   | 44    |  |   | 55   
|Income from mortgage banking investee |  |      | 249   |   |      |   |      |  |   |     
|Earnings on bank owned life insurance |  |      | 19    |   |      |   |      |  |   |     
|Other                                 |  |      | 59    |   |      |   | 86    |  |   | 91   
|                                      |  |      |       |   |      |   |       |  |   |      
|Total noninterest income              |  | $    | 2,053 |   |      | $ | 1,370 |  | $ | 1,243
|                                      |  |      |       |   |      |   |       |  |   |      



Noninterest Expense



Noninterest expense for 2003, 2002, and 2001 was $4.4 million, $3.9 million and $3.9
million, respectively. The overhead ratio of noninterest expense to adjusted total revenues (net interest income plus noninterest income excluding securities transactions) was 53%, 56% and 71% in 2003, 2002, and 2001, respectively. Management
expects the overhead ratio to continue to improve as the Company grows.



Total
personnel expenses, the largest component of noninterest expense was $2.3 million, $2.1 million and $1.8 million during 2003, 2002, and 2001, respectively. Personnel expenses increased $186,000 or 8.9% during 2003 and $260,000 or 14.2% during 2002.
This was due to Bank growth and the addition of senior management. Personnel expenses increased $480,000 in 2001. Management expects these costs to continue to increase as the Company grows.



Combined occupancy and furniture and equipment expense was $640,000, $593,000 and $549,000,
or 14.4%, 15.2% and 14.1% of noninterest expense during 2003, 2002, and 2001, respectively. Professional services expense, fees paid to attorneys, independent auditors, consultants and state examiners was $67,000, $80,000, $134,000 in 2003, 2002,
2001, respectively. The larger expense in 2001 was partially due to the formation of the holding company.



Advertising and public relations expense increased to $98,000 in 2003 from $42,000 in 2002. The Company began aggressively marketing loan and deposit products in 2003. Data processing and credit card processing fees
were $341,000, $194,000 and $386,000 during 2003, 2002, and 2001, respectively. These fees relate directly to the number of accounts serviced and transactions processed. Management expects these expenses to continue to increase as the Company grows.
The decrease in 2002 is the result of a one-time $97,000 incentive received from the Banks outside data processor and decreased processing fees.



Total noninterest expense will most likely continue to increase as the Company grows. However, as the Company becomes more mature, growth in net interest income will
outpace growth in noninterest expense. Accordingly, management believes the Companys overhead ratio will continue to improve. The primary elements of noninterest expense for the past three years are summarized in the table on the following
page.



34



---

Managements Discussion and Analysis



Sources of Noninterest Expense (thousands)



|                                 |  |      |       |      |   |       |  |   |      
|-------------------------------- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                 |  | 2003 |       | 2002 |   | 2001 
|Salaries and wages               |  | $    | 1,807 |      | $ | 1,693 |  | $ | 1,568
|Employee benefits                |  |      | 466   |      |   | 395   |  |   | 260  
|                                 |  |      |       |      |   |       |  |   |      
|Total personnel expense          |  |      | 2,273 |      |   | 2,088 |  |   | 1,828
|                                 |  |      |      
|Occupancy expense                |  |      | 448   |      |   | 407   |  |   | 385  
|Furniture and equipment          |  |      | 192   |      |   | 186   |  |   | 164  
|Printing and supplies            |  |      | 76    |      |   | 69    |  |   | 75   
|Professional services            |  |      | 67    |      |   | 80    |  |   | 134  
|Postage and office               |  |      | 67    |      |   | 56    |  |   | 65   
|Telephone                        |  |      | 58    |      |   | 49    |  |   | 47   
|Dues and subscriptions           |  |      | 23    |      |   | 19    |  |   | 16   
|Education and seminars           |  |      | 9     |      |   | 19    |  |   | 13   
|Franchise and local taxes        |  |      | 42    |      |   | 37    |  |   | 48   
|Advertising and public relations |  |      | 98    |      |   | 42    |  |   | 164  
|Director fees                    |  |      | 127   |      |   | 125   |  |   | 92   
|Data processing services         |  |      | 341   |      |   | 194   |  |   | 386  
|Amortization of deposit premium  |  |      | 227   |      |   | 227   |  |   | 227  
|Other operating expense          |  |      | 388   |      |   | 295   |  |   | 246  
|                                 |  |      |       |      |   |       |  |   |      
|Total other expenses             |  | $    | 4,436 |      | $ | 3,893 |  | $ | 3,890
|                                 |  |      |       |      |   |       |  |   |      



Income Taxes



Income tax expense is based on amounts reported in the statements of income (after
adjustments for non-taxable income and non-deductible expenses) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. The deferred tax
assets and liabilities represent the future Federal income tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.



Income tax expense was $1,210,000 and $739,000 for 2003 and 2002, respectively. The Company
recognized a tax benefit in 2001 of $13,000. Net deferred income tax benefits of approximately $752,000 and 657,000 at December 31, 2003 and 2002, respectively, were included in other assets. At December 31, 2003, $51,000 of the total deferred tax
asset is applicable to unrealized appreciation on investment securities available for sale.



The Banks deferred income tax benefits and liabilities are the result of temporary differences in loss carry forwards, provisions for loan losses, valuation reserves, depreciation, deferred income, and
investment security discount accretion.



35



---

Managements Discussion and Analysis



Earning Assets



Average earning assets were $165.8 million during 2003, an increase of 16.8% over 2002. Average earning assets were $142.0 million in 2002, an increase of 26.7% or $29.9
million. Average earning assets were $112.1 million during 2001. Total average earning assets represented 93.4%, 93.1%, and 92.9% of total average assets during the periods ended December 31, 2003, 2002 and 2001, respectively. A summary of average
assets is shown in the following table.



Average Asset Mix
(thousands)



|                        |  |                |         |         |        |                |      |         |  |        |                |  |         |         |  |       
|----------------------- |  | -------------- | ------- | ------- | ------ | -------------- | ---- | ------- |  | ------ | -------------- |  | ------- | ------- |  | ------
|                        |  | 2003           |         | 2002    |        |                | 2001
|                        |  | AverageBalance |         | Percent |        | AverageBalance |      | Percent |  |        | AverageBalance |  | Percent
|Earnings assets:        |  |                |         |         |        |                |      |         |  |        |                |  |         |         |  |       
|Loans, net              |  | $              | 137,403 |         | 77.38  |                | $    | 114,823 |  | 75.26  | %              |  | $       | 84,209  |  | 69.80 
|Investment securities   |  |                | 19,663  |         | 11.08  |                |      | 18,309  |  | 12.00  |                |  |         | 18,577  |  | 15.40 
|Federal funds sold      |  |                | 8,333   |         | 4.69   |                |      | 7,354   |  | 4.82   |                |  |         | 4,798   |  | 3.98  
|Deposits with banks     |  |                | 448     |         | .25    |                |      | 1,494   |  | .98    |                |  |         | 4,470   |  | 3.70  
|                        |  |                |         |         |        |                |      |         |  |        |                |  |         |         |  |       
|Total earning assets    |  |                | 165,847 |         | 93.40  |                |      | 141,980 |  | 93.06  |                |  |         | 112,054 |  | 92.88 
|                        |  |                |         |         |        |               
|Nonearning assets:      |  |                |         |         |        |                |      |         |  |        |                |  |         |         |  |       
|Cash and due from banks |  |                | 4,923   |         | 2.77   |                |      | 4,027   |  | 2.64   |                |  |         | 3,586   |  | 2.97  
|Premises and equipment  |  |                | 3,341   |         | 1.88   |                |      | 3,461   |  | 2.27   |                |  |         | 3,246   |  | 2.69  
|Other assets            |  |                | 3,452   |         | 1.95   |                |      | 3,091   |  | 2.03   |                |  |         | 1,760   |  | 1.46  
|                        |  |                |         |         |        |                |      |         |  |        |                |  |         |         |  |       
|Total nonearning assets |  |                | 11,716  |         | 6.60   |                |      | 10,579  |  | 6.94   |                |  |         | 8,592   |  | 7.12  
|                        |  |                |         |         |        |                |      |         |  |        |                |  |         |         |  |       
|Total assets            |  | $              | 177,563 |         | 100.00 |                | $    | 152,559 |  | 100.00 |                |  | $       | 120,646 |  | 100.00
|                        |  |                |         |         |        |                |      |         |  |        |                |  |         |         |  |       



Loans



The Bank makes both consumer and commercial loans to borrowers in all neighborhoods within
its market area, including the low- and moderate-income areas. The Banks market area is generally defined to be all of Columbus and Brunswick counties of North Carolina which management feels helps diversify market risk. The Bank emphasizes
consumer based installment loans, commercial loans to small and medium sized businesses and real estate loans.



A significant portion of the loan portfolio is made up of loans secured by various types of real estate. Real estate loans represented 60.7%, 51.0%, and 46.4% of total loans at December 31, 2003, 2002, and 2001,
respectively. Total loans secured by one-to-four family residential properties represented 26.5%, 25.2%, and 29.9% of total loans at the end of 2003, 2002, and 2001, respectively. Loans for commercial and business purposes were $43.1 million, $46.8
million and $38.3 million, or 29.7%, 36.6% and 37.4% of total loans outstanding at December 31, 2003, 2002, and 2001, respectively.



The amounts of gross loans outstanding by type at December 31, 2003 and 2002 are shown in the table on the following page.



36



---

Managements Discussion and Analysis



Loan Portfolio Summary (thousands)



|                             |  |        |         |      |        |        |   |         |  |       
|---------------------------- |  | ------ | ------- | ---- | ------ | ------ | - | ------- |  | ------
|                             |  | 2003   |         | 2002
|                             |  | Amount |         | %    |        | Amount |   | %      
|Construction and development |  | $      | 23,389  |      | 16.15  |        | $ | 23,690  |  | 18.55 
|Farmland                     |  |        | 2,141   |      | 1.31   |        |   | 1,297   |  | 1.02  
|1-4 family residential       |  |        | 38,354  |      | 26.48  |        |   | 32,224  |  | 25.23 
|Multifamily residential      |  |        | 1,899   |      | 1.48   |        |   | 1,487   |  | 1.16  
|Nonfarm, nonresidential      |  |        | 22,130  |      | 15.28  |        |   | 6,400   |  | 5.01  
|                             |  |        |         |      |        |        |   |         |  |       
|Total real estate            |  |        | 87,913  |      | 60.70  |        |   | 65,098  |  | 50.97 
|Agricultural                 |  |        | 3,238   |      | 2.24   |        |   | 3,223   |  | 2.52  
|Commercial and industrial    |  |        | 43,068  |      | 29.74  |        |   | 46,625  |  | 36.51 
|Consumer                     |  |        | 8,775   |      | 6.06   |        |   | 11,109  |  | 8.70  
|Other                        |  |        | 1,819   |      | 1.26   |        |   | 1,661   |  | 1.30  
|                             |  |        |         |      |        |        |   |         |  |       
|Total                        |  | $      | 144,813 |      | 100.00 |        | $ | 127,716 |  | 100.00
|                             |  |        |         |      |        |        |   |         |  |       



The maturity/repricing distribution of
loans as of December 31, 2003 are set forth in the following table.



Maturity Schedule of Loans (thousands)



|                                   |  |                   |         |   |       
|---------------------------------- |  | ----------------- | ------- | - | ------
|                                   |  | December 31, 2003
|                                   |  | Total            
|                                   |  | Amount            |         | %
|Three months or less               |  |                   | 59,584  |   | 41.15 
|Over three months to twelve months |  |                   | 9,437   |   | 6.52  
|Over one year to five years        |  |                   | 61,087  |   | 42.18 
|Over five years                    |  |                   | 14,705  |   | 10.15 
|                                   |  |                   |         |   |       
|Total loans                        |  | $                 | 144,813 |   | 100.00
|                                   |  |                   |         |   |       



Investment Securities



The Bank uses its investment portfolio to provide liquidity for
unexpected deposit decreases, to fund loans, to meet the Banks interest rate sensitivity goals, and to generate income.



Securities are classified as securities held to maturity when management has the intent and the Bank has the ability at the time of purchase to hold the securities to
maturity. Securities held to maturity are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities to be held for indefinite periods of time are classified as securities available for sale. Unrealized gains and
losses on securities available for sale are recognized as direct increases or decreases in stockholders equity. Securities available for sale include securities that may be sold in response to changes in market interest rates, changes in the
securitys prepayment risk, increases in loan demand, general liquidity needs and other similar factors. The entire securities portfolio is classified as available for sale.



Management of the investment portfolio is conservative with virtually all investments taking the form of purchases of Corporate securities,
municipal securities, U.S. Government agencies, and mortgage-backed securities. Management views the investment portfolio as a source of income, and purchases securities with that in mind. However, adjustments are necessary in the portfolio to
provide an adequate source of liquidity which can be used to meet funding requirements for loan demand and deposit fluctuations and to control interest rate risk. Therefore, management may sell certain securities prior to their maturity.



37



---

Managements Discussion and Analysis



The following table presents the investment portfolio at December 31, 2003 and 2002 by major types of investments and
maturity ranges. Maturities may differ from scheduled maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid prior to the scheduled maturity date. Maturities on all other securities are based
on the contractual maturity.



Investment Securities
(thousands)



|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|-------------------------- |  | ------------------ | ---- | - | ------------------------- | - | ----- | ------------------------- |  | - | ------------- | - |  | ---------------- | ------ | ----- |  | - | --------- |  | - | ------ | - |  | - | ------
|                           |  | December 31, 2003 
|                           |  | Amortized Cost Due |      |   |                           |   |       |                           |  |  
|                           |  | In One Yr.or Less  |      |   | After OneThroughFive Yrs. |   |       | After FiveThroughTen Yrs. |  |   | AfterTenYears |   |  | EquitySecurities |        | Total |  |   | FairValue
|U. S. Government agencies  |  | $                  |     |   |                           | $ | 500   |                           |  | $ |              |   |  | $                |       |       |  | $ |          |  | $ | 500    |   |  | $ | 516   
|Municipal securities       |  |                    | 310  |   |                           |   |      |                           |  |   | 1,299         |   |  |                  | 1,494  |       |  |   |          |  |   | 3,103  |   |  |   | 3,097 
|Corporate securities       |  |                    |     |   |                           |   | 1,247 |                           |  |   | 481           |   |  |                  | 3,312  |       |  |   |          |  |   | 5,040  |   |  |   | 5,266 
|Mortgage-backed securities |  |                    |     |   |                           |   | 374   |                           |  |   | 1,549         |   |  |                  | 12,241 |       |  |   |          |  |   | 14,164 |   |  |   | 14,072
|Equity securities          |  |                    |     |   |                           |   |      |                           |  |   |              |   |  |                  |       |       |  |   | 1,102     |  |   | 1,102  |   |  |   | 1,102 
|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|Total                      |  | $                  | 310  |   |                           | $ | 2,121 |                           |  | $ | 3,329         |   |  | $                | 17,047 |       |  | $ | 1,102     |  | $ | 23,909 |   |  | $ | 24,053
|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|                           |  |                    |      |   |                           |   |      
|Weighted average yields:   |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|                           |  |                    |      |   |                           |   |      
|U.S. Government agencies   |  |                    |     | % |                           |   | 5.75  | %                         |  |   |              | % |  |                  |       | %     |  |   |           |  |   | 5.75   | % |  |   |       
|Municipal securities       |  |                    | 4.19 |   |                           |   |      |                           |  |   | 3.74          |   |  |                  | 4.92   |       |  |   |           |  |   | 4.35   |   |  |   |       
|Corporate securities       |  |                    |     |   |                           |   | 6.40  |                           |  |   | 6.83          |   |  |                  | 8.14   |       |  |   |           |  |   | 7.58   |   |  |   |       
|Mortgage-backed securities |  |                    |     |   |                           |   | 6.04  |                           |  |   | 3.90          |   |  |                  | 3.50   |       |  |   |           |  |   | 3.61   |   |  |   |       
|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|Consolidated               |  |                    | 4.19 | % |                           |   | 6.18  | %                         |  |   | 4.26          | % |  |                  | 4.53   | %     |  |   |           |  |   | 4.64   | % |  |   |       
|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       



|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|-------------------------- |  | ------------------ | ---- | - | ------------------------- | - | ----- | ------------------------- |  | - | ------------- | - |  | ---------------- | ------ | ----- |  | - | --------- |  | - | ------ | - |  | - | ------
|                           |  | December 31, 2002 
|                           |  | Amortized Cost Due |      |   |                           |   |       |                           |  |  
|                           |  | In One Yr.or Less  |      |   | After OneThroughFive Yrs. |   |       | After FiveThroughTen Yrs. |  |   | AfterTenYears |   |  | EquitySecurities |        | Total |  |   | FairValue
|U. S. Government agencies  |  | $                  |     |   |                           | $ | 1,527 |                           |  | $ |              |   |  | $                |       |       |  | $ |          |  | $ | 1,527  |   |  | $ | 1,498 
|Municipal securities       |  |                    |     |   |                           |   | 313   |                           |  |   |              |   |  |                  | 623    |       |  |   |          |  |   | 936    |   |  |   | 929   
|Corporate securities       |  |                    | 500  |   |                           |   | 1,245 |                           |  |   | 959           |   |  |                  | 2,888  |       |  |   |          |  |   | 5,592  |   |  |   | 5,627 
|Mortgage-backed securities |  |                    |     |   |                           |   |      |                           |  |   | 740           |   |  |                  | 10,799 |       |  |   |          |  |   | 11,539 |   |  |   | 11,596
|Equity securities          |  |                    |     |   |                           |   |      |                           |  |   |              |   |  |                  |       |       |  |   | 1,046     |  |   | 1,046  |   |  |   | 1,046 
|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|Total                      |  | $                  | 500  |   |                           | $ | 3,085 |                           |  | $ | 1,699         |   |  | $                | 14,310 |       |  | $ | 1,046     |  | $ | 20,640 |   |  | $ | 20,696
|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|                           |  |                    |      |   |                           |   |      
|Weighted average yields:   |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|                           |  |                    |      |   |                           |   |      
|U.S. Government agencies   |  |                    |     | % |                           |   | 5.62  | %                         |  |   |              | % |  |                  |       | %     |  |   |           |  |   | 5.62   | % |  |   |       
|Municipal securities       |  |                    |     |   |                           |   | 4.16  |                           |  |   |              |   |  |                  | 6.76   |       |  |   |           |  |   | 5.89   |   |  |   |       
|Corporate securities       |  |                    | 7.72 |   |                           |   | 6.41  |                           |  |   | 6.75          |   |  |                  | 7.93   |       |  |   |           |  |   | 7.37   |   |  |   |       
|Mortgage-backed securities |  |                    |     |   |                           |   |      |                           |  |   | 5.93          |   |  |                  | 3.61   |       |  |   |           |  |   | 3.76   |   |  |   |       
|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       
|Consolidated               |  |                    | 7.72 | % |                           |   | 5.79  | %                         |  |   | 6.39          | % |  |                  | 4.62   | %     |  |   |           |  |   | 5.04   | % |  |   |       
|                           |  |                    |      |   |                           |   |       |                           |  |   |               |   |  |                  |        |       |  |   |           |  |   |        |   |  |   |       



The interest rate environment and the
need for liquidity resulted in an annualized average yield on the investment portfolio of 4.6%, 5.8%, and 5.9% during 2003, 2002, and 2001, respectively. At December 31, 2003, 2002 and 2001, the market value of the investment portfolio was $24.1
million, $20.7 million, and $16.3 million, respectively. Amortized cost was $23.9 million, $20.6 million, and $16.1 million.



38



---

Managements Discussion and Analysis



Waccamaw Bankshares, Inc. purchased Waccamaw Banks 10% ownership in Sidus Financial Corporation, a mortgage
brokerage and financial services provider. The Bank paid $331,530 for this investment and, subsequently, wrote down its investment by $125,000 in 2000 as a result of the poor financial performance of Sidus Financial Corporation. Waccamaw Bankshares,
Inc. purchased the investment from the Bank at the full purchase price of $331,530 and immediately wrote down the investment by $125,000 to accurately reflect the carrying cost of the Banks investment in Sidus Financial Corporation. Waccamaw
Bankshares, Inc. also exercised $50,000 of warrants in 2003. Management believes this is a conservative valuation of the investment due to the substantially improved performance of Sidus Financial Corporation. Sidus Financial Corporation converted
to Sidus Financial, LLC on January 1, 2003.



Federal Funds Sold



Federal funds represent the most liquid portion of the Banks
invested funds and generally the lowest yielding portion of earning assets. However, because of the flat yield curve and the need to maintain liquidity, management maintained a significant amount of Federal funds during the past three years. Average
Federal funds sold totaled $8.3 million, $7.4 million, and $4.8 million in 2003, 2002, and 2001, respectively. Year-end Federal funds sold were $10.1 million and $2.7 million at December 31, 2003 and 2002, respectively.



Deposits



The Bank relies on deposits generated in its market area to provide the majority of funds needed to support lending activities and for
investments in liquid assets. More specifically, core deposits (total deposits less time deposits in denominations of $100,000 or more) are the primary funding source.



The Banks balance sheet growth is largely determined by the availability of deposits in its market, the cost of attracting the
deposits, and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios. Market conditions have resulted in depositors shopping for better deposit rates more than in the past. An increased customer
awareness of interest rates adds to the importance of rate management. The Banks management must continuously monitor market pricing, competitors rates, and internal interest rate spreads to maintain the Banks growth and achieve
profitability. The Bank attempts to structure rates so as to promote deposit and asset growth while at the same time increasing the overall profitability of the Bank.



Average total deposits were $147.7 million during 2003. This is an increase of 17.4% over 2002. Average total deposits were $125.7 million
for the year ended December 31, 2002. This was an increase of $25.5 million or 25.4% over 2001. Substantially all of those deposits were core deposits. The percentage of the Banks average deposits that were interest bearing in 2003 was 90.2%
and 89.2% during 2002 and 89.3% during 2001. Average demand deposits which earn no interest were $14.5 million, $13.6 million and $10.7 million for the periods ended December 31, 2003, 2002, and 2001, respectively.



Managements strategy has been to support loan and investment growth with core deposits
and not to aggressively solicit the more volatile, large denomination certificates of deposit. Large denomination certificates of deposit are particularly sensitive to changes in interest rates. Management considers these deposits to be volatile
and, in order to minimize liquidity and interest rate risks, invests these funds in short-term investments.



39



---

Managements Discussion and Analysis



Average deposits for the periods ended December 31, 2003, 2002, and 2001 are summarized in the following table.



Average Deposit Mix (thousands)



|                                    |  |        |         |      |        |        |   |         |  |        |  |   |         |  |       
|----------------------------------- |  | ------ | ------- | ---- | ------ | ------ | - | ------- |  | ------ |  | - | ------- |  | ------
|                                    |  | 2003   |         | 2002 |        | 2001  
|                                    |  | Amount |         | %    |        | Amount |   | %       |  | Amount |  | %
|Interest bearing deposits:          |  |        |         |      |        |        |   |         |  |        |  |   |         |  |       
|Demand accounts                     |  | $      | 12,901  |      | 8.74   |        | $ | 10,652  |  | 8.47   |  | $ | 8,494   |  | 8.47  
|Money market                        |  |        | 16,999  |      | 11.51  |        |   | 14,788  |  | 11.76  |  |   | 13,388  |  | 13.35 
|Savings                             |  |        | 5,299   |      | 3.59   |        |   | 4,945   |  | 3.93   |  |   | 4,314   |  | 4.32  
|Time deposit                        |  |        | 97,923  |      | 66.31  |        |   | 81,701  |  | 64.99  |  |   | 63,289  |  | 63.15 
|                                    |  |        |         |      |        |        |   |         |  |        |  |   |         |  |       
|Total interest bearing deposits     |  |        | 133,122 |      | 90.15  |        |   | 112,086 |  | 89.15  |  |   | 89,485  |  | 89.29 
|Noninterest bearing demand deposits |  |        | 14,541  |      | 9.85   |        |   | 13,640  |  | 10.85  |  |   | 10,735  |  | 10.71 
|                                    |  |        |         |      |        |        |   |         |  |        |  |   |         |  |       
|Total deposits                      |  | $      | 147,663 |      | 100.00 |        | $ | 125,726 |  | 100.00 |  | $ | 100,220 |  | 100.00
|                                    |  |        |         |      |        |        |   |         |  |        |  |   |         |  |       



The following table provides maturity
information relating to time deposits of $100,000 or more at December 31, 2003.



Large Time Deposit Maturities, (thousands)



|                                                    |  |   |       
|--------------------------------------------------- |  | - | ------
|Remaining maturity of three months or less          |  | $ | 11,297
|Remaining maturity over three through twelve months |  |   | 11,845
|Remaining maturity over twelve months               |  |   | 11,500
|                                                    |  |   |       
|Total time deposits of $100,000 or more             |  | $ | 34,642
|                                                    |  |   |       



Short-Term Debt



Other borrowed funds consisting of securities sold under agreements to repurchase and
Federal funds purchased were $3.7 million, $6.1 million, and $3.5 million at December 31, 2003, 2002, and 2001, respectively. Average short-term debt was $4.5 million, $5.5 million, and $4.4 million during 2003, 2002, and 2001, respectively. The
related interest expense was $29,082, $59,200, and $196,088 during 2003, 2002, and 2001, respectively.



Long-Term Debt



As a member of the
Federal Home Loan Bank of Atlanta, the Bank has the ability to borrow up to 10% of total assets in the form of FHLB advances. At December 31, 2003 and 2002 advances of $8.5 million were outstanding. The average amount outstanding during 2003 and
2002 was $8.5 million and $6.3 million, respectively. An advance outstanding of $2.5 million at the end of 2003 bears interest at a fixed rate of 5.85% and matures in 2010. An advance outstanding of $2.0 million at the end of 2003 bears interest at
a fixed rate of 3.95% and matures in 2012. This advance is convertible to a variable rate based on three month LIBOR effective May 29, 2005, at the option of the FHLB. An advance of $4.0 million at the end of 2003 bears interest at an adjustable
rate using three month LIBOR plus (1) basis point on a quarterly basis from commencing date of May 9, 2002. The current adjustable rate at December 31, 2003 was 1.18%.



Capital Adequacy



Stockholders equity was $17.0 million at December 31, 2003. This was a 16.2% increase over the $14.6 million at the end of 2002. Average stockholders equity
as a percentage of average total assets was 8.8%, 8.9% and 10.2% for 2003, 2002, and 2001, respectively.



The Company completed its first issuance of Trust Preferred securities in December 2003 in the amount of $8 million. These capital issuances will be utilized to capitalize the continued growth of the Company and the
Bank.



40



---

Managements Discussion and Analysis



The Trust Preferred securities are accounted for as long-term debt in the accompanying financial statements, however,
for regulatory capital purposes, the majority of this issuance is considered Tier I capital with the remainder qualifying as Tier II capital. The following tables illustrate the Companys and the Banks respective capital position and
ratios along with minimum regulatory ratios at December 31, 2003.



Regulatory
guidelines relating to capital adequacy provide minimum risk-based ratios which assess capital adequacy while encompassing all credit risks, including those related to off-balance sheet activities. Capital ratios under these guidelines are computed
by weighing the relative risk of each asset category to derive risk-adjusted assets. For the Company, risk-based capital guidelines require minimum ratios of core (Tier 1) capital (common stockholders equity) to risk-weighted assets of 4.0%
and total regulatory capital (core capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted assets of 8.0%. As of December 31, 2003, the Companys Tier 1 risk-weighted capital ratio and total capital ratio
were 12.9% and 14.2%, respectively.



The Bank also has capital ratio
constraints with which to comply. These ratios are slightly different than those required at the parent company level. At December 31, 2003, the Banks capital ratios were as follows: Tier I leverage ratio, 10.2%, Tier I risk-based capital
ratio, 12.6% and total risk-based ratio, 13.8%. These capital ratios were sufficient at December 31, 2003 to classify the Bank as well capitalized in accordance with the FDICs regulatory capital rules. The Companys and
Banks actual capital amounts and ratios are presented in the following table.



Capital Requirements (thousands)



Waccamaw Bankshares, Inc.



|         |  |                  |        |               |                |   |                    |               |               |  |       |        |  |               |        |  |       |  
|-------- |  | ---------------- | ------ | ------------- | -------------- | - | ------------------ | ------------- | ------------- |  | ----- | ------ |  | ------------- | ------ |  | ----- | -
|         |  |                  |        |               |                |   | Risk-based Capital |              
|         |  | Leverage Capital |        |               | Tier I Capital |   |                    | Total Capital |              
|         |  | Amount           |        | Percentage(1) |                |   | Amount             |               | Percentage(2) |  |       | Amount |  | Percentage(2) |       
|Actual   |  | $                | 19,544 |               | 10.47          | % |                    | $             | 19,544        |  | 12.91 | %      |  | $             | 21,436 |  | 14.24 | %
|Required |  |                  | 7,464  |               | 4.00           | % |                    |               | 6,054         |  | 4.00  | %      |  |               | 12,109 |  | 8.00  | %



Waccamaw Bank



|         |  |                  |        |               |                |   |                    |               |               |  |       |        |  |               |        |  |       |  
|-------- |  | ---------------- | ------ | ------------- | -------------- | - | ------------------ | ------------- | ------------- |  | ----- | ------ |  | ------------- | ------ |  | ----- | -
|         |  |                  |        |               |                |   | Risk-based Capital |              
|         |  | Leverage Capital |        |               | Tier I Capital |   |                    | Total Capital |              
|         |  | Amount           |        | Percentage(1) |                |   | Amount             |               | Percentage(2) |  |       | Amount |  | Percentage(2) |       
|Actual   |  | $                | 18,913 |               | 10.16          | % |                    | $             | 18,913        |  | 12.56 | %      |  | $             | 20,794 |  | 13.81 | %
|Required |  |                  | 7,447  |               | 4.00           | % |                    |               | 6,022         |  | 4.00  | %      |  |               | 12,044 |  | 8.00  | %

---

|(1) | Percentage of total adjusted average assets. The FRB minimum leverage ratio requirement is 3 percent to 5 percent, depending on the institutions composite rating as determined
by its regulators. The FRB has not advised the Company of any specific requirements applicable to it.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Percentage of risk-weighted assets.
|--- | -----------------------------------



Common Stock Outstanding



During 2001, Waccamaw Bankshares, Inc. acquired all the outstanding shares of Waccamaw Bank. In addition, the Company declared a 20% stock dividend. Total shares
outstanding (after adjusting for the stock dividend) at December 31, 2001, was 1,505,730. During 2002, the Company sold 12,575 shares of stock and stock options were exercised for 9,805 shares. At December 31, 2002 the Bank had 1,528,110 shares of
common stock outstanding. During 2003, Waccamaw Bankshares, Inc. declared a 20% stock dividend. Total shares outstanding (after adjusting for the stock dividend) at December 31, 2003, was 1,859,772. These shares are held by approximately 2,000
shareholders of record. All share and per share data have been restated to reflect stock splits.



41



---

Managements Discussion and Analysis



Nonperforming and Problem Assets



Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and
attempts to manage them effectively. The Bank also attempts to reduce repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and
follow up on exceptions to credit policies.



The allowance for loan losses is
maintained at a level adequate to absorb probable losses. Some of the factors which management considers in determining the appropriate level of the allowance for credit losses are: past loss experience, an evaluation of the current loan portfolio,
identified loan problems, the loan volume outstanding, the present and expected economic conditions in general, regulatory policies, and in particular, how such conditions relate to the market areas that the Bank serves. Bank regulators also
periodically review the Banks loans and other assets to assess their quality. Loans deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance.



The accrual of interest on loans is discontinued on a loan when, in the
opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.



The provision for loan losses, net charge-offs and the activity in the allowance for loan losses is detailed in the following table.



Allowance for Loan Losses (thousands)



|                                              |  |      |       |   |      |   |       |      |  |   |       |  
|--------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                              |  | 2003 |       |   | 2002 |   |       | 2001 | 
|Allowance for loan losses, beginning          |  | $    | 1,854 |   |      | $ | 1,422 |      |  | $ | 977   |  
|Provision for loan losses, charged to expense |  |      | 730   |   |      |   | 794   |      |  |   | 612   |  
|                                              |  |      |       |   |      |   |       |      |  |   |       |  
|                                              |  |      | 2,584 |   |      |   | 2,216 |      |  |   | 1,589 |  
|                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Loans charged off                             |  |      | (392  | ) |      |   | (388  | )    |  |   | (208  | )
|Recoveries of loans previously charged off    |  |      | 26    |   |      |   | 26    |      |  |   | 41    |  
|                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Net charge-offs                               |  |      | (366  | ) |      |   | (362  | )    |  |   | (167  | )
|                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Allowance for loan losses, ending             |  | $    | 2,218 |   |      | $ | 1,854 |      |  | $ | 1,422 |  
|                                              |  |      |       |   |      |   |       |      |  |   |       |  



Management realizes that general
economic trends greatly affect loan losses and no assurances can be made about future losses. Management does, however consider the allowance for loan losses to be adequate at December 31, 2003, 2002, and 2001.



Nonperforming assets consisted of repossessed property of $50,000 and nonaccrual loans of
$701,000 at December 31, 2003 and repossessed property of $140,000 and nonaccrual loans $1.8 million at December 31, 2002. Nonperforming assets consisted of repossessed property of $42,000 at December 31, 2001. Net charge off loans were $366,000 in
2003, $362,000 in 2002, and $167,000 in 2001. The allowance for loan losses was $2.2 million, $1.9 million, and $1.4 million at December 31, 2003, 2002, and 2001, respectively. This is 1.5%, 1.5%, and 1.4% of total gross loans outstanding at the end
of 2003, 2002 and 2001, respectively.



Liquidity and Sensitivity



The principal goals of the Banks asset and liability management
strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash in order to fund depositors withdrawals or borrowers loans without significant loss. Interest
rate risk management balances the effects of interest rate changes on assets that earn interest against liabilities on which interest is paid, to protect the Bank from wide fluctuations in its net interest income which could result from interest
rate changes.



42



---

Managements Discussion and Analysis



Management must insure that adequate funds are available at all times to meet the needs of its customers. On the
asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance sheet, liquidity sources include
core deposits, the ability to increase large denomination certificates, Federal funds lines from correspondent banks, borrowings from the Federal Home Loan Bank, as well as the ability to generate funds through the issuance of long-term debt and
equity.



Interest rate risk is the effect that changes in interest rates would
have on interest income and interest expense as interest-sensitive assets and interest-sensitive liabilities either reprice or mature. Management attempts to maintain the portfolios of earning assets and interest-bearing liabilities with maturities
or repricing opportunities at levels that will afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates.



At December 31, 2003, the Bank was cumulatively asset-sensitive (earning assets subject to interest rate changes exceeded interest-bearing liabilities subject to
changes in interest rates). Demand, savings and money market accounts repricing within three months were $41.0 million, which historically are not as rate sensitive as other types of interest-bearing deposits. Removing the impact of demand, savings
and money market accounts, the Bank is asset sensitive in the three month or less time period, with the four to twelve months time period being liability-sensitive, the thirteen to sixty months time period being asset-sensitive and the over sixty
months time period being asset-sensitive.



Time deposits in denominations of
$100,000 or more and large municipal repurchase accounts are especially susceptible to interest rate changes. These deposits are matched with short-term investments. Matching sensitive positions alone does not ensure that the Bank has no interest
rate risk. The repricing characteristics of assets are different from the repricing characteristics of funding sources. Thus, net interest income can be impacted by changes in interest rates even if the repricing opportunities of assets and
liabilities are perfectly matched.



Mortgage backed securities are shown based
on their contractual maturity but tend to be repaid earlier. Long-term debt maturing in 2010 and 2012 with a quarterly call feature is shown in the 1-3 month repricing period.



43



---

Managements Discussion and Analysis



The table below shows the sensitivity of the Banks balance sheet at the dates indicated, but is
not necessarily indicative of the position on other dates.



Interest Rate Sensitivity



|                                                             |  |                                        |         |    |            |   |         |             |  |   |               |    |  |       |        |   |  |   |         |  
|------------------------------------------------------------ |  | -------------------------------------- | ------- | -- | ---------- | - | ------- | ----------- |  | - | ------------- | -- |  | ----- | ------ | - |  | - | ------- | -
|                                                             |  | December 31, 2003 Maturities/Repricing |        
|                                                             |  | 1-3Months                              |         |    | 4-12Months |   |         | 13-60Months |  |   | Over 60Months |    |  | Total |       
|Earning assets:                                              |  |                                        |         |    |            |   |         |             |  |   |               |    |  |       |        |   |  |   |         |  
|Loans                                                        |  | $                                      | 59,587  |    |            | $ | 9,437   |             |  | $ | 61,089        |    |  | $     | 14,700 |   |  | $ | 144,813 |  
|Investments                                                  |  |                                        | 311     |    |            |   |        |             |  |   | 1,816         |    |  |       | 21,926 |   |  |   | 24,053  |  
|Federal funds sold                                           |  |                                        | 10,116  |    |            |   |        |             |  |   |              |    |  |       |       |   |  |   | 10,116  |  
|Deposits with banks                                          |  |                                        | 318     |    |            |   |        |             |  |   |              |    |  |       |       |   |  |   | 318     |  
|                                                             |  |                                        |         |    |            |   |         |             |  |   |               |    |  |       |        |   |  |   |         |  
|Total                                                        |  |                                        | 70,332  |    |            |   | 9,437   |             |  |   | 62,905        |    |  |       | 36,626 |   |  |   | 179,300 |  
|                                                             |  |                                        |         |    |            |   |         |             |  |   |               |    |  |       |        |   |  |   |         |  
|Interest-bearing liabilities:                                |  |                                        |         |    |            |   |         |             |  |   |               |    |  |       |        |   |  |   |         |  
|Demand accounts                                              |  |                                        | 13,328  |    |            |   |        |             |  |   |              |    |  |       |       |   |  |   | 13,328  |  
|Savings and money market                                     |  |                                        | 27,703  |    |            |   |        |             |  |   |              |    |  |       |       |   |  |   | 27,703  |  
|Time deposits                                                |  |                                        | 26,878  |    |            |   | 45,133  |             |  |   | 19,958        |    |  |       | 5,426  |   |  |   | 97,395  |  
|Repurchase agreements and purchased funds                    |  |                                        | 3,654   |    |            |   |        |             |  |   |              |    |  |       |       |   |  |   | 3,654   |  
|Long-term debt                                               |  |                                        | 6,500   |    |            |   |        |             |  |   | 2,000         |    |  |       |       |   |  |   | 8,500   |  
|Junior subordinated debentures                               |  |                                        | 8,000   |    |            |   |        |             |  |   |              |    |  |       |       |   |  |   | 8,000   |  
|                                                             |  |                                        |         |    |            |   |         |             |  |   |               |    |  |       |        |   |  |   |         |  
|Total                                                        |  |                                        | 86,063  |    |            |   | 45,133  |             |  |   | 21,958        |    |  |       | 5,426  |   |  |   | 158,580 |  
|                                                             |  |                                        |         |    |            |   |         |             |  |   |               |    |  |       |        |   |  |   |         |  
|Interest rate gap                                            |  | $                                      | (15,731 | )  |            | $ | (35,696 | )           |  | $ | 40,947        |    |  | $     | 31,200 |   |  | $ | 20,720  |  
|                                                             |  |                                        |         |    |            |   |         |             |  |   |               |    |  |       |        |   |  |   |         |  
|Cumulative interest sensitivity gap                          |  | $                                      | (15,731 | )  |            | $ | (51,427 | )           |  | $ | (10,480       | )  |  | $     | 20,720 |   |  |   |         |  
|                                                             |  |                                        |         |    |           
|Ratio of sensitivity gap to total earnings assets            |  |                                        | (8.77   | )% |            |   | (19.91  | )%          |  |   | 22.84         | %  |  |       | 17.40  | % |  |   | 11.55   | %
|Cumulative ratio of sensitivity gap to total earnings assets |  |                                        | (8.77   | )% |            |   | (28.68  | )%          |  |   | (5.84         | )% |  |       | 11.55  | % |  |   |         |  



Effects of Inflation



Interest rates are affected by inflation, but the timing and magnitude of
the changes may not coincide with changes in the consumer price index. Management actively monitors the Banks interest rate sensitivity in order to minimize the effects of inflationary trends on the Banks operations. Other areas of
non-interest expense may be more directly affected by inflation.



Financial
Ratios



The following table summarizes ratios considered to be significant
indicators of the Banks operating results and financial condition for the periods indicated.



Key Financial Ratios



|                                 |  |       |   |  |       |   |  |       |  
|-------------------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                 |  | 2003  |   |  | 2002  |   |  | 2001  |  
|Return on average assets         |  | 1.13  | % |  | 1.02  | % |  | .85   | %
|Return on average equity         |  | 12.84 | % |  | 11.46 | % |  | 8.36  | %
|Average equity to average assets |  | 8.80  | % |  | 8.92  | % |  | 10.15 | %



44



---

Board of Directors and Officers



Board of Directors



|                      |  |                                                     
|--------------------- |  | ----------------------------------------------------
|M. B. Bo Biggs      |  | K. M. Biggs, Inc.                                   
|                      | 
|Dr. Maudie M. Davis   |  | Principal, South Columbus High School               
|                      | 
|E. Autry Dawsey, Sr.  |  | Premiere Enterprises of Whiteville, L.L.C.          
|                      | 
|Monroe Enzor III      |  | Monroe Enzor Farms                                  
|                      | 
|James G. Graham       |  | President and Chief Executive Officer, Waccamaw Bank
|                      | 
|James E. Hill, Jr.    |  | Hill & High, L.L.P.                                 
|                      | 
|Michael K. Jones      |  | Jones Stores, Inc. and Related Companies            
|                      | 
|Alan W. Thompson      |  | Thompson, Price, Scott, Adams & Co., P.A.           
|                      | 
|Dale Ward             |  | J. D. Wright Roofing Co., Inc.                      
|                      | 
|J. Densil Worthington |  | Worthington Funeral Home, Inc.                      



Directors
Emeritus



|                   |  |                                
|------------------ |  | -------------------------------
|Dewey L. Hill      |  | Hillcrest Corp.                
|                   | 
|Lucian P. Stephens |  | Blockade Runner Motor Inn, Inc.



Bank Executive
Officers



|                  |  |                                                
|----------------- |  | -----------------------------------------------
|James G. Graham   |  | President and Chief Executive Officer          
|                  | 
|Perry B. Dawson   |  | Senior Vice President and Chief Banking Officer
|                  | 
|Freda H. Gore     |  | Vice President and Chief Operations Officer    
|                  | 
|David A. Godwin   |  | Vice President and Chief Financial Officer     
|                  | 
|Richard C. Norris |  | Vice President and Senior Credit Officer       



45



---

Bank Employees



|                                  |  |                                                   
|--------------------------------- |  | --------------------------------------------------
|Main Office                      
|                                  | 
|Edith Edie Stanley              |  | Assistant Vice President & Branch Manager         
|Timothy J. Reilly                 |  | Vice President & Commercial Lender                
|Janet D. Smith                    |  | Executive Assistant/Assistant Corporate Secretary 
|Lisa Leggett                      |  | Administrative Assistant                          
|Michelle Brown                    |  | Loan Officer                                      
|Amanda Prince                     |  | Loan Officer Assistant                            
|Laura Garrell                     |  | Teller                                            
|Edna Lewis                        |  | Teller                                            
|Rosario G. Mincey                 |  | Teller                                            
|Jenny Hinson                      |  | Head Teller                                       
|Vickie Williamson                 |  | Roving Teller                                     
|Kelly Bass                        |  | Customer Service Representative                   
|Bobbie Lewis                      |  | Customer Service Representative                   
|Hilda W. Branch                   |  | Receptionist                                      
|                                 
|Tabor City Office                
|                                  | 
|Geoffrey R. Hopkins               |  | Vice President & City Executive                   
|Gayle N. Watson                   |  | Assistant Vice President                          
|Sarah W. Currie                   |  | Head Teller & Customer Service Representative     
|Tammy C. Simmons                  |  | Teller/Loan Assistant                             
|M. Pearl Lewis                    |  | Teller                                            
|                                 
|Chadbourn Office                 
|                                  | 
|Mark Madden                       |  | Assistant Vice President & Branch Manager         
|Judy W. Strickland                |  | Financial Services Representative                 
|Misty Hardwick                    |  | Financial Services Representative                 
|Lou Ellen Williamson              |  | Loan Officer                                      
|Debbie Edwards                    |  | Loan Administrative Assistant                     
|Hilda F. Bullard                  |  | Customer Service Representative                   
|Pamela M. Thornton                |  | Head Teller                                       
|Rita Spivey                       |  | Teller                                            
|Lori C. Williams                  |  | Teller                                            
|Wanda F. Rozier                   |  | Teller                                            
|Kimberly Young                    |  | Teller                                            
|                                 
|Shallotte Office                 
|                                  | 
|Dianne F. McRainey                |  | Vice President & City Executive                   
|Vernon L. Parker                  |  | Vice President & Branch Manager                   
|Linwood Johnston                  |  | Loan Officer Administrator                        
|Sonja Milligan                    |  | Customer Service Representative                   
|Penny S. McKeithan                |  | Head Teller                                       
|Barbara Evans                     |  | Teller                                            
|Letha Yow                         |  | Teller                                            
|                                 
|Holden Beach Office              
|                                  | 
|Cynthia Akers                     |  | Vice President & Branch Manager                   
|Elizabeth A. Evans                |  | Head Teller                                       
|Cynthia P. Elliott                |  | Teller                                            
|Melissa A. King                   |  | CSR/Loan Officer                                  
|                                 
|Mortgage Lending                 
|                                  | 
|Columbus County                   |  |                                                   
|Jami H. Hinson                    |  | Mortgage Banker                                   
|                                  | 
|Brunswick County                  |  |                                                   
|Judy Seaboldt                     |  | Mortgage Banker                                   
|                                 
|Waccamaw Financial Services, Inc.
|                                  | 
|Kelley Jones                      |  | Vice President & Investments and Insurance Advisor
|                                 
|Credit Administration            
|                                  | 
|Cindy B. Ross                     |  | Vice President & Credit Officer                   
|George Benton                     |  | Assistant Credit Manager                          
|Lefell G. Eason                   |  | Loan Assistant                                    
|Alinette Priest                   |  | Loan Assistant                                    
|Ella Scarborough                  |  | Loan Assistant                                    
|Amanda Williams                   |  | Loan Assistant                                    
|                                 
|Operations & Accounting          
|                                  | 
|Gracie B. McClary                 |  | Operations, Security & Compliance Officer         
|Deanna Nichols                    |  | Assistant Operations Officer                      
|Emily Bullard                     |  | Operations Assistant                              
|Valerie W. Register               |  | Accounting Manager                                
|Barbara P. Lanier                 |  | Accounting Assistant                              
|                                 
|Human Resources                  
|                                  | 
|Mary W. Duncan                    |  | Personnel Director/Assistant Corporate Secretary  



46



---

Stockholder Information



Annual Meeting



The annual meeting of stockholders will be held Thursday, April 15, 2004 at 7:00 p.m. at the Waccamaw Bank and Corporate Center, 110 North J. K. Powell Boulevard,
Whiteville, North Carolina.



---



Requests for Information



Requests for information should be directed to Mr. James G. Graham, President, at Waccamaw Bankshares, Inc., Post Office Box 2009, Whiteville, North Carolina, 28472;
telephone (910) 641-0044.



---



|                                                                                              |  |                                                                                              |  |                                                                                          
|--------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------
|Independent Auditors                                                                          |  | Stock Transfer Agent                                                                         |  | Legal Counsel                                                                            
|Larrowe & Company, PLC Certified Public Accountants Post Office Box 760 Galax, Virginia 24333 |  | First Citizens Bank & Trust Company Post Office Box 29522 Raleigh, North Carolina 27626-0522 |  | Gaeta & Associates, P.A. 8305 Falls of Neuse Road Suite 203 Raleigh, North Carolina 27615



---



Federal Deposit Insurance Corporation



The Bank is a member of the FDIC. This statement has not been reviewed, or confirmed for accuracy or relevance by the Federal Deposit
Insurance Corporation.



---



Banking Offices



|                                                                           |  |                                                            |  |                                                                  
|-------------------------------------------------------------------------- |  | ---------------------------------------------------------- |  | -----------------------------------------------------------------
|110 North J. K. Powell Boulevard Whiteville, North Carolina (910) 641-0044 |  | 105 Hickman Road Tabor City, North Carolina (910) 653-3202 |  | 111 Strawberry Boulevard Chadbourn, North Carolina (910) 654-1005



|                                |  |                             
|------------------------------- |  | ----------------------------
|4949 West Main Street           |  | 3178 Holden Beach Road, SW  
|Shallotte, North Carolina 28470 |  | Supply, North Carolina 28462
|(910) 754-8499                  |  | (910)842-7760               



47